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

                                   Form 10-QSB

{ X }  Quarterly  Report  Pursuant  to Section 13 or 15 (d) of the  Securities
     Exchange Act of 1934 for the Period Ended September 30, 1996. 0r
{   }  Transition  Report  Pursuant  to Section 13 or 15 (d) of the  Securities
     Exchange  Act of  1934  for  the  Transition  Period  From  _____________to
     _____________

Commission File Number  33-92894

                             Preferred/telecom, Inc.

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

12655 N. Central Expwy, Suite 800
Dallas,  TX                                                      75243
(Address of Principal Executive                               (Zip Code)
            Offices)

                                    (214)  458-9950
                  (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 Issuers Involved in Bankruptcy
                   Proceedings During the Preceding Five Years

     Indicate by check mark whether the  registrant  has filed all documents and
reports  required  to be filed by  Sections  12, 13, or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by the Court.     Yes           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 -  10,851,142  Shares as of October 31, 1996.

Transitional Small Business Format    Yes   X                 No



<PAGE>





                                      INDEX

                             Preferred/telecom, Inc.
                                                                            PAGE

Part I.  Financial Information                                               F-1

Item 1.   Financial Statements

         Balance  Sheets-September  30, 1996,  September 30, 1995,
          and March 31, 1996.

         Statements of  Operations-  Three Months Ended  September 
          30, 1996, and 1995,  Six Months Ended  September 30, 1996
          and 1995,  and for the Year Ended March 31, 1996.

         Statements of Cash Flows- Six Months Ended September 30, 
          1996, and 1995 and for the Year Ended March 31, 1996.

         Notes to Financial Statements - September 30, 1996.

Item 2.  Management's Discussion and Analysis of Financial 
          Condition and Results of Operations                                  1

Part II. Other Information

Item 1.  Legal Proceedings                                                     3

Item 2.  Changes in Securities                                                 3

Item 3.  Defaults upon Senior Securities                                       3

Item 4.  Submission of Matters to a Vote of Security Holders                   3

Item 5.  Other Information                                                     3

Item 6.  Exhibits and Reports on Form 8-K                                      3

Signatures                                                                     5

<PAGE>
                             PREFERRED/TELECOM, INC.

                                 BALANCE SHEETS
                 SEPTEMBER 30, 1996 AND 1995 AND MARCH 31, 1996

<TABLE>
<CAPTION>

                                                                           SEPTEMBER 30,        SEPTEMBER 30,          MARCH 31,
                                                                                 1996                 1995                 1996
ASSETS                                                                      (UNAUDITED)          (UNAUDITED)           (AUDITED)

      CURRENT ASSETS:
<S>                                                                     <C>                 <C>                   <C>            
          CASH AND CASH EQUIVALENTS                                     $        18,250     $         75,096      $        42,574
                                                                                 
           ACCOUNTS RECEIVABLE, NET OF
           ALLOWANCE                                                            206,205               13,130               57,475
           FOR DOUBTFUL ACCOUNTS OF $ 2,474,
           $-0- AND $2,474 RESPECTIVELY
          EMPLOYEE RECEIVABLES
                                                                                  1,507                3,500               13,185
          PREPAID EXPENSES
                                                                                198,810               24,595               30,917
                                                                     -------------------  -------------------  -------------------

      TOTAL CURRENT ASSETS                                              $       424,772              116,321              144,151
                                                                     -------------------  -------------------  -------------------

      PROPERTY AND EQUIPMENT:
         COMPUTER EQUIPMENT                                             $       103,663               57,466
                                                                                                                           99,979
         FURNITURE AND FIXTURES
                                                                                 25,143               18,075               24,550
         OFFICE EQUIPMENT
                                                                                  6,082                2,184                6,082
         LEASEHOLD IMPROVEMENTS
                                                                                  6,248                2,553                6,248
         CALL VALIDATION SYSTEM
                                                                                127,682                  -O-              112,520
         LESS:  ACCUMULATED DEPRECIATION
                                                                               (50,250)              (8,836)             (23,419)
                                                                     -------------------  -------------------  -------------------

      NET PROPERTY AND EQUIPMENT                                        $       218,568               71,442              225,960
                                                                     -------------------  -------------------  -------------------

      OTHER ASSETS:
         DEPOSITS                                                      $        103,624                4,199               14,852
         PREPAID EXPENSES                                                       640,000                  -O-                  -O-
         DEFERRED CONTRACT COSTS
                                                                                107,327              156,938              121,576
         DEFERRED DEBT ISSUE COSTS-NET                                            4,387               37,913                4,333
         PATENTS AND TRADEMARKS-NET
                                                                                 21,751                  -O-               16,208
         CERTIFICATE OF DEPOSIT
                                                                                 50,445                  -O-               50,445
         DEFERRED STOCK ISSUE COSTS
                                                                                 68,241                  -O-                  -O-
                                                                     -------------------  -------------------  -------------------

      TOTAL OTHER ASSETS                                               $        995,775     $        199,050      $       207,414
                                                                     -------------------  -------------------  -------------------

TOTAL ASSETS                                                           $      1,639,115     $        386,813      $       577,525
                                                                     ===================  ===================  ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                          SEPTEMBER 30,        SEPTEMBER 30,          MARCH 31,
                                                                               1996                 1995                 1996
LIABILITIES AND STOCKHOLDER'S DEFICIT                                       (UNAUDITED)          (UNAUDITED)           (AUDITED)

