##### Table of Contents

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United States

Securities and Exchange Commission

Washington, D. C. 20549



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Form 10-QSB



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|x | Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



for the Period Ended June 30, 2004.



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



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PREFERRED VOICE, INC.



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 75-2440201                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|6500 Greenville Avenue Suite 570 Dallas, TX                    |  | 75206                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          



(214) 265-9580

(Registrants Telephone Number, including area code.)



Not Applicable

(Former name, Former Address and Former Fiscal year, if changed since last report.)



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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 
29,607,493 shares as of August 10, 2004.



Transitional Small Business
Format    Yes ̈No  x



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##### Table of Contents

INDEX



Preferred Voice, Inc.



|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|Part I.    |  | Financial Information                                                                 |  |   
|           |  |                                                                                      
|Item 1.    |  | Financial Statements                                                                  |  |   
|           |  |                                                                                      
|           |  | Balance Sheets-June 30, 2004 and March 31, 2004.                                      |  | 1 
|           |  |                                                                                      
|           |  | Statements of Operations-Three Months Ended June 30, 2004 and 2003.                   |  | 3 
|           |  |                                                                                      
|           |  | Statements of Cash Flows-Three Months Ended June 30, 2004 and 2003.                   |  | 4 
|           |  |                                                                                      
|           |  | Notes to Financial Statements - June 30, 2004.                                        |  | 6 
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12
|           |  |                                                                                      
|Item 3.    |  | Controls and Procedures                                                               |  | 15
|           |  |                                                                                      
|Part II.   |  | Other Information                                                                     |  | 15
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 15
|           |  |                                                                                      
|Item 2.    |  | Changes in Securities                                                                 |  | 15
|           |  |                                                                                      
|Item 3.    |  | Defaults upon Senior Securities                                                       |  | 16
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 16
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 16
|           |  |                                                                                      
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 16
|           | 
|Signatures |  | 17                                                                                   



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##### Table of Contents

PREFERRED VOICE, INC.



CONDENSED
BALANCE SHEETS

JUNE 30, 2004 AND MARCH 31, 2004



|                                                                                                               |  |                           |           |                         |   |          
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------- | --------- | ----------------------- | - | ---------
|                                                                                                               |  | June 30, 2004 (unaudited) |           | March 31,2003 (audited)
|Assets                                                                                                         |  |                           |           |                         |   |          
|Current assets:                                                                                                |  |                           |           |                         |   |          
|Cash and cash equivalents                                                                                      |  | $                         | 935,421   |                         | $ | 64,674   
|Accounts receivable, net of allowance for doubtful accounts of $5,325 and $6,325, respectively                 |  |                           | 141,367   |                         |   | 133,542  
|Prepaid expense                                                                                                |  |                           | 1,387     |                         |   | 2,851    
|                                                                                                               |  |                           |           |                         |   |          
|Total current assets                                                                                           |  | $                         | 1,078,175 |                         | $ | 201,067  
|                                                                                                               |  |                           |           |                         |   |          
|Property and equipment:                                                                                        |  |                           |           |                         |   |          
|Computer equipment                                                                                             |  | $                         | 1,599,624 |                         | $ | 1,575,228
|Furniture and fixtures                                                                                         |  |                           | 32,046    |                         |   | 32,046   
|Office equipment                                                                                               |  |                           | 61,044    |                         |   | 61,044   
|                                                                                                               |  |                           |           |                         |   |          
|                                                                                                               |  | $                         | 1,692,714 |                         | $ | 1,668,318
|Less accumulated depreciation                                                                                  |  |                           | 923,229   |                         |   | 847,415  
|                                                                                                               |  |                           |           |                         |   |          
|Net property and equipment                                                                                     |  | $                         | 769,485   |                         | $ | 820,903  
|                                                                                                               |  |                           |           |                         |   |          
|Other assets:                                                                                                  |  |                           |           |                         |   |          
|Capitalized software development costs, net of accumulated amortization of $889,467 and $872,672, respectively |  | $                         | 166,826   |                         | $ | 121,528  
|Deposits                                                                                                       |  |                           | 4,485     |                         |   | 4,485    
|Trademarks and patents, net of accumulated amortization of $6,612 and $1,819, respectively                     |  |                           | 81,610    |                         |   | 78,532   
|                                                                                                               |  |                           |           |                         |   |          
|Total other assets                                                                                             |  | $                         | 252,921   |                         | $ | 204,545  
|                                                                                                               |  |                           |           |                         |   |          
|Total assets                                                                                                   |  | $                         | 2,100,581 |                         | $ | 1,226,515
|                                                                                                               |  |                           |           |                         |   |          



