UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549











FORM 10-Q








x Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for thePeriod Ended June 30, 2010oro Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of  1934 for the Transition Period From _____________to _____________





Commission File Number 33-92894





PREFERRED VOICE, INC.


(Exact name of Issuer as specified in its charter)








Delaware
75-2440201(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)





6500 Greenville Avenue, Suite 570 Dallas, Texas
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 period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes ý    No o
  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
  Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
  Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company ý
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
  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 practicable date.
 
 Common Stock, $ 0.001 Par Value – 6,130,184 shares as of July 29, 2010.




Table of Contents




TABLEOF CONTENTS
 
 Preferred Voice, Inc.
 Part I. Financial Information
1Item 1.
Financial Statements
1Balance Sheets-June 30, 2010 and March 31, 2010
1Statements of Operations-Three Months Ended June 30, 2010 and 2009
3Statements of Cash Flows-Three Months Ended June 30, 2010 and 2009
4Notes to Financial Statements - June 30, 2010
6Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11Item 3.
Quantitative and Qualitative Disclosures About Market Risk
14Item 4T.
Controls and Procedures
14Part II. Other InformationItem 1.
Legal Proceedings
15Item 1A.
Risk Factors
15Item 2.
Unregistered Sales of Securities and Use of Proceeds
15Item 3.
Defaults upon Senior Securities
15Item 4.
Removed and Reserved
15Item 5.
Other Information
15Item 6.
Exhibits and Reports on Form 8-K
15Signatures
16
 Table of Contents
  Item1. Financial Statements
 PREFERREDVOICE, INC.
 
 CONDENSED BALANCE SHEETS
 JUNE 30, 2010 AND MARCH 31, 2010
 
 June 30,


March 31,2010


2010(unaudited)


(audited)AssetsCurrent assets:Cash and cash equivalents

$
333,916


$
600,647Accounts receivable, net of allowance for doubtfulaccounts of $0 at June 30, 2010 and March 31, 2010


900,049



601,272Inventory


12,393



12,393Prepaid expenses


11,196



-Total current assets

$
1,257,554


$
1,214,312Property and equipment:Computer equipment

$
322,611


$
325,988Furniture and fixtures


22,317



22,317Office equipment


15,805



17,506$
360,733


$
365,811Less accumulated depreciation


259,885



250,998Net property and equipment

$
100,848


$
114,813Other assets:Capitalized software development costs, net of accumulatedamortization of $1,257,610 and $1,255,996, respectively

$
13,550


$
12,114Deposits


4,485



4,485Trademarks and patents, net of accumulatedamortization of $49,942 and $47,937, respectively


63,421



65,427Total other assets

$
81,456


$
82,026Total assets

$
1,439,858


$
1,411,151
 The accompanying notes are an integral part of these financial statements.
 1
 Table of Contents




June 30,


March 31,2010


2010(unaudited)


(audited)Liabilities and stockholders' equity (deficit)Current liabilities:Accounts payable

$
298,047


$
329,753Accrued vacation


8,763



10,334Accrued payroll and payroll taxes


12,553



14,860Accrued interest


49,024



34,808Accrued operating costs


-



6,000Deferred revenue


49,237



56,917Current portion debentures payable - net of discounts


772,200



1,111,500Total current liabilities

$
1,189,824


$
1,564,172Commitments and contingencies (Note E)Stockholders' equity (deficit):Common stock, $.001 par value;100,000,000 shares authorized; 6,130,184and 6,130,184 shares issued, respectively

$
6,130


$
6,130Additional paid-in capital


20,481,148



20,481,148Accumulated deficit


(20,235,738
)


(20,638,793
)Treasury stock - 4,500 shares at cost


(1,506
)


(1,506
)Total stockholders' equity (deficit)

$
250,034


$
(153,021
)Total liabilities and stockholders' equity (deficit)

$
1,439,858


$
1,411,151


The accompanying notes are an integral part of these financial statements.
  2
 Table of Contents
  PREFERREDVOICE, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS
 FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
 
 Three months


Three monthsended


endedJune 30,


June 30,2010


2009(unaudited)


(unaudited)Net sales

$
1,467,854


$
1,098,125Cost of sales


727,975



542,859Gross profit

$
739,879


$
555,266General and administrative expenses

$
322,758


$
329,872Income from operations

$
417,121


$
225,394Other income (expense):Interest expense

$
(14,216
)

$
(52,774
)Gain on sale of assets


150



-Total other income (expense)

$
(14,066
)

$
(52,774
)Income from operations before income taxes

$
403,055


$
172,620Provision for income taxes


-



-Net income

$
403,055


$
172,620Per share amounts:Income from operations

$
0.07


$
0.03Net income

$
0.07


$
0.03
  The accompanying notes are an integral part of these financial statements.
  3
 Table of Contents
 PREFERREDVOICE, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009
 
 2010


2009(unaudited)


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

$
1,169,077


$
1,116,137Cash paid to suppliers and employees


(1,096,254
)