    CURENT LIABILITIES:
<S>                                                                     <C>                  <C>                 <C>             
       ACCOUNTS PAYABLE                                                 $       769,420      $       224,642     $        526,162
       ACCRUED OPERATING & VACATION EXPENSES
                                                                                 72,077               42,603               56,567
       ACCRUED PAYROLL AND RELATED TAX
                                                                                397,263              145,561              162,411
       ACCRUED INTEREST PAYABLE
                                                                                 81,290               48,481               20,866
       NOTES PAYABLE
                                                                              1,197,446            1,197,500              985,000
       NOTES PAYABLE-OFFICERS
                                                                                 57,500               57,500               57,500
                                                                     -------------------  -------------------  -------------------

      TOTAL CURRENT LIABILITIES                                          $    2,574,996      $     1,716,287      $     1,808,506
                                                                     -------------------  -------------------  -------------------



      LONG TERM DEBT                                                     $      875,000      $           -O-      $           -O-
                                                                     -------------------  -------------------  -------------------


      COMMITMENTS AND CONTINGENCIES (NOTE G)



      STOCKHOLDERS DEFICIT:
       COMMON STOCK, $0.001 PAR VALUE
         20,000,000 SHARES AUTHORIZED;
         SHARES ISSUED 10,851,142, 7,370,000
         AND 8,949,942 RESPECTIVELY                                    $         10,851      $         7,370     $          8,950
      ADDITIONAL  PAID IN CAPITAL                                             2,898,934
                                                                                                      35,480            1,916,632
      ACCUMULATED DEFICIT                                                   (4,718,798)          (1,360,724)          (3,156,428)
      TREASURY STOCK - AT COST
                                                                                (1,868)                  -O-                (135)
      STOCK SUBSCRIPTIONS RECEIVABLE
                                                                                    -O-             (11,600)                  -O-
                                                                     -------------------  -------------------  -------------------

      TOTAL STOCKHOLDER DEFICIT                                        $    (1,810,881)      $   (1,329,474)     $    (1,230,981)
                                                                     -------------------  -------------------  -------------------

TOTAL LIABILITIES AND STOCKHOLDER DEFICIT                              $      1,639,115      $       386,813     $        577,525
                                                                     ===================  ===================  ===================
</TABLE>
<PAGE>
                             PREFERRED/TELECOM, INC.

                            STATEMENTS OF OPERATIONS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
            AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                      AND FOR THE YEAR ENDED MARCH 31, 1996


<TABLE>
<CAPTION>

                                          THREE MONTHS ENDED                                   SIX MONTHS ENDED
                                ----------------------------------------  ----------------------------------------
                                     SEPTEMBER 30,        SEPTEMBER 30,        SEPTEMBER 30,        SEPTEMBER 30,        MARCH 31,
                                         1996                 1995                 1996                 1995                1996
                                     (UNAUDITED)          (UNAUDITED)          (UNAUDITED)          (UNAUDITED)          (AUDITED)
                                -------------------  -------------------  -------------------  -------------------  ----------------

<S>                                 <C>                  <C>                 <C>                  <C>                  <C>          
SALES                               $      269,496       $  13,265           $   478,910          $   14,450           $     159,004

COST OF SALES                              293,771          93,081               583,896              93,851                 344,310
                                -------------------  -------------------  -------------------  -------------------  ----------------

   GROSS PROFIT (LOSS)              $     (24,275)       $(79,816)           $  (104,986)         $ (79,401)           $   (185,306)
                                -------------------  -------------------  -------------------  -------------------  ----------------

COSTS AND EXPENSES:
  SALES & MARKETING                 $      388,811       $ 227,938           $   752,237          $  307,955           $   1,091,453
  GENERAL & ADMINISTRATIVE                  330785         333,778               619,076             501,089               1,360,693
  INTEREST EXPENSE                           57968          35,521                86,071              86,469                  39,772
                                -------------------  -------------------  -------------------  -------------------  ----------------
    TOTAL COSTS AND EXPENSES        $      777,564       $ 597,237           $ 1,457,384          $  848,816           $   2,538,615
                                -------------------  -------------------  -------------------  -------------------  ----------------

LOSS BEFORE INCOME TAX              $    (801,839)       (677,053)           (1,562,370)          $(928,217)           $ (2,723,921)

PROVISION FOR INCOME TAX                       -O-             -O-                   -O-                 -O-                     -O-
                                -------------------  -------------------  -------------------  -------------------  ----------------

NET LOSS                            $    (801,839)       (677,053)           (1,562,370)          $(928,217)           $ (2,723,921)
                                ===================  ===================  ===================  ===================  ================

NET LOSS PER SHARE                  $       (0.07)          (0.10)                (0.16)              (0.14)                  (0.35)
                                ===================  ===================  ===================  ===================  ================
</TABLE>
<PAGE>
                             PREFERRED/TELECOM, INC.