See independent accountants
review report.

The accompanying notes are an integral part of these financial statements.



1



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##### Table of Contents

|                                                                                                                   |  |                          |             |   |                          |   |             |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ----------- | - | ------------------------ | - | ----------- | -
|                                                                                                                   |  | June 30, 2004(unaudited) |             |   | March 31, 2003 (audited) |  
|Liabilities and stockholders equity                                                                               |  |                          |             |   |                          |   |             |  
|Current liabilities:                                                                                               |  |                          |             |   |                          |   |             |  
|Accounts payable                                                                                                   |  | $                        | 220,353     |   |                          | $ | 202,079     |  
|Accrued operating expenses                                                                                         |  |                          | 1,420       |   |                          |   | 239         |  
|Accrued vacation                                                                                                   |  |                          | 12,558      |   |                          |   | 8,565       |  
|Accrued payroll and payroll taxes                                                                                  |  |                          | 16,613      |   |                          |   | 30,241      |  
|Current portion - notes payable                                                                                    |  |                          | 36,732      |   |                          |   | 49,041      |  
|Accrued lawsuit settlement                                                                                         |  |                          |            |   |                          |   | 132,293     |  
|                                                                                                                   |  |                          |             |   |                          |   |             |  
|Total current liabilities                                                                                          |  | $                        | 287,676     |   |                          | $ | 422,458     |  
|                                                                                                                   |  |                          |             |   |                          |   |             |  
|Long-term liabilities:                                                                                             |  |                          |             |   |                          |   |             |  
|Notes payable                                                                                                      |  | $                        | 24,207      |   |                          | $ | 27,459      |  
|                                                                                                                   |  |                          |             |   |                          |   |             |  
|Commitments and contingencies (Note L)                                                                             |  |                          |             |   |                          |   |             |  
|                                                                                                                   |  |                         
|Stockholders equity:                                                                                              |  |                          |             |   |                          |   |             |  
|Common stock, $.001 par value; 50,000,000 shares authorized; 29,607,493 and 18,607,493 shares issued, respectively |  | $                        | 29,607      |   |                          | $ | 18,607      |  
|Additional paid-in capital                                                                                         |  |                          | 18,935,947  |   |                          |   | 17,846,301  |  
|Accumulated deficit                                                                                                |  |                          | (17,175,350 | ) |                          |   | (17,086,804 | )
|Treasury stock - 22,500 shares at cost                                                                             |  |                          | (1,506      | ) |                          |   | (1,506      | )
|                                                                                                                   |  |                          |             |   |                          |   |             |  
|Total stockholders equity                                                                                         |  | $                        | 1,788,698   |   |                          | $ | 776,598     |  
|                                                                                                                   |  |                          |             |   |                          |   |             |  
|Total liabilities and stockholders equity                                                                         |  | $                        | 2,100,581   |   |                          | $ | 1,226,515   |  
|                                                                                                                   |  |                          |             |   |                          |   |             |  



See independent accountants
review report.

The accompanying notes are an integral part of these financial statements.



2



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##### Table of Contents

PREFERRED VOICE, INC.



