##### Table of Contents

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United States Securities and
Exchange Commission


Washington, D. C. 20549





---




Form 10-QSB





xQuarterly Report Pursuant to Section 13 or 15 (d) of the


Securities Exchange Act of 1934





for the Period Ended September 30, 2002.





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.





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.)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.





Yes  x    No  ̈





Applicable Only to Corporate Issuers





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





Common Stock, $ 0.001 Par Value  18,407,493 shares as of November 11, 2002.





Transitional Small Business Format    Yes  ̈ No  x





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##### Table of Contents




INDEX





Preferred Voice, Inc.





Part I.

Financial Information

1Item 1.

Financial Statements

1Balance Sheets-September 30, 2002, September 30, 2001 and March 31, 2002.

1Statements of Operations-Three Months Ended September 30, 2002 and 2001 and Six Months Ended September 30, 2002 and 2001 and for the Year Ended March 31, 2002.

3Statements of Cash Flows-Six Months Ended September 30, 2002 and 2001 and for the Year Ended March 31, 2002.

4Notes to Financial StatementsSeptember 30, 2002.

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

13Item 3.

Controls and Procedures

17Part II.

Other Information

17Item 1.

Legal Proceedings

17Item 2.

Changes in Securities

17Item 3.

Defaults upon Senior Securities

17Item 4.

Submission of Matters to a Vote of Security Holders

18Item 5.

Other Information

18Item 6.

Exhibits and Reports on Form 8-K

18Signatures

19




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PREFERRED VOICE, INC.


CONDENSED BALANCE SHEETS


SEPTEMBER 30, 2002 and 2001


AND MARCH 31, 2002





September 30, 2002 (unaudited)

September 30, 2001 (unaudited)

March 31, 2002 (unaudited)AssetsCurrent assets:Cash and cash equivalents

$
213,635

$
234,723

$
1,302,754Accounts receivable, net of allowance for doubtful accounts of $36,578, $-0-, and $36,578


289,073


88,880


162,940Employee advances


685


0


2,638Inventory


0


49,085


0Prepaid expenses


35,063


159


28,411Total current assets

$
538,456

$
372,847

$
1,496,743Property and equipment:Computer equipment

$
1,684,003

$
1,105,736

$
1,678,172Furniture and fixtures


42,691


42,691


42,691Office equipment


62,997


62,997


62,997$
1,789,691

$
1,211,424

$
1,783,860Less accumulated depreciation


525,960


288,545


408,104Net property and equipment

$
1,263,731

$
922,879

$
1,375,756Other assets:Notes receivable

$
12,000

$
0

$
0Capitalized software development costs, net of accumulated amortization of $682,612, $453,444 and $588,815,
respectively


291,619


425,873


316,474Deposits


23,019


15,687


23,019Trademarks and patents, net of accumulated amortization of $910, $-0- and $-0- respectively


74,144


52,365


53,535Total other assets

$
400,782

$
493,925

$
393,028Total assets

$
2,202,969

$
1,789,651

$
3,265,527




1




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##### Table of Contents




September 30, 2002 (unaudited)


September 30, 2001 (unaudited)


March 31, 2002 (unaudited)Liabilities and stockholders equityCurrent liabilities:Accounts payable

$
284,302


$
376,388


$
333,636Accrued operating expenses


38,853



31,264



98,420Accrued vacation


17,351



33,001



23,715Accrued payroll and payroll taxes


1,027



72,936



4,501Accrued interest payable


30,819



39,515



33,319Deferred revenue


342,118



342,118



344,618Notes payable


100,866



70,866



50,866Total current liabilities

$
815,336


$
966,088


$
889,075Long-term debt

$
0


$
0


$
50,000Commitments (Notes F, G and H)Stockholders equity:Common stock, $0.001 par value; 50,000,000 shares authorized; 18,407,493 shares issued

$
18,407


$
15,745


$
18,407Additional paid-in capital


17,817,465



14,652,779



17,817,465Accumulated deficit


(16,446,733
)


(13,843,456
)


(15,507,914
)Treasury stock  22,500 shares at cost


(1,506
)


(1,506
)


(1,506
)Total stockholders equity

$
1,387,633


$
823,563


$
2,326,452Total liabilities and stockholders equity

$
2,202,969


$
1,789,651


$
3,265,527







2




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##### Table of Contents




PREFERRED VOICE, INC.