                             STATEMENT OF CASH FLOWS
              FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                      AND FOR THE YEAR ENDED MARCH 31, 1996

<TABLE>
<CAPTION>

                                                                           SEPTEMBER 30,        SEPTEMBER 30,         MARCH 31,
                                                                               1996                 1995                 1996
                                                                           (UNAUDITED)          (UNAUDITED)           (AUDITED)
                                                                     -------------------  -------------------  -------------------

      CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                   <C>                   <C>                   <C>            
        CASH RECEIVED FROM CUSTOMERS                                  $         330,180     $          1,320      $       101,529
                                                                                                                    
        CASH PAID TO SUPPLIERS AND EMPLOYEES                                (1,522,190)            (832,889)          (2,359,786)
        INTEREST PAID
                                                                                    -O-                  -O-             (75,916)
                                                                     -------------------  -------------------  -------------------

               NET CASH USED BY OPERATING                             $     (1,192,012)     $      (831,569)      $   (2,334,173)
      ACTIVITIES
                                                                     -------------------  -------------------  -------------------

      CASH FLOWS FROM INVESTING ACTIVITIES:
         CAPITAL EXPENDITURES                                         $        (33,988)     $       (54,178)      $     (246,459)
         PURCHASE OF CERTIFICATE OF DEPOSIT
                                                                                    -O-                  -O-             (50,000)
         PROCEEDS FROM SALE OF FIXED ASSETS
                                                                                    -O-                  -O-                3,056
                                                                     -------------------  -------------------  -------------------

      NET CASH USED BY INVESTING ACTIVITIES                           $        (33,988)     $       (54,178)      $     (293,403)
      
                                                                     -------------------  -------------------  -------------------

      CASH FLOWS FROM FINANCING ACTIVITIES:
         PROCEEDS FROM SALE OF STOCK                                  $             150     $         25,100      $     1,938,332   
         PROCEEDS FROM NOTES PAYABLE
                                                                              1,271,500              900,000              687,500
         INCREASE IN DEFERRED OFFERING COST
                                                                               (68,241)              (7,610)                  -O-
         PURCHASE OF TREASURY STOCK
                                                                                (1,733)                  -O-                (135)
         DECREASE IN STOCK SUBSCRIPTION
      RECEIVABLE                                                                    -O-                  -O-                1,100
                                                                     -------------------  -------------------  -------------------

               NET CASH PROVIDED BY FINANCING ACTIVITIES               $      1,201,676     $        917,490       $    2,626,797
                                                                     -------------------  -------------------  -------------------

      NET INCREASE (DECREASE) IN CASH AND
          CASH EQUIVALENTS                                             $       (24,324)     $         31,743       $        (779)

      CASH AND CASH EQUIVALENTS:
         BEGINNING OF PERIOD
                                                                                 42,574               43,353               43,353
                                                                     -------------------  -------------------  -------------------

         END OF PERIOD                                                 $         18,250     $         75,096       $       42,574
                                                                                 
                                                                     ===================  ===================  ===================
</TABLE>



      SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
                  AND FINANCING
      ACTIVITIES:
          ISSUANCE OF COMMON STOCK IN EXCHANGE FOR
             BARTERING CREDITS                                         $ 800,000
          CONVERSION OF DEBENTURE TO COMMON STOCK
                                                                          75,000
                                                             -------------------

      TOTAL NON-CASH INVESTING ACTIVITIES                              $ 875,000
                                                             ===================
<PAGE>
<TABLE>
<CAPTION>

                                                                           SEPTEMBER 30,        SEPTEMBER 30,          MARCH 31,
                                                                                1996                 1995                 1996
                                                                             (UNAUDITED)          (UNAUDITED)           (AUDITED)
                                                                     -------------------  -------------------  -------------------

      RECONCILIATION OF NET LOSS TO NET CASH
                  USED BY OPERATING ACTIVITIES:

<S>                                                                     <C>                 <C>                   <C>            
      NET LOSS                                                          $   (1,562,370)     $      (928,217)      $   (2,723,921)
                                                                     -------------------  -------------------  -------------------

      ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
                 USED BY OPERATING
      ACTIVITIES:

         DEPRECIATION                                                   $        26,830     $          6,440      $        25,017
         AMORTIZATION                                                            23,201                8,714               29,604
     (GAIN) LOSS ON SALE OF FIXED ASSETS
                                                                                    -O-                  -O-                (636)


     CHANGES IN ASSETS AND LIABILITIES:
      (INCREASE) DECREASE IN ACCOUNTS RECEIVABLE
                                                                              (148,730)             (13,130)             (57,475)
      (INCREASE) DECREASE IN EMPLOYEE RECEIVABLES
                                                                                 11,678              (3,500)             (13,185)
      (INCREASE) DECREASE IN CERTIFICATE OF DEPOSIT
                                                                                    -O-                  -O-                (445)
      (INCREASE) DECREASE IN DEPOSITS
                                                                               (88,772)              (1,354)             (12,007)
      (INCREASE) DECREASE IN PREPAID
       EXPENSES                                                                  (7,893)             (23,404)             (29,726)
      (INCREASE) DECREASE IN DEFERRED CONTRACT COSTS
                                                                                    -O-            (135,500)            (114,500)
      INCREASE (DECREASE) IN ACCOUNTS
       PAYABLE                                                                   243,258              224,642              526,162
      INCREASE (DECREASE) IN ACCRUED
       EXPENSES                                                                  310,786               33,740               36,939
                                                                     -------------------  -------------------  -------------------

                                                                         $    370,358.0     $         96,648      $       389,748
                                                                     -------------------  -------------------  -------------------

      NET CASH USED BY OPERATING ACTIVITIES                             $ (1,192,012.0)     $      (831,569)      $   (2,334,173)
                                                                     ===================  ===================  ===================
</TABLE>
<PAGE>

                             PREFERRED/TELECOM, INC.