CONDENSED
STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003



|                                         |  |                                            |          |   |                                             |   |          |  
|---------------------------------------- |  | ------------------------------------------ | -------- | - | ------------------------------------------- | - | -------- | -
|                                         |  | Three months endedJune 30, 2004(unaudited) |          |   | Three months ended June 30, 2003(unaudited) |  
|Net sales                                |  | $                                          | 310,959  |   |                                             | $ | 471,353  |  
|                                         |  |                                           
|Cost of sales                            |  |                                            | 116,929  |   |                                             |   | 153,290  |  
|                                         |  |                                            |          |   |                                             |   |          |  
|Gross profit                             |  | $                                          | 194,030  |   |                                             | $ | 318,063  |  
|                                         |  |                                            |          |   |                                             |   |          |  
|General and administrative expenses      |  | $                                          | 308,454  |   |                                             | $ | 513,409  |  
|                                         |  |                                            |          |   |                                             |   |          |  
|Loss from operations                     |  | $                                          | (114,424 | ) |                                             | $ | (195,346 | )
|                                         |  |                                            |          |   |                                             |   |          |  
|Other income (expense):                  |  |                                            |          |   |                                             |   |          |  
|Interest income                          |  | $                                          |         |   |                                             | $ | 177      |  
|Interest expense                         |  |                                            | (3,587   | ) |                                             |   | (4,058   | )
|Negotiated settlement                    |  |                                            | 29,465   |   |                                             |   |         |  
|Forgiveness of debt                      |  |                                            |         |   |                                             |   | 8,413    |  
|Gain on sale of assets                   |  |                                            |         |   |                                             |   | 71,639   |  
|                                         |  |                                            |          |   |                                             |   |          |  
|Total other income (expense)             |  | $                                          | 25,878   |   |                                             | $ | 76,171   |  
|                                         |  |                                            |          |   |                                             |   |          |  
|Loss from operations before income taxes |  | $                                          | (88,546  | ) |                                             | $ | (119,175 | )
|Provision for income taxes               |  |                                            |         |   |                                             |   |         |  
|                                         |  |                                            |          |   |                                             |   |          |  
|Net loss                                 |  | $                                          | (88,546  | ) |                                             | $ | (119,175 | )
|                                         |  |                                            |          |   |                                             |   |          |  
|Per share amounts:                       |  |                                            |          |   |                                             |   |          |  
|Loss from operations                     |  | $                                          | (0.01    | ) |                                             | $ | (0.01    | )
|                                         |  |                                            |          |   |                                             |   |          |  
|Net loss                                 |  | $                                          | (0.01    | ) |                                             | $ | (0.01    | )
|                                         |  |                                            |          |   |                                             |   |          |  



See independent accountants
review report.

The accompanying notes are an integral part of these financial statements.



3



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##### Table of Contents

PREFERRED VOICE, INC.