(863,015
)Interest paid


-



(11,726
)Net cash provided by operating activities

$
72,823


$
241,396Cash flows from investing activities:Capital expenditures

$
(3,049
)

$
(9,862
)Proceeds from sale of assets


2,795



-Net cash used by investing activities

$
(254
)

$
(9,862
)Cash flows from financing activities:Repayment of notes payable

$
(339,300
)

$
(292,500
)Net cash used by financing activities

$
(339,300
)

$
(292,500
)Net decrease in cash and cash equivalents

$
(266,731
)

$
(60,966
)Cash and cash equivalents:Beginning of period


600,647



466,187End of period

$
333,916


$
405,221
 
 The accompanying notes are an integral part of these financial statements.
 4
 Table of Contents
 
 2010


2009(unaudited)


(unaudited)Reconciliation of net income to net cash providedby operating activities:Net income

$
403,055


$
172,620Adjustments to reconcile net income to net cash providedby operating activities:Depreciation and amortization

$
14,939


$
19,545Gain on sale of assets


(150
)


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


(298,777
)


18,012Decrease in inventory


-



11,661(Increase) decrease in prepaid expenses


(11,196
)


7,500Decrease in accounts payable


(31,706
)


(21,135
)Decrease in deferred revenue


(7,680
)


(18,875
)Increase in accrued expenses


4,338



52,068Total adjustments

$
(330,232
)

$
68,776Net cash provided by operating activities

$
72,823


$
241,396
  The accompanying notes are an integral part of these financial statements.
 5
 PREFERREDVOICE, INC.
 NOTES TO CONDENSED 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 enhanced 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, 2010, Form 10K and should be read in conjunction with the financial statements for the three months ended June 30, 2010, contained herein.
 
 The financial information included herein as of June 30, 2010, and for the three month periods ended June 30, 2010 and 2009, has been presented without an audit, pursuant to accounting principles for the interim financial information generally accepted in the United States of America and the rules of the Securities and Exchange Commission.  The Company believes that the disclosures are adequate to make the information presented not misleading.  The information presented reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the period.
 
 Cash and cash equivalents
 
 For purposes of reporting cash flows, cash and cash equivalents include all amounts due from banks with original maturities of three months or less.
 
 Inventory
 
 Inventory, consisting of digital signage components of $12,393, is stated at the lower of cost or market.  Cost is determined using the first-in, first-out method.
 
 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.
 
 During the prior year, approximately sixty-five percent of the Company’s revenue consisted of sales and installation of ringback service equipment to one carrier customer.  The Company was advised that this customer will be canceling its service in August of 2010.
 
 Receivables and credit policies
 
 Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date.   Unpaid accounts receivable with invoice dates over 30 days old bear no interest.
 
 Accounts receivable are stated at the amount billed to the customer. Customer account balances with invoices dated over 90 days are considered delinquent.
 
 6
 Table of Contents
  PREFERRED VOICE, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 
 Note B - Summary of significant accounting policies (continued):
 
 Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoice.
 
 The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of amounts that will not be collected.  Management individually reviews all accounts receivable balances that exceed 90 days from invoice date and, based on an assessment of current creditworthiness, estimates that portion, if any, of the balance that will not be collected.  Accounts receivable past 90 days due are $970 and $643 as of June 30, 2010 and March 31, 2010, respectively.
 
 Capitalized software development
 
 The Company is dependent on internally developed software to provide all of its services.  As required by the Software Topic of the FASB Accounting Standards Codification, 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.
 
 Property and equipment
 
 The cost of property and equipment is depreciated over the estimated useful lives of the related assets.  Depreciation is computed on the straight-line method for financial reporting purposes and the double declining method for income tax purposes.
 
 Maintenance and repairs are charged to operations when incurred.  Betterments and renewals are capitalized.
 
 The useful lives of property and equipment for purposes of computing depreciation are as follows:
 
 Computer equipment                                                  5 years
 Furniture and fixtures                                                 5 years
 Office equipment                                                         5 years
 
 Fair value of financial instruments
 
 The Company defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.  Financial instruments included in the Company’s financial statements include cash and cash equivalents, trade accounts receivable, other receivables, other assets, notes payable and long-term debt.  Unless otherwise disclosed in the notes to the financial statements, the carrying value of financial instruments is considered to approximate fair value due to the short maturity and characteristics of those instruments.  The carrying value of long-term debt approximates fair value as terms approximate those currently available for similar debt instruments.
 
 Revenue recognition
 
 For recognizing revenue, the Company applies the rules defined by the Revenue Recognition Topic of the FASB Accounting Standards Codification. 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.
  7
 Table of Contents
 
 PREFERRED VOICE, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 
 Note B - Summary of significant accounting policies (continued):
 
 Income or loss per share
 
 The Company adopted the provisions of the Earnings Per Share Topic of the FASB Accounting Standards Codification.  This standard replaces 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.  For 2010 and 2009, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
 
 Income per share for the three months ended June 30, 2010 and 2009, respectively, is based on the weighted average number of shares outstanding of 6,130,184 for both periods.
 