                          NOTES TO FINANCIAL STATEMENTS

NOTE A - GENERAL ORGANIZATION

Preferred/telecom,  Inc. (the "Company") is a Delaware corporation  incorporated
in  1992.  The  Company  commenced  business  on May  13,  1994,  and was in the
development  stage until  August 1, 1995.  The Company  provides  long  distance
telecommunications  services  throughout  the United  States and  maintains  its
principal  offices in Dallas,  Texas.  The Company has not  presented  financial
statements  for the period from  incorporation  in 1992 through May 14, 1994, as
the Company did not begin its planning and  organizational  activities until May
13, 1994. In the opinion of management,  the  accompanying  unaudited  financial
statements  reflect  all  adjustments   (consisting  only  of  normal  recurring
adjustments)  that  are  necessary  for a fair  presentation  of  the  financial
position of the Company at September 30, 1996, the results of its operations for
the three and six months  ended  September  30, 1996 and 1995 and the results of
the cash flows for the six  months  ended  September  30,  1996 and 1995.  These
financial  statements  should  be read in  conjunction  with  the  notes  to the
Company's annual financial statements that were included in the Company's Annual
Report  on Form  10-KSB  for the  year  ended  March  31,  1996  filed  with the
Securities and Exchange Commission (the "Commission") on August 2, 1996.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS

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

ACCOUNTS RECEIVABLE

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

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
                  Leasehold Improvements                      6 years

INCOME TAXES

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

LOSS PER SHARE

Loss per share is based on the weighted average number of shares  outstanding of
10,745,544  and 9,936,904  for the three months and six months ending  September
30, 1996,  respectively;  7,172,391  and  6,926,448 for the three months and six
months  ending  September  30, 1995,  respectively  and 7,769,708 for the period
ending March 31, 1996.

AMORTIZATION

Fees and other expenses associated with the issuance of subordinated convertible
debentures are being amortized on the straight-line  method over the term of the
debentures beginning in April, 1995. Amortization expense was $18,634 and $8,888
for the six months and three months ended  September,  1996,  respectively;  and
$5,152 and $ 2,576 for the six months and three  months ended  September,  1995,
respectively; and $ 10,303 for the fiscal year ended March 31, 1996.
<PAGE>

                          NOTES TO FINANCIAL STATEMENTS

AMORTIZATION (CONTINUED)

The cost of patents and trademarks are being amortized on the straight line over
a period of 15 years. Amortization expense charged to operations as of September
30, 1996 was $ 2,308,  $ 4,628 and $ 559 for the three months and six months and
for the fiscal year ended March 31, 1996, respectively.

NOTE C-NOTES PAYABLE-RELATED PARTIES

Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>

                                                                       SEPT. 30,              SEPT. 30,      MARCH 31,
                                                                          1996                  1995           1996
                                                                       ----------            --------        --------

Notes payable to a director and officer, dated Sept. 1,1994
and June 12, 1996, due on Oct. 1, 1996 and June 12, 1998,
and unsecured, interest payable semi-annually at a rate of
prime + 2% (8.25% at Sept. 30, 1996 and March 31, 1996
<S> <C>                                                               <C>               <C>               <C>        
and 7% per annum).                                                    $     67,500      $      7,500      $     7,500

Notes payable to a director and officer, dated June 5,1994
due on Oct. 1, 1996 and unsecured, interest payable semi-
annually at a rate of prime + 2% (8.25% at Sept. 30, 1996
and March 31, 1996).                                                        50,000            50,000           50,000

Notes Payable to Pegasus  Settlement  Trust (PST), a stockholder
of the Company. The beneficiary and a trustee of PST are officers
of the Company.  The notes are unsecured  and bear interest at 
rates  ranging from prime  rate(8.25%  and 9% at September, 1996
 and March, 1996) with the principal and accrued interest payable
at maturity on various dates through January 31, 1997                      590,946           550,000          650,000

Notes payable to a stockholder of the Company and several  
affiliated  trusts of which the stockholder is the trustee.  
The notes are unsecured and bear interest at rates of 9% and
 10% per annum and prime  (8.25%  at  September  30,  1996 and
March 1996) with principal and accrued interest payable at
various dates through November 26, 1996                                    325,000           225,000          225,000
                                                                         ----------         ---------        ---------  

         Total related party notes payable                             $ 1,033,446         $ 832,500        $ 932,500
</TABLE>

Interest  expense  charged to  operations  related to the  related  party  notes
payable  was  $48,246  and  $24,945  for the six months and three  months  ended
September,  1996, respectively;  and $24,780 and $ 16,098 for the six months and
three months ended September,  1995,  respectively;  and $ 78,943 for the fiscal
year ended March 31, 1996.

NOTE D-LONG TERM DEBT

Long-term  debt  consisted of the  following at September  30, 1996 and 1995 and
March 31, 1996:
<TABLE>
<CAPTION>

                                                                                SEPT. 30,                 SEPT. 30,        MARCH 31,
                                                                                   1996                       1995           1996
                                                                                ----------                --------        ----------
     1996
Notes payable dated various dates from May 20, 1996 through  September 24, 1996,
secured by common stock with  principal and accrued  interest due at maturity on
various dates through September 24, 1998. 437,500 warrants to purchase shares of
common stock at $ 1.50 per share expiring from dates in May
<S>                <C>                                                          <C>                      <C>    <C>       <C>    <C>
through September, 1998 were issued to the note holders                         $ 875,000**              $     -0-        $     -0-
                                                                                ---------                ---------        ----------


                                                         Total                    875,000                $     -0-        $     -0-
</TABLE>