CONDENSED
STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003



|                                                 |  |                 |           |   |                 |   |          |  
|------------------------------------------------ |  | --------------- | --------- | - | --------------- | - | -------- | -
|                                                 |  | 2004(unaudited) |           |   | 2003(unaudited) |  
|Cash flows from operating activities:            |  |                 |           |   |                 |   |          |  
|Cash received from customers                     |  | $               | 332,599   |   |                 | $ | 519,278  |  
|Cash paid to suppliers and employees             |  |                 | (452,035  | ) |                 |   | (609,271 | )
|Interest received                                |  |                 |          |   |                 |   | 177      |  
|Interest paid                                    |  |                 | (3,587    | ) |                 |   | (2,807   | )
|                                                 |  |                 |           |   |                 |   |          |  
|Net cash used by operating activities            |  | $               | (123,023  | ) |                 | $ | (92,623  | )
|                                                 |  |                 |           |   |                 |   |          |  
|Cash flows from investing activities:            |  |                 |           |   |                 |   |          |  
|Capital expenditures                             |  | $               | (90,669   | ) |                 | $ | (28,880  | )
|Proceeds from sale of assets                     |  |                 |          |   |                 |   | 102,596  |  
|Employee advances                                |  |                 |          |   |                 |   | 650      |  
|                                                 |  |                 |           |   |                 |   |          |  
|Net cash provided (used) by investing activities |  | $               | (90,669   | ) |                 | $ | 74,366   |  
|                                                 |  |                 |           |   |                 |   |          |  
|Cash flows from financing activities:            |  |                 |           |   |                 |   |          |  
|Proceeds from stock issuance                     |  | $               | 1,100,000 |   |                 | $ |         |  
|Repayment of note payable                        |  |                 | (15,561   | ) |                 |   |         |  
|                                                 |  |                 |           |   |                 |   |          |  
|Net cash used by financing activities            |  | $               | 1,084,439 |   |                 | $ |         |  
|                                                 |  |                 |           |   |                 |   |          |  
|Net decrease in cash and cash equivalents        |  | $               | 870,747   |   |                 | $ | (18,257  | )
|Cash and cash equivalents:                       |  |                 |           |   |                 |   |          |  
|Beginning of period                              |  |                 | 64,674    |   |                 |   | 55,760   |  
|                                                 |  |                 |           |   |                 |   |          |  
|End of period                                    |  | $               | 935,421   |   |                 | $ | 37,503   |  
|                                                 |  |                 |           |   |                 |   |          |  



See independent accountants
review report.

The accompanying notes are an integral part of these financial statements.



4



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##### Table of Contents

|                                                                            |  |                  |          |   |                  |   |          |  
|--------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                                                            |  | 2004 (unaudited) |          |   | 2003 (unaudited) |  
|Reconciliation of net loss to net cash used by operating activities:        |  |                  |          |   |                  |   |          |  
|Net loss                                                                    |  | $                | (88,546  | ) |                  | $ | (119,175 | )
|                                                                            |  |                  |          |   |                  |   |          |  
|Adjustments to reconcile net loss to net cash used by operating activities: |  |                  |          |   |                  |   |          |  
|Depreciation and amortization                                               |  | $                | 93,711   |   |                  | $ | 122,337  |  
|Gain on sale of assets                                                      |  |                  |         |   |                  |   | (71,639  | )
|Fair value of stock warrants issued in exchange for services                |  |                  | 646      |   |                  |   |         |  
|Changes in operating assets and liabilities:                                |  |                  |          |   |                  |   |          |  
|(Increase) decrease in accounts receivable                                  |  |                  | (7,825   | ) |                  |   | 47,925   |  
|(Increase) decrease in prepaid expenses                                     |  |                  | 1,464    |   |                  |   | (2,139   | )
|Increase (decrease) in accounts payable                                     |  |                  | 18,274   |   |                  |   | (25,346  | )
|Decrease in accrued expenses                                                |  |                  | (140,747 | ) |                  |   | (44,586  | )
|Decrease in customer deposits                                               |  |                  |         |   |                  |   |         |  
|                                                                            |  |                  |          |   |                  |   |          |  
|Total adjustments                                                           |  | $                | (34,477  | ) |                  | $ | 26,552   |  
|                                                                            |  |                  |          |   |                  |   |          |  
|Net cash used by operating activities                                       |  | $                | (123,023 | ) |                  | $ | (92,623  | )
|                                                                            |  |                  |          |   |                  |   |          |  



See independent accountants
review report.

The accompanying notes are an integral part of these financial statements.



5



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##### Table of Contents

PREFERRED VOICE, INC.

NOTES TO FINANCIAL STATEMENTS



Note A - General organization:



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



Note B - Summary of significant accounting policies:



Basis of presentation



The accounting policies followed by Preferred Voice, Inc. are set forth in the Companys financial statements that are a part of its
March 31, 2004, Form 10KSB and should be read in conjunction with the financial statements for the three months ended June 30, 2004, contained herein.