CONDENSED STATEMENTS OF OPERATIONS


FOR THE THREE AND SIX MONTHS ENDED


SEPTEMBER 30, 2002 AND 2001


AND FOR THE YEAR ENDED MARCH 31, 2002





Three months ended September 30, 2002 (unaudited)


Six months ended September 30, 2002 (unaudited)


Three months ended September 30, 2001 (unaudited)


Six months ended September 30, 2001 (unaudited)


March 31, 2002 (audited)Sales

$
611,708


$
1,028,792


$
210,908


$
295,180


$
1,474,465Cost of sales


163,457



356,873



54,335



73,545



462,311Gross profit

$
448,251


$
671,919


$
156,573


$
221,635


$
1,012,154General and administrative expense

$
648,505


$
1,610,781


$
1,282,459


$
2,390,442


$
4,854,006Loss from operations

$
(200,254
)

$
(938,862
)

$
(1,125,886
)

$
(2,168,807
)

$
(3,841,852
)Other income (expense):Interest income

$
1,224


$
4,556


$
0


$
0


$
0Interest expense


(1,250
)


(2,500
)


(700
)


(1,850
)


(5,255
)Other expense


0



(2,015
)


0



0



0Total other income (expense)

$
(26
)

$
41


$
(700
)

$
(1,850
)

$
(5,255
)Loss from operations before income taxes

$
(200,280
)

$
(938,821
)

$
(1,126,586
)

$
(2,170,657
)

$
(3,847,107
)Provision for income taxes


0



0



0



0



0Loss from operations before extraordinary item

$
(200,280
)

$
(938,821
)

$
(1,126,586
)

$
(2,170,657
)

$
(3,847,107
)Gain from extinguishments of debt (net of applicable income taxes of $-0-)


0



0



0



0



11,992Net loss

$
(200,280
)

$
(938,821
)

$
(1,126,586
)

$
(2,170,657
)

$
(3,835,115
)Per share amounts:Loss from operations

$
(0.01
)

$
(0.05
)

$
(0.07
)

$
(0.14
)

$
(0.23
)Net loss per share

$
(0.01
)

$
(0.05
)

$
(0.07
)

$
(0.14
)

$
(0.23
)





See independent accountants review report.


The accompanying notes are an integral part of these statements.




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##### Table of Contents




PREFERRED VOICE, INC.


CONDENSED STATEMENTS OF CASH FLOWS


FOR THE SIX MONTHS ENDED


SEPTEMBER 30, 2002 AND 2001


AND FOR THE YEAR ENDED MARCH 31, 2002





September 30, 2002 (unaudited)


September 30, 2001 (unaudited)


March 31, 2002 (audited)Cash flows from operating activities:Cash received from customers

$
900,158


$
245,441


$
1,365,158Cash paid to suppliers and employees


(1,899,943
)


(2,151,420
)


(4,707,443
)Interest received


4,556



0



0Interest paid


(5,000
)


0



0Net cash used by operating activities

$
(1,000,229
)

$
(1,905,979
)

$
(3,342,285
)Cash flows from investing activities:Capital expenditures

$
(74,772
)

$
(379,639
)

$
(978,046
)Increase in notes receivable


(12,000
)


0



0Employee advances (repayments)


1,953



922



(1,716
)Net cash used by investing activities

$
(84,819
)

$
(378,717
)

$
(979,762
)Cash flows from financing activities:Proceeds from issuance of stock

$
0


$
783,667


$
4,072,035Proceeds from issuance of note


0



0



50,000Stock issuance costs


(4,071
)


0



(232,986
)Net cash provided (used) by financing activities

$
(4,071
)

$
783,667


$
3,889,049Net decrease in cash and cash equivalents

$
(1,089,119
)

$
(1,501,029
)

$
(432,998
)Cash and cash equivalents:Beginning of period


1,302,754



1,735,752



1,735,752End of period

$
213,635


$
234,723


$
1,302,754





See independent accountants review report.