**Includes $ 60,000  in related party participation.
<PAGE>

                          NOTES TO FINANCIAL STATEMENTS

The following are maturities of long term debt for each of the next three years:

                  YEAR ENDING
                    MARCH 31,                        AMOUNT

                      1997                           $        0
                      1998                           $        0
                      1999                           $  875,000
                                                     ----------

                           Total                     $  875,000

NOTE E - COMMON STOCK:

STOCK PURCHASE WARRANTS

At  September  30,  1996,  the  Company  had  outstanding  warrants  to purchase
1,950,400 shares of the Company's common stock at prices which ranged from $0.04
per share to $2.44 per  share.  The  warrants  are  exercisable  at any time and
expire on dates  ranging from January 27, 1997 to June 3, 2001. At September 30,
1996, 1,950,400 shares of common stock were reserved for that purpose.

CHANGE IN AUTHORIZED SHARES

On March 15, 1995, the Company's  stockholders approved an amendment to increase
the number of authorized shares of common stock from 10,000,000 to 15,000,000.

On July 25, 1995, the Company's  stockholders  approved an amendment to increase
the number of authorized shares of common stock from 15,000,000 to 20,000,000.

COMMON STOCK RESERVED

At September  30, 1996,  shares of common stock were  reserved for the following
purposes:

                  Exercise of stock warrants                           1,950,400
                  Conversion of convertible debentures                    23,333
                  Exercise and future grants of stock options
                        and stock appreciation rights                    405,000

                           Total                                       2,378,733

NOTE F - STOCK OPTION PLAN:

On November 1, 1994, the Company  adopted a stock award and incentive plan which
permits  the  issuance  of options  and stock  appreciation  rights to  selected
employees  and  independent  contractors  of the  Company.  The plan  originally
reserved  450,000 shares of common stock for grant,  of which 45,000 shares have
been  purchased,  leaving  405,000 shares of common stock for grant and provides
that the term of each  award be  determined  by the  committee  of the  Board of
Directors (Committee) charged with administering the plan.

Under the terms of the  plan,  options  granted  may be either  nonqualified  or
incentive stock option, and the exercise price, determined by the Committee, may
not be less  than the  fair  market  value of a share on the date of the  grant.
Stock appreciation  rights granted in tandem with an option shall be exercisable
only to the extent the  underlying  option is  exercisable  and the grant  price
shall be equal to the exercise price of the underlying  option. At September 30,
1996,  options to purchase  164,500  shares at exercise  prices of  $0.0031/3 to
$1.50 per share  have  been  granted.  No stock  appreciation  rights  have been
granted at September 30, 1996.

NOTE G - COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENT

The  Company  has  entered  into a  non-cancelable  operating  lease for  office
facilities  under a lease  agreement  which  commenced  on  February 1, 1996 and
expires on August 31, 2002.  Minimum future rental to be paid on  non-cancelable
leases as of September 30, 1996 for each of the next five years in the aggregate
are:
<PAGE>


                          NOTES TO FINANCIAL STATEMENTS

NOTE G - COMMITMENTS AND CONTINGENCIES: (CONTINUED)


LEASE COMMITMENT (CONTINUED)

                  YEAR ENDING
                    MARCH 31,                        AMOUNT

                      1997                           $   127,836
                      1998                               127,836
                      1999                               131,708
                      2000                               151,608
                      2001                               151,608
                  Thereafter                             214,013

                                                     $   904,609

Total rent expense charged to operations  $64,560 and $32,602 for the six months
and three months ended September,  1996,  respectively;  and $16,571 and $ 8,852
for the six months and three months ended September,  1995, respectively;  and $
49,661 for the fiscal year ended March 31, 1996.

LETTER OF CREDIT

At September 30, 1996,  the Company had a $50,000  outstanding  letter of credit
expiring February 1, 1998. The letter of credit is for the benefit of the lessor
of office space facilities and may be drawn in the event of default.  The letter
of credit is secured by a certificate of deposit in the amount of $50,445.

CARRIER AGREEMENT

The Company is obligated for minimum monthly service payments under the terms of
a carrier  services  agreement  with MCI  Telecommunications  Corporation  (MCI)
expiring in October 1998. The minimum annual commitments under the MCI agreement
are:

                  YEAR ENDING
                    MARCH 31,                                AMOUNT

                      1997                           $      9,725,000
                      1998                                 12,000,000
                      1999                                 12,000,000
                      2000                                  7,000,000
                                                     -----------------

                                                     $     40,725,000

The MCI  agreement  is for a period of 46 months.  The  Company  has a liability
equal to fifteen (15) percent of the remaining  minimum payments in the event of
termination prior to expiration by the Company or MCI under certain  conditions.
The remaining liability amounts to a maximum of $ 6,000,000.  Initially,  60% of
the Company's  revenues will be paid to MCI,  subject to subsequent  adjustments
for over and underpayments.


OTHER COMMITMENTS

On April 19, 1995, the Company entered into an equipment and services  agreement
with Brite Voice Systems,  Inc. (BVS).  Under the terms of this  agreement,  the
Company paid BVS an initial fee of $89,500 and minimum monthly payments are due,
starting at $ 20,000 per month,  for a period of three years.  The total minimum
monthly  commitments  amount to  $900,000,  over the term of the  agreement.  In
return,   BVS  will  provide  access  to  its   technology   used  in  providing
voice-activated calling card services.