The financial information included herein as of June 30, 2004, and for the three-month period ended June 30, 2004 and 2003, has been
presented without an audit, pursuant to accounting principles for the interim financial information generally accepted in the United States of America and the rules of the Securities and Exchange Commission. The Company believes that the disclosures
are adequate to make the information presented not misleading. The information presented reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results
for the period.



Cash and cash equivalents



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



Concentration of business, market and credit risks



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



Receivables and credit policies



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



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



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



The carrying amount of accounts receivable is reduced by a valuation allowance that reflects
managements best estimate of amounts that will not be collected. Management individually reviews all accounts receivable balances that exceed 90 days from invoice date and, based on an assessment of current creditworthiness, estimates that
portion, if any, of the balance that will not be collected. Accounts receivable past 90 days due are $17,109 and $13,024 as of June 30, 2004 and March 31, 2004, respectively.



6



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##### Table of Contents

PREFERRED VOICE, INC.

NOTES TO FINANCIAL STATEMENTS



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



Capitalized software development



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



Depreciation



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



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



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



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



Fair value of
financial instruments



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



Revenue recognition



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



Loss per share



The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128 reporting requirements replace primary and fully-diluted earnings per share
(EPS) with basic and diluted EPS. Basic EPS is calculated by dividing net income or loss (available to common stockholders) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Since the Company incurred a loss from operations for the periods ended June 30, 2004 and 2003, no computation of diluted EPS has been
performed.



Loss per share is based on the
weighted average number of shares outstanding of 23,863,049 and 18,407,493 for the three months ended June 30, 2004 and 2003, respectively.



7



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##### Table of Contents

PREFERRED VOICE, INC.

NOTES TO FINANCIAL STATEMENTS



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



Income taxes



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



Trademarks and patents



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



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



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



Use of estimates



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



Reclassification



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



Reporting comprehensive income and operating segments



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



Stock based compensation



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



8



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##### Table of Contents

PREFERRED VOICE, INC.

NOTES TO FINANCIAL STATEMENTS



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



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



Gain from extinguishment of debt



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



Note C
- Notes payable:



Notes payable consist of the following:



|                                                                                                                                                                                                                                  |  |              |        |               |   |       
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------- | - | ------
|                                                                                                                                                                                                                                  |  | June 30,2004 |        | March 31,2004
|Note payable, 10% interest rate. Principal and accrued interest was payable on September 30, 2003. Convertible into shares of the Companys common stock at a conversion rate of $2.00 of
indebtedness per share of common stock. |  | $            | 24,000 |               | $ | 36,500
|Note payable, 6% interest rate. Principal and interest is payable on March 1, 2007. Note is unsecured                                                                                                                             |  |              | 36,939 |               |   | 40,000
|                                                                                                                                                                                                                                  |  |              |        |               |   |       
|                                                                                                                                                                                                                                  |  | $            | 60,939 |               | $ | 76,500
|Less current portion                                                                                                                                                                                                              |  |              | 36,732 |               |   | 49,041
|                                                                                                                                                                                                                                  |  |              |        |               |   |       
|                                                                                                                                                                                                                                  |  | $            | 24,207 |               | $ | 27,459
|                                                                                                                                                                                                                                  |  |              |        |               |   |       



Interest expense charged to operations related to notes payable was $1,415 and $1,250 for the three months ended June 30, 2004 and 2003, respectively.



Note D - Common stock:



Common stock authorized



On September 29, 2000, the Companys Board of Directors adopted a resolution to increase the number of authorized shares of common
stock from 20,000,000 to 50,000,000. The increase in authorized shares was approved by the Companys stockholders on September 21, 2001.



Stock purchase warrants



At June 30, 2004, the Company had outstanding warrants to purchase 13,930,500 shares of the Companys common stock at prices which
ranged from $0.10 per share to $3.53 per share. The warrants are exercisable at any time and expire through May 18, 2009. At June 30, 2004, 13,930,500 shares of common stock were reserved for that purpose.