The accompanying notes are an integral part of these statements.







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##### Table of Contents




June 30, 2002
(unaudited)


June 30, 2001
(unaudited)


March 31, 2002 (unaudited)Reconciliation of net loss to net cash used by operating activities:Net loss

$
(938,821
)

$
(2,170,657
)

$
(3,835,115
)Adjustments to reconcile net loss to net cash used by operating activities:Depreciation and amortization

$
212,564


$
210,793


$
465,723(Gain) loss on sale of fixed assets


2,014



(3,291
)


0Fair value of stock warrants issued in Exchange for services


0



0



91,186Forgiveness of debt


0



0



(11,992
)Changes in assets and liabilities:Increase in accounts receivable


(126,134
)


(49,739
)


(123,799
)Decrease in inventory


0



0



49,085(Increase) in deposits


0



(1,594
)


(8,926
)(Increase) decrease in prepaid expenses


(2,581
)


334



(27,918
)Increase in patents and trademarks


(23,533
)


(3,832
)


(5,002
)Increase (decrease) in accounts payable


(49,335
)


38,118



(4,634
)Increase (decrease) in accrued expenses


(71,903
)


73,889



66,607Decrease in customer deposits


(2,500
)


0



2,500Total adjustments

$
(61,408
)

$
264,678


$
492,830Net cash used by operating activities

$
(1,000,229
)

$
(1,905,979
)

$
(3,342,285
)Supplemental schedule of non-cash investing and financing activities:Issuance of common stock in exchange for debt

$
0


$
16,786


$
34,247







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, 2002, Form 10KSB and should be read in conjunction with the financial statements for the three and six months ended September 30, 2002, contained herein.





The financial information included herein as of September 30, 2002, and for the three and six month periods ended
September 30, 2002 and 2001, have 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.





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





At September 30, 2002, the Company had cash balances of approximately $226,000 in banking institutions in excess of federally insured amounts. These
balances are before considering outstanding items.





For the three months ended September 30, 2002,
the Company earned 21% of revenue from one customer. At September 30,2002, accounts receivable includes 28% receivable from one customer.




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





Depreciation





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





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





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





Computer equipment

5 yearsFurniture and fixtures

5 yearsOffice equipment

5 years





Fair value of financial instruments





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





Revenue recognition





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




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PREFERRED VOICE, INC.





NOTES TO FINANCIAL STATEMENTS







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





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 September 30, 2002 and 2001, no computation of diluted EPS has been performed.





Loss per
share is based on the weighted average number of shares outstanding of 18,407,493 and 15,722,071 for the three months ended September 30, 2002 and 2001, respectively, and 18,407,493 and 13,746,255 for the six months ended September 30, 2002 and
2001, respectively.





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 20 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 Assetseffective 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.




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##### Table of Contents



PREFERRED VOICE, INC.





NOTES TO FINANCIAL STATEMENTS







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





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.





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





Gain from extinguishment of debt


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




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##### Table of Contents



PREFERRED VOICE, INC.





NOTES TO FINANCIAL STATEMENTS







Note CNotes payable:





Notes payable consist of the following:





September 30, 2002

March 31, 2002Note payable, Brite Voice Systems, Inc., dated January 31, 1997. Note is unsecured.

$
50,866

$
50,866Note payable, 10% interest rate. Principal and accrued interest payable on September 30, 2003. Convertible into
shares of the Companys common stock at a conversion rate of $2.00 of indebtedness per share of common stock.


50,000


0$
100,866

$
50,866





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 notes payable was $1,250 and $-0- for the three months ended September 30, 2002 and 2001,
respectively.





Note DLong-term debt:





Long-term debt consists of the following:





September 30, 2002

March 31, 2002Note payable, 10% interest rate. Principal and accrued interest payable on September 30, 2003. Convertible into shares
of the Companys common stock at a conversion rate of $2.00 of indebtedness per share of common stock.