<PAGE>
                          NOTES TO FINANCIAL STATEMENTS

NOTE H - BARTER TRANSACTION

On June 3, 1996,  the Company  entered into a media  purchase  agreement for the
promotion of its products and services with Proxhill Marketing, Ltd. (Proxhill).
Under the terms of the agreement,  the Company committed to purchase  $1,200,000
of media  advertising  time in exchange for 400,000  shares of common stock at a
value of $ 2.00 per share,  and $400,000 in cash.  The agreement is for a period
of five years.  For each purchase of media  advertising  time,  the Company will
receive  a barter  credit  equal to  66.67% of the  transaction  value  with the
remaining  balance  payable in cash.  In  connection  with this  agreement,  the
Company  issued to Proxhill  100,000  options to purchase the  Company's  common
stock at a price of $2.00 per share. The options expire June 3, 2001.

NOTE I - GOING CONCERN

The Company has incurred  substantial  operating  losses to date. In June, 1995,
the Company issued 600,000  shares of its common stock to Star  Resources,  Inc.
(Star),  a public company,  for $ 24,000.  The Company then filed a registration
statement  with  the  Securities  and  Exchange  Commission  to  allow  Star  to
distribute  to its  stockholders  the  600,000  shares  of  common  stock.  Upon
completion  of the Star  distribution,  the  Company  became a  separate  public
company.  The Company has raised,  and intends to continue to raise,  additional
capital through subsequent offerings of its common stock.

In the quarter ended September 30, 1996, the Company  received total proceeds of
$875,000 in connection with a private offering of $10,000 notes bearing interest
at 7% and warrants to purchase 5,000 shares of common stock at a price of $1.50.
The offering  was closed on  September  30,  1996.  This  amount,  however,  was
insufficient  to fund the Company's  operations.  The Company has been forced to
significantly curtail its operations and made drastic cuts in its overhead.  The
Company has borrowed  $100,00 from a lender and has a commitment  from that same
lender for an  additional  advance of $50,000.  This short term  funding  should
allow the Company to continue its curtailed operations only through December 31,
1996.  The  Company  intends to make a private  placement  in the form of common
stock and warrants in the maximum amount of $1.8 million. If this maximum amount
is raised,  the Company should be able to resume  operations beyond December 31,
1996.

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.











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

The following  discussion and analysis  should be read in  conjunction  with the
Financial  Statements  of  the  Company  and  related  notes  thereto  appearing
elsewhere in this filing.

Results of Operations

Preferred/telecom,  Inc. (the Company)  commenced  business on May 13, 1994, and
was in the development  stage through August 1, 1995. During the period from its
inception  until  March 31,  1995,  the end of the fiscal  year,  the  Company's
activities  consisted entirely of developing and implementing its business plan,
including  developing its product service  offerings,  formulating its marketing
strategies and operations,  negotiation of agreements  necessary to its proposed
operations and hiring personnel. The Company began its sales activities in April
1995 and had no  revenues  during the period of May 13, 1994  through  March 31,
1995. The initial sales activity  involved  introducing  the Company's  proposed
services to  prospective  customers to gauge  consumer  response with respect to
pricing , features and  viability of the services.  The Company began  enrolling
SecureCard  customers  in  August  1995 and has  been  providing  long  distance
services,  including  SecureCard and  traditional 1+ and 800 services since that
time.

In the six months period ended September 30, 1995 the Company booked revenues of
$ 14,450 for services, and the direct costs associated with generating sales was
$ 93,851.  During the six months ended  September 30, 1996,  the Company  booked
revenues of $ 478,910.  Of this amount,  19% was  attributed  to the  SecureCard
product.  The  remainder  of the  Company's  revenue was derived from 1+ and 800
service. Direct cost of sales for the six month period ending September 30, 1996
was  $583,896  or  121.9%  of  sales.  Of that  amount,  $  127,500  related  to
contractual  minimums,  very  little of which  represented  payment  for  actual
services. In part, this is due to the costs of the basic infrastructure that the
Company has put in place and is required regardless of the level of sales.

During the fiscal year ended  March 31,  1996,  the Company  booked $ 159,004 in
revenue and $ 344,310 in direct expenses  associated with the sale of SecureCard
and  other  telecommunication  services.  Of these  direct  expenses,  $ 140,000
related to paying contractual  minimums.  For the six months ended September 30,
1996,  sales  and  marketing  expenses  were  113% of  sales,  and  general  and
administrative   expenses  were  147%  of  sales.   Each  of  these  ratios  are
considerably less than the equivalent ratios for the fiscal year ended March 31,
1996, down from 722.1% and 697.2% respectively.

The Company has  reevaluated  its  marketing  efforts and product  strategies as
expenses  continue  to exceed  revenues.  The Company  now  recognizes  that the
services it pioneered are applicable  not only in the long distance  markets but
also in the  newly-competitive  local  calling  arena and the realm of  wireless
communications.  The  Company  plans on  divesting  itself of its long  distance
business.  The strategic  focus will be on providing its  technology to domestic
and international  interexchange carriers and other  telecommunications  service
providers  who  wish  to  offer  speech   recognition-enhanced   services  as  a
value-added product to their customers, and to corporations who wish to make the
convenience of speech recognition available to its employees.