9



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##### Table of Contents

PREFERRED VOICE, INC.

NOTES TO FINANCIAL STATEMENTS



Note D -
Common stock (continued):



Common stock reserved



At June 30, 2004, shares of common stock were reserved
for the following purposes:



|                                                                                                          |  |           
|--------------------------------------------------------------------------------------------------------- |  | ----------
|Exercise of stock warrants                                                                                |  | 13,930,500
|Exercise of future grants of stock options and stock appreciation rights under the 1994 stock option plan |  | 337,132   
|Exercise of future grants of stock options and stock appreciation rights under the 2000 stock option plan |  | 2,000,000 
|                                                                                                          |  |           
|                                                                                                          |  | 16,267,632
|                                                                                                          |  |           



Private equity offering



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



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



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



|                        |  |              |  |             
|----------------------- |  | ------------ |  | ------------
|                        |  | 2004         |  | 2003        
|Expected dividend yield |  | 0.00%        |  | 0.00%       
|Risk-free interest rate |  | 1.00% -3.79% |  | 2.28% -4.13%
|Expected life           |  | 1 -5 years   |  | 2.5 years   
|Expected volatility     |  | 94% - 197%   |  | 165% - 191% 



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



|                                                                                                                                    |  |                             |          |   |      |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                                                    |  | Three months ended June 30, |         
|                                                                                                                                    |  | 2004                        |          |   | 2003 |  
|Net loss, as reported                                                                                                               |  | $                           | (88,546  | ) |      | $ | (119,175 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects |  |                             | (45,145  | ) |      |   | (13,670  | )
|                                                                                                                                    |  |                             |          |   |      |   |          |  
|Proforma net loss                                                                                                                   |  | $                           | (133,691 | ) |      | $ | (132,845 | )
|                                                                                                                                    |  |                             |          |   |      |   |          |  
|Loss per common share:                                                                                                              |  |                             |          |   |      |   |          |  
|As reported                                                                                                                         |  | $                           | (0.01    | ) |      | $ | (0.01    | )
|                                                                                                                                    |  |                             |          |   |      |   |          |  
|Proforma                                                                                                                            |  | $                           | (0.01    | ) |      | $ | (0.01    | )
|                                                                                                                                    |  |                             |          |   |      |   |          |  



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##### Table of Contents

PREFERRED VOICE, INC.

NOTES TO FINANCIAL STATEMENTS



Note F -
Commitments:



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



|                      |  |        |        
|--------------------- |  | ------ | -------
|Year ending March 31, |  | Amount
|2005                  |  | $      | 62,096 
|2006                  |  |        | 53,820 
|2007                  |  |        | 53,820 
|2008                  |  |        | 53,820 
|2009                  |  |        | 40,365 
|                      |  |        |        
|                      |  | $      | 263,921
|                      |  |        |        



Total rent expense
charged to operations was $14,583 and $69,940 for the three months ended June 30, 2004 and 2003, respectively.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial

Condition and Results of Operations



This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including those set forth herein under Managements Discussion and Analysis of Financial Condition and
Results of Operations and those set forth in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of the Form 10-KSB for the fiscal year ended March 31, 2004. Notwithstanding the
foregoing, the Company is not entitled to rely on the safe harbor for forward looking statements under 27A of the Securities Act or 21E of the Exchange Act as long as the Companys stock is classified as a penny stock within the meaning of Rule
3a51-1 of the Exchange Act. A penny stock is generally defined to be any equity security that has a market price (as defined in Rule 3a51-1) of less than $5.00 per share, subject to certain exceptions.