$
0

$
50,000





Interest expense charged to operations related to the long-term
debt was $-0- and $700 for the three months ended September 30, 2002 and 2001, respectively.





Note ECommon stock:





Common stock authorized





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




10




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##### Table of Contents



PREFERRED VOICE, INC.





NOTES TO FINANCIAL STATEMENTS







Note ECommon stock (continued):





Stock purchase warrants





At September 30, 2002, the Company had outstanding warrants to purchase 4,318,703 shares of the Companys common stock at prices which ranged from
$0.50 per share to $3.53 per share. The warrants are exercisable at any time and expire through November 20, 2006. At September 30, 2002, 4,318,703 shares of common stock were reserved for that purpose.





Common stock reserved





At September 30, 2002, shares of common stock were reserved for the following purposes:





Exercise of stock warrants

4,318,703Exercise of future grants of stock options and stock appreciation rights under the 1994 stock option plan

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

2,000,0006,655,835





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, 2002:





Year ending March 31,

Amount2003

$176,4332004

169,5242005

170,5262006

127,895$644,378





Total rent expense charged to operations was $52,209 and $51,062
for the three months ended September 30, 2002 and 2001, respectively.




11




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##### Table of Contents



PREFERRED VOICE, INC.





NOTES TO FINANCIAL STATEMENTS







Note GOperation and managements intent:





Operating losses





The Company has incurred substantial operating losses to date. The Company intends to increase sales by focusing on its marketing of revenue sharing agreements to various telecommunication service
providers throughout the United States.





Stock offerings





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





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





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





Operations





As of September 30, 2002, the Company has entered into
forty-seven 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.





Managements intent





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





Note HContingencies:





The Company has been
the plaintiff and the counter-defendant in a lawsuit with a former customer. The former customer placed a cash deposit for an order of certain items with the Company. After the customer received the first stage of its order, the customer wanted to
cancel the order. The Company claimed that under the terms of the order the customer was not entitled to a refund of its deposits as deferred revenue.





In September 2002, the lawsuit proceeded to trial. The jury returned its verdict on September 25, 2002; but prior to any judgment being signed by the court, the parties announced that all matters in
dispute between them had been resolved by an agreement. Among other items, the agreement called for the Company to return $150,000 of the customers deposit no later than October 1, 2003. The two parties requested that the court sign the
agreement. As of September 30, 2002 and the subsequent period between September 30, 2002 and the date of the review report, the court has yet to sign the agreement. The Company will not recognize the difference between the deferred revenue and
settlement agreement amount as revenue until the court signs the agreement; therefore, the total deferred revenue will remain on the Companys balance sheet. As of September 30, 2002 and March 31, 2001, the balance in deferred revenue is
$344,618.







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





We first attempted to sell our hardware and license our application software but after only one such agreement with KMC Telecom Holdings, Inc. (KMC) we decided
to pursue revenue sharing whereby we provide all hardware, software applications and support in exchange for a portion of revenue generated from the service provided by our customer to their subscribers. Our entire sales force focuses on marketing
our revenue sharing agreements and, to date, we have signed forty eight (48) local telephone company and cell phone company multi-year contracts. Seventeen contracts have been fully implemented so that the systems installed pursuant to such
contracts are already generating revenues for us. As of September 30, 2002, these seventeen contracts were generating revenues of approximately $190,000 per month. The revenue sharing agreement, and not the sale of our hardware, is the primary
method in which we intend to contract with customers to generate revenue going forward. Since our deployments began in October of 2000, we have experienced increased revenues each month but with a new technology it is difficult to project continued
satisfaction with the product; therefore, revenues will fluctuate with subscriber additions and deletions. One contracting phone company is in the system acceptance and early marketing stages, and we should generate revenues from this contract by
the third quarter of the fiscal year ending March 31, 2003.