Liquidity and Capital Resources

The  Company's  cash and cash  equivalents  at September 30, 1996 were $ 18,250.
During the period from  inception , May 1994 through  September  30,  1995,  the
Company's operations were funded primarily through loans of $ 1,255,000 of which
an aggregate of $ 822,500 was borrowed  from the Company's  officers,  directors
and a greater than 5% beneficial  owner. In March,  1995 the Company conducted a
private offering of convertible  debentures in which debentures due in September
1996 with an aggregate principal amount of $ 122,500 were sold. In October, 1995
$ 12,500 of those debentures were converted to stock. In July, 1996, $ 15,000 of
those  debentures  were converted to stock. By terms of the debenture , when the
debenture came due on September 27, 1996 the holder was due principal,  interest
and penalties for a sum due of $ 125,000.  Of this amount  $60,000 was converted
to 40,000 shares of the Company's common stock (the "Common  Stock"), $0.001 par
value per share, and $65,000 of the debenture was replaced by a convertible note
due March 27, 1997 bearing  interest at a rate of 8.5% per annum and convertible
into shares of Common Stock at a rate of $1.50 per share.  In October,  1995 the
Company  conducted a Regulation S offering and sold  1,000,000  shares of Common
Stock at $ 1.50 per share,  generating $ 1,500,000 in capital.  In addition,  in
October and
                                                     -1-
<PAGE>
November, 1995, in accordance with Regulation D under the Securities Act of 1933
(the "Securities  Act"), the Company conducted an offering of eight percent (8%)
convertible  debentures  due March  31,  1997 with  interest  payable  quarterly
commencing  December 31, 1995.  Under the terms of the debenture  offering the $
375,000  generated  was  converted  to  Common Stock in  November,  1995.   From
this $  1,875,000  generated,  notes  due to  non-affiliates  in the  amount  of
$300,000.  were repaid with associated interest. The remainder was available for
working capital and payment of vendor payables.

In April 1996 the  Company  commenced a private  offering of notes and  warrants
("Units")  with  maximum  proceeds  to the  Company of  $800,000  with each Unit
consisting of (i) a note in principal face amount of $10,000 bearing interest at
a rate of 7% per annum,  with principal and interest  payable two years from the
date of issue and (ii)  warrants to purchase  5,000 shares of Common  Stock,  at
$1.50 per share at any time within two (2) years after issuance of the warrants.

On June 3, 1996,  the terms of the offering were amended to increase the size of
the offering  from 80 Units to a maximum of 150 Units or proceeds to the Company
of $1,500,000. Also in this amendment the Company altered the repayment terms to
the promissory note by means of an addendum to the note stating that the Company
contemplated  raising  capital  in an  underwritten  public  offering  and after
payment of expenses of the underwriting would apply proceeds of such offering to
repayment of the notes issued in the private offering. The funds being sought in
the offering were only intended to permit the Company to continue operations and
meet its  material  operating  obligations  while it sought  additional  funding
sufficient for long term  implementation  of its business plan. The offering was
closed on  September  30,  1996,  after the  Company had raised $ 875,000 in the
private placement.

The Company  entered into a letter of intent with an investment  banking firm to
underwrite  on a firm  commitment  basis,  a  proposed  Four  Million  Dollar ($
4,000,000)  public offering of the Company's  securities.  The  underwriting was
subject  to  numerous  conditions  upon which  ultimately  the  Company  and the
investment  banking  firm were  unable  to agree.  Therefore,  the  Company  has
terminated  its plans to conduct a public  offering at this time.  Although  the
provisions  of the  letter  of  intent  relating  to the  public  offering  have
terminated,  the letter of intent grants to the investment  banking firm a right
of first refusal to act as the Company's investment banker with regard to future
offerings, and certain acquisition/disposition transactions and provides for the
payment of a  substantial  fee to the  investment  banking  firm for a breach of
these provisions. The Company requested a general termination and mutual release
in order to move forward with other means of financing.  To date, the investment
banking  firm has  agreed  to waive  compensation  on the  near  term  financing
requirements of the Company but has not provided a release with respect to other
transactions.

The  Company has  acquired  short term  funding  which will allow it to continue
operations  through  December  31,  1996.  In October,  1996,  a greater than 5%
shareholder  lent the Company $ 60,000 at 10% per annum and is secured by office
furniture and equipment.  Principal and interest is due on this note on November
25, 1996.  Additional  funding of  $150,000.  has been  negotiated  with another
shareholder  which bears interest at 12% and is due February 10, 1997. This note
is secured by warrants to purchase 600,000 shares of Common Stock, at a purchase
price of $0.50 per share. The Company has been forced to  significantly  curtail
its  operations  and has  made  drastic  cuts  in its  overhead.  The  Company's
operations consist principally of servicing existing customers. It has suspended
its  marketing  operations  and  is not  acquiring  additional  platforms  until
additional  financing is in place. The Company intends to offer a combination of
Common Stock and  warrants in a Regulation D offering for maximum  proceeds of $
1,800,000.  If all such  proceeds are raised,  the Company will have  sufficient
funds to operate while it continues to develop a long term financial  structure.
The timing of the proposed  offering is subject to a number of factors,  certain
of which are beyond the  Company's  control;  however,  the  Company  intends to
commence this offering in early December 1996.

Future Obligations. During the next twelve months, the Company plans, subject to
raising  adequate  capital,  to sell  platforms  which  provide  the  technology
necessary to utilize its  Preferred  SecureCard,  VIP800 and  Preferred  Collect
Service  technology,  to introduce new products,  and to continue  refining this
technology.  Subject  to the  Company's  ability  to fund the  cost,  Management
expects the Company to hire or contract with approximately 20 additional persons
during  the  next  12  months,  primarily  to  support  its  expanded  marketing
activities.