Overview



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



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



Our
contracts in most instances are revenue sharing contracts whereby we in most cases provide all hardware, software applications and support in exchange for a portion of revenue generated from the service provided by our customer to their subscribers.
Our sales force focuses on marketing our revenue sharing agreements and, to date, we have signed forty nine (49) local telephone company and cell phone company multi-year contracts. Nineteen contracts have been fully implemented so that the systems
installed pursuant to such contracts are already generating revenues for us. As of July 31, 2004, these nineteen contracts were generating revenues of approximately $83,000 per month from our primary product voice dial. The revenue sharing agreement
is the primary method by which we intend to contract with customers to generate revenue going forward but with some services will require a licensing fee to initiate the service.



We have focused the last twelve months on converting our systems structure to a robust data base system which will allow for
scalability and addition of new services to the platform in shorter development cycles than were possible under our previous structure. The conversion also included web access to our platform with Push2Connect being the first of our product line to
be accessible to end users via the web.



We have concentrated
our efforts in searching for services that our current carrier customers and potential carrier customers would like to provide their customers. We therefore contracted with a leading content provider to distribute their library of downloadable
wireless games, picture messages, graphics and ring-tones. Our first content project was launched on June 18, 2004 with a full turnkey solution for the carrier that includes secure customer login from the carrier website, viewing of content,
download of content, and creation of a billing record for the carriers billing system. We believe that since we already have a relationship with the carrier and are integrated with most of these carriers customer service department and billing
department that we have an opportunity to introduce new products with minimal integration effort. We will continue to research and either develop or acquire additional services that can be deployed through our platform.



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##### Table of Contents

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



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



| |  | establish and maintain relationships with phone companies;
| | - | ----------------------------------------------------------



| |  | make sure the VIP system works with the telephone switches of all of the major manufacturers;
| | - | ---------------------------------------------------------------------------------------------



| |  | achieve user acceptance for our services;
| | - | -----------------------------------------



| |  | generate reasonable margins on our services;
| | - | --------------------------------------------



| |  | continue to deploy and install VIP systems on a timely and acceptable schedule;
| | - | -------------------------------------------------------------------------------



| |  | respond to competitive market developments;
| | - | -------------------------------------------



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



| |  | continually update our product offerings to meet the needs of consumers.
| | - | ------------------------------------------------------------------------



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



Results of Operations



We recorded a net loss of $88,546 or $0.01 per share, for the period ended June 30, 2004, compared to a net loss of $119,175
or $0.01 per share, for the period ended June 30, 2003.



Total Sales



Total revenue for the period
ended June 30, 2004, was $310,959 compared to $471,353 for the period ended June 30, 2003. Revenues in both periods consisted entirely of revenue sharing receipts from our customer phone companies and billing our direct end-users for individual
services.



We anticipate that revenues from the sale of our
services will continue to grow very gradually throughout fiscal year 2005 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 and
as new services are launched.



Cost of Sales



Cost of sales for the period ended June 30, 2004 was $116,929 compared to
$153,290 for the period ended June 30, 2003. Cost of sales consisted entirely of costs for network infrastructure such as collocations, connectivity, system access and long distance to end-users during both periods and marketing enhancements to our
opt-out customers.



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##### Table of Contents

Selling, General and Administrative



Selling, general and administrative expenses for the period ended June 30, 2004 were $308,454 compared to $513,409 for the
period ended June 30, 2003. The decrease from 2003 to 2004, are due to decreases in staffing. We expect that selling, general and administrative expenses will remain steady through fiscal year 2005, such expenses to include costs related to the
number of employees, office space requirements and general overhead.



Core Technology Enhancements Software Applications and Hardware



The capitalization of software development costs begins when a products technological feasibility has been established and ends when the product is available for general release to customers. Capitalized
software development costs include direct costs incurred subsequent to establishment of technological feasibility for significant product enhancements. During the periods ended June 30, 2004 and 2003, software development costs capitalized were
$75,690 and $6,623 respectively. The amortization of capitalized software development costs for the periods ended June 30, 2004 and 2003 was $17,827 and $45,091 respectively.



Other Income and Expense



During the period ended June 30, 2003, the Company made a sale of equipment to a customer that generated one-time net revenue of $71,639. The company was
also able to negotiate settlement of outstanding accounts payable for the periods ended June 30, 2004 and 2003 of $29,465 and $8,413 respectively.