We are still at an early stage of implementing our
business plan. It is subject to risks inherent in the establishment and deployment of technology with which consumers have limited experience. We believe our services are services that any consumer who uses a phone can utilize. For example, any cell
phone user who wants to speak a name or use our dial number feature without punching buttons on his cell phone would be a user, or a company who wants their employees accessed by the caller saying an employee name instead of asking the caller to




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##### Table of Contents

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





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




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




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




| |  |  | establish a lead time for delivery of hardware;
| | - |  | -----------------------------------------------




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




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




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




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




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




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




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





Results of Operations





We recorded a net loss of $938,821
or $0.05 per share, for the six-month period ended September 30, 2002, compared to a net loss of $2,170,657 or $0.14 per share, for the six-month period ended September 30, 2001. For the three-month period ended September 30, 2002, we recorded a net
loss of $200,280, or $.01 per share compared to a net loss of $1,126,586 or $.07 per share for the three-month period ended September 30, 2001.





Total Sales





Total revenue for the six-month period ended
September 30, 2002, was $1,028,792 compared to $295,180 for the six-month period ended September 30, 2001. Total revenue for the three-month period ended September 30, 2002, was $611,708 compared to $210,908 for the three-month period ended
September 30, 2001. Revenues in both the six-month and three-month periods for both years consisted of revenue sharing receipts from our customer phone companies and billing our direct end-users for individual services. The 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 2003 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.




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Cost of Sales





Cost of sales for the six-month period ended September 30, 2002 was $356,873 compared to $73,545 for the six-month period ended September 30, 2001. Cost of sales for the
three-month period ended September 30, 2002 was $163,457 compared to $54,335 for the three-month period ended September 30, 2001. Cost of sales consisted entirely of costs for network infrastructure such as collocations, connectivity, system access
and long distance to end-users during both periods.





Selling, General and Administrative





Selling, general and administrative expenses for the six-month period ended September 30, 2002 were $1,610,781 compared to
$2,390,442 for the six-month period ended September 30, 2001. Selling, general and administrative expenses for the three-month period ended September 30, 2002 were $648,505 compared to $1,282,459 for the three-month period ended September 30, 2001.
The decrease from 2001 to 2002, are due to decreases in staffing. We expect that selling, general and administrative expenses will remain steady through fiscal year 2003, such expenses to include costs related to the number of employees, office
space requirements and general overhead. However, we believe that such expenses will begin to increase again in fiscal year 2004 as the company expects to market new services.





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 September 30, 2002 and 2001, software development costs
capitalized were $68,941 and $155,155, respectively. The amortization of capitalized software development costs for the periods ended September 30, 2002 and 2001 was $47,507 and $119,738 respectively.





Income Taxes





As of September 30, 2002, we had cumulative federal net operating losses of approximately $16 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 September 30, 2002 were
$213,635, a decrease of $1,089,119 from $1,302,754 at March 31, 2002. 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,




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##### Table of Contents




On November 16, 2000, we filed a breach of contract suit against KMC and as of
September 30, 2002 still 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.





On March 1, 2001, KMC gave written notice to us that it was terminating its agreement with us effective on the anniversary
date, June 3, 2001, without cause. Upon a termination without cause under the terms of the contract, neither party would be entitled to receive any money back.





On September 16, 2002 the lawsuit against KMC went to trial in the 101 st Dallas District Court. The jury concluded that there was no breach by KMC in canceling the contract with Preferred but that Preferred had breached the contract with KMC by not completing system testing within the 90 day
testing period specified in the contract but that Preferred was justified in its breach and therefore excused from paying damages to KMC. KMC and Preferred have agreed to a settlement agreement whereby Preferred will pay KMC $150,000 no later than
October 1, 2003. We have requested that the court sign the agreement.





We have relied on the issuance of stock to
fund our operations since January of 1997 when we sold our long-distance resale operation. We began collecting revenues from our revenue sharing agreements in January of 2001. These revenues are approximately $200,000 per month and we expect these
to continue to rise 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.





Future Obligations





We project our working capital needs to be $1,200,000 over the next six months for corporate overhead and equipment purchases to continue
to deploy our systems in carrier locations. Management believes that current cash and cash equivalents and cash that may be generated from operations will be sufficient to meet these anticipated capital requirements and to finance continued growth
for the next six months. Such projections have been based on continued growth from our current customers and customers which are already under contract utilizing the revenue rates that we have experienced over the past six months with our currently
installed customers and projected cash requirements to support installation, sales and marketing, and general overhead. We may be forced to raise additional capital through the issuance of new shares, the exercise of outstanding warrants, or reduce
our current overhead. However, any projections of future cash needs and cash flows are subject to substantial uncertainty.