The  ability of the Company to raise  capital is, in the opinion of  Management,
the primary constraint on such business plan.  Management estimates that, during
the next twelve (12) months, the Company will require approximately

                                                     -2-
<PAGE>


$ 3,500,000  of equity  and/or long term debt to finance its costs of  marketing
and the continued refinement of its services at anticipated levels, with most of
these funds being needed to support marketing efforts. In addition,  the Company
will be required to  renegotiate  or obtain  extensions  of its current  debt or
raise additional funds of approximately $ 1,300,000 to retire its debt. There is
no  assurance  however,  that  the  Company  will  be able to  secure  any  such
renegotiations,  financing or extensions  of its current debt. In addition,  the
Company will continue to seek a general  termination  and mutual  release of the
provisions of the letter of intent with its investment  banking firm relating to
future offerings.

The  Company  was  obligated  under its  agreement  with MCI  Telecommunications
Corporation  (MCI)  to pay at  least $  1,000,000  per  month  for  transmission
services beginning January,  1996. Throughout 1996,  negotiations for a mutually
beneficial  revised  agreement  took place,  but no final  revised  contract was
executed.  With the Company's new focus on sales of  technology,  the need for a
carrier agreement is no longer necessary.  The Company is currently  negotiating
with MCI to eliminate its agreement  completely and provide its services through
traditional  long  distance  service  agreements  which would be based upon much
lower  traffic  volume  requirements.  The  Company may be  obligated  to make a
substantial payment of previously  submitted invoices to terminate its agreement
with MCI.

The Company's  agreement  with Brite Voice  Systems,  Inc.  ("Brite")  calls for
minimum  monthly  usage fees of at least $ 20,000 per month  through  August 15,
1996, $ 25,000 per month through August 15, 1997, and $ 30,000 per month through
August 15, 1998 in  SecureCard  charges.  The  Company's  obligation to Brite is
based upon the Company's  billable minutes through the Brite system and paid out
of  revenues  as they  are  received.  To the  extent  that  the  monthly  usage
obligation  is  less  than  the  minimum  amounts  specified  in  the  governing
agreements,  the Company would be required to pay Brite the  difference  between
the actual  usage  charges and these  minimums at those times  specified  in the
agreements.  At present,  the  Company's  monthly usage is less than the minimum
amount.  The Company and Brite have  executed an  agreement  to convert  monthly
minimums of $216,500  which  represent  minimum  payments  from January  through
October into a promissory note bearing interest at prime +2% per annum which was
due November 1, 1996 and warrants to purchase 60,000 shares of common stock at a
price of $2.44 per share  exercisable  three years from the date of the note. At
this time, the Company is in default of this note.

Certain  of the  information  contained  in Parts I and II of this  form  10-QSB
constitutes  forward looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities  Exchange Act of 1934. Although
the Company  believes that the  expectations  reflected in such forward  looking
statements are based upon reasonable assumptions,  it can give no assurance that
its expectations will be achieved. Important factors that could cause the actual
results to differ from the Company's expectations are set forth and herein under
the caption "Risk Factors" in the Company's prospectus dated August 15, 1995. In
addition,  an  important  factor is the  Company's  ability to raise  sufficient
capital to execute its business plan and meet its  obligations.  Therefore,  the
actual  results that are achieved  may differ  materially  from any such forward
looking information.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.

The Company is not involved in any material legal proceedings.

Item 2.  Changes in Securities.

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

Item 3.  Defaults upon Senior Securities.

None.

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

None.



                                                     -3-

<PAGE>



Item  5. Other Information.

Subsequent  Events.  On October 2,  1996,  Brite  Voice  Systems,  Inc.  (Brite)
executed a Reseller  Agreement  with the Company  which  grants a License to the
Company  to  market,  on a  worldwide  basis  with  two  local  exceptions,  the
technology  housed on Brite's  platform  which was jointly  developed by the two
companies. This agreement was vital to the Company's new strategic focus.

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

        EXHIBIT
        NUMBER                              DESCRIPTION

         10.1 Promissory Note to Patrik Carlens, in renewal principal amount of
               $ 65,000, dated as of September 27, 1996.

         10.2 Promissory Note and Security Agreement to Lawrence E. Steinberg,
               in original principal amount of $ 40,000, dated as of October 11,
               1996

         10.3 Promissory Note to Lawrence E. Steinberg, in original principal
               amount of $ 20,000, dated as of October 14, 1996.

         10.4 Loan Agreement and Promissory note to Bisbro Investments  Company,
               Ltd., in original principal amount of $ 100,000, dated
               November 12, 1996.

         10.5 Warrant  Certificate  to purchase  600,000  shares of Common Stock
               issued to Bisbro Investments Company, Ltd.

         27.0 Financial Data Schedule

The Company did not file any reports on Form 8-K during the three  months  ended
September 30, 1996.






















                                                     -4-

<PAGE>




SIGNATURES

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


                                            PREFERRED/TELECOM, INC.


     November 19, 1996                   \S\Dennis L. Gundy
     -----------------                   ------------------
          Date                              Dennis L. Gundy,  President
                                            (Principal Executive Officer)


     November 19, 1996                   \S\Mary G. Merritt
     -----------------                   ------------------
          Date                              Mary G. Merritt, Secretary/Treasurer
                                            (Principal Financial Officer)




                                                     -5-