Income Taxes



As of June 30, 2004, we had cumulative federal net operating losses of approximately $17 million, which can be used to offset future income subject to
federal income tax through the fiscal year 2024. Net operating loss limitations may be imposed if changes in our stock ownership create a change of control as provided in Section 382 of the Internal Revenue Code of 1986.



Liquidity and Capital Resources



Our cash and cash equivalents at June 30, 2004 were approximately $935,421,
an increase of $870,747 from $64,674 at March 31, 2004. We have relied primarily on the issuance of stock and warrants to fund our operations since January of 1997 when we sold our long-distance resale operation.



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



Our revenues are approximately
$83,000 per month and we expect these to continue to rise slowly as we continue to deploy new customers and our current customers continue to provide services to their customers.



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



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##### Table of Contents

Future Obligations



We project our working capital needs to be $720,000 over the next six months for corporate overhead and equipment purchases to continue to deploy our
services to carrier customers. Management believes that current cash and cash equivalents and cash that may be generated from operations will be sufficient to meet these anticipated capital requirements and to finance steady growth for the next six
months. Such projections have been based on revenue trends from current customers and customers which are already under contract utilizing the revenue rates that we have experienced over the past six months with our currently installed customers and
projected cash requirements to support installation, sales and marketing, and general overhead. We may be forced to raise additional capital through the issuance of new shares, the exercise of outstanding warrants, or reduce our current overhead.
However, any projections of future cash needs and cash flows are subject to substantial uncertainty.



Item 3. Controls and Procedures



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



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



PART II. OTHER INFORMATION



Item 1. Legal Proceedings.



We are not
a party to any material legal proceedings.



Item 2. Changes in Securities and Use of Proceeds.



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



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



|(c) | Recent Sales of Unregistered Securities
|--- | ---------------------------------------



On May 18, 2004, we completed the sale of 220 units consisting of Fifty Thousand (50,000) shares of the common stock of the Company and a warrant to
purchase Twenty-Five Thousand shares of common stock at a purchase price of $5,000.00 per unit for an aggregate of $1.1 million. The Warrants are exercisable for 5 years at an exercise price of $.12 per share of common stock, subject to adjustments
to the exercise price and number of shares issued on exercise on standard events, such as recapitalization or reorganization. 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. T.R. Winston & Company Incorporated acted as placement agent in connection with the sale of the
Units and was granted warrants to purchase a number of shares of the Companys $.001 par value common stock equal to five percent (5%) of the total funds raised in the offering, exercisable for five years thereafter at $.12 per share. The
Company has agreed to file a registration statement to register the resale of the Common Stock and the shares issuable upon exercise of the Warrants within 90 days after the closing of the offering.



15



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##### Table of Contents

Item 3. Defaults upon Senior Securities.



None.



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



None



Item 5. Other Information.



None



Item 6. Exhibits and Reports on Form 8-K



|(a) | Exhibits
|--- | --------



|              |  |                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                   
|31.1          |  | Certification of Chief Executive Officer                                                                              
|              | 
|31.2          |  | Certification of Chief Financial Officer                                                                              
|              | 
|32.1          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|              | 
|32.2          |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



|(b) | Reports on Form 8-K
|--- | -------------------



We filed a Current Report on Form 8-K on May 18, 2004 with the Securities and Exchange Commission reporting on our offering that closed on May 18, 2004 in
which we issued 200 units, consisting of fifty thousand shares of common stock and a warrant to purchase twenty-five thousand shares of common stock as an Item 5, Other Event. No financial statements were filed with these reports.



16



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##### Table of Contents

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 16, 2004 |  | /s/ Latif M. Nathani                
|Date            |  | Latif M. Nathani                    
|                |  | Chairman and Chief Executive Officer
|                |  | (Principal Executive Officer)       



17