We do not make any assurance that we will be able to raise any additional capital or to raise capital on terms satisfactory to us. If we need to raise additional capital before November 21, 2002, we may be required to issue
additional shares of our common stock to the stockholders who purchased their stock in the November 21, 2001 offering pursuant to the terms of the subscription agreement executed between us and such stockholders. At this time we are not projecting
any requirements for additional employees during the next twelve (12) months. On May 31, 2002, we implemented a thirty-three (33) percent reduction in force and at November 11, 2002 we employed nineteen (19) employees, seventeen (17) that were full
time employees.




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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.





With respect to the KMC Telecom Holdings
litigation which was reported in the Form 10-KSB, on September 16, 2002 the lawsuit against KMC went to trial in the 101 st Dallas District Court, Texas. The jury concluded that there was no breach by KMC in canceling the contract with Preferred but that Preferred had breached the contract with KMC by not completing system testing within the
90-day testing period specified in the contract and that Preferred was justified in its breach and therefore excused from paying damages to KMC. In regards to attorneys fees, KMC and Preferred have agreed to a settlement agreement whereby
Preferred will pay KMC $150,000 no later than October 1, 2003, which will be memorialized in the judgment of the 101 st Dallas District Court and a related settlement agreement.





With respect to the
Proxhill Marketing Ltd. litigation which was reported in the Form 10-KSB, Preferred Voice and Proxhill reached an agreement to dismiss both the Texas litigation and the Colorado litigation after Proxhill provided verified financials that it was
unable to respond in damages once Preferred Voice prevailed in either lawsuit. The Texas litigation was dismissed on September 30, 2002 and the Colorado claim and counterclaim were dismissed on October 11, 2002.





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
|--- |  | ---------------------------------------




None





Item 3.    Defaults upon Senior Securities.





None.




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





Our
Stockholders met for the 2002 Annual Meeting of the Stockholders on September 26, 2002.





At that meeting, the
following directors were elected: G. Ray Miller, Mary G. Merritt, Scott V. Ogilvie and Leslie Melzer. Set forth in the following chart are the matters voted upon and the votes cast for, against or withheld, as well as abstentions and broker
non-votes:





Proposals

For

Withhold/ Against

Abstain

Broker Non-VotesDirectors:G. Ray Miller

13,567,898

212,500Mary G. Merritt

13,767,898

12500Scott V. Ogilvie

13,767,898

12500Leslie Melzer

13,767,898

12500





Item 5.    Other Information.





None





Item 6.    Exhibits and Reports on Form 8-K





(a)    Exhibits





Exhibit Number

Exhibit Description99.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.2

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





None







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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.November 13, 2002



/s/  William J. SchereckDate



William J. Schereck PresidentNovember 13, 2002



/s/  Mary G. MerrittDate



Mary G. Merritt Secretary, Treasurer and Vice President of Finance (Principal Financial
Officer)




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CERTIFICATIONS





I, William J. Schereck, certify that:





1. I have reviewed this quarterly report on Form 10-QSB of Preferred Voice, Inc.;





2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.





4. The
registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;





b.
evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and





c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;





5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):





a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and





b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrants internal controls; and





6. The registrants other
certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





/s/ William J. Schereck


---




William J. Schereck


President


(Principal Executive Officer)


November 13, 2002




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I, Mary G. Merritt, certify that:





1. I have reviewed this quarterly report on Form 10-QSB of Preferred Voice, Inc.;





2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;





3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.





4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





a. designed such disclosure controls and
procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;





b. evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and





c. presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;





5. The registrants
other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):





a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and





b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and





6. The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





/s/ Mary G. Merritt


---




Mary G. Merritt


Chief Financial Officer


(Principal Financial Officer)


November 13, 2002




21