 Income taxes
 
 For income taxes, the Company applies the rules defined by the Income Taxes Topic of the FASB Accounting Standards Codification.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using enacted tax rates that will apply in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
 Trademarks and patents
 
 For trademarks and patents, the Company applies the rules defined by the Intangibles-Goodwill and Other Topic of the FASB Accounting Standards Codification.  Trademarks and patents are recorded at cost and amortization is computed on the straight-line method over the identifiable lives of the trademarks and patents.  The statement addresses how intangible assets that are acquired should be accounted for in financial statements upon their acquisition, as well as how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.  The statement requires intangible assets to be reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable and that a loss shall be recognized if the carrying amount of an intangible exceeds its fair value.
 
 Use of estimates
 
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
 
 Stock-based compensation
 
 For stock-based compensation, the Company applies the rules defined by the Compensation - Stock Compensation Topic of the FASB Accounting Standards Codification.  This statement requires the Company to recognize compensation costs related to stock-based payment transactions (i.e. granting of stock options and warrants to employees) in the financial statements.  With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued.  In addition, liability awards will be remeasured each reporting period.  Compensation cost will be recognized over the period that an employee provides services in exchange for the award.   Compensation expense recognized during the three months ended June 30, 2010 and 2009 was $-0- for both periods.
 
 8
 Table of Contents
  PREFERRED VOICE, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 
 Note B - Summary of significant accounting policies (continued):
 
 Subsequent events
 
 In May 2009, the FASB issued new authoritative guidance for subsequent events. Such authoritative guidance establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, this statement sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  This authoritative guidance is effective for the interim or annual financial periods ending after June 15, 2009.  On June 30, 2009, the Company adopted the authoritative guidance for subsequent events. Such adoption did not have a material impact on the Company’s condensed consolidated financial statements.
 
 In February 2010, the FASB amended its guidance on subsequent events to remove the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events, for both issued and revised financial statements. This amendment alleviates potential conflicts between the FASB’s guidance and the reporting rules of the SEC. Our adoption of this amended guidance, which was effective upon issuance, had no effect on our financial condition, results of operations, or cash flows.  There were no subsequent events that would require adjustment to or disclosure in the financial statements.
 
 Note C - Convertible debt and warrants:
 
 On September 29, 2006, the Company closed a Securities Purchase Agreement and issued $1,170,000 in principal amount of 6% Convertible Debentures due September 29, 2009 and subsequently extended to September 29, 2010 (the "Debentures"), to a group of institutional and high net worth investors.  As of June 30, 2010, there was an outstanding balance due of $772,200. The Debentures pay an interest rate of 6% on an annual basis and are convertible into 2,206,286 shares of the Company’s common stock at a price of $0.35 per share.   The investors also received warrants to purchase an additional 1,671,429 shares of common stock with an exercise price of $0.50 per share.
 
 The Company has allocated the proceeds from the issuance of the Debentures to the warrants and the Debentures based on their relative fair market values at the date of issuance.  The value assigned to the warrants of $281,977 has been recorded as an increase in additional paid-in capital.  The assignment of a value to the warrants results in a loan discount being recorded for the same amount.  The discount was amortized over the original three-year term of the Debentures as additional interest expense.    Amortization was $0 and $23,498 for the three months ended June 30, 2010 and 2009, respectively.
 
 167,143 warrants were issued in exchange for consulting services provided for in the issuance of the Securities Purchase Agreement.  These warrants are exercisable at price of $0.50 per share and were valued using the relative fair market value at the date of issuance.  The value assigned to the warrants of $25,285 has been recorded as deferred loan cost and is being amortized over the original three-year term of the debentures as financing cost.  Amortization was $0 and $2,107 for the three months ended June 30, 2010 and 2009, respectively.
 
 9
 Table of Contents
  PREFERRED VOICE, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 
 Note D - Common stock:
 
 Stock purchase warrants
 
 At June 30, 2010, the Company had outstanding warrants to purchase 3,900,072 shares of the Company's common stock at prices which ranged from $0.50 per share to $0.75 per share.  The warrants are exercisable at any time and expire through September 29, 2011.  At June 30, 2010, 3,900,072 shares of common stock were reserved for that purpose.
 
 Common stock reserved
 
 At June 30, 2010, shares of common stock were reserved for the following purposes:
  Exercise of stock warrants and debt conversion


6,106,358Exercise of future grants of stock options and stockappreciation rights under the 2000 stock option plan


814,1336,920,491
 
 Note E - Commitments:
 
 The Company leases its office facilities and office equipment under operating leases expiring through December 31, 2012.  Following is a schedule of future minimum lease payments required under the above operating leases as of June 30, 2010:
 
 Year endingMarch 31,

Amount2011

$
43,4462012


45,6522013


35,5952014


-2015


-$
124,693
 
 Total rent expense charged to operations for the three months ended June 30, 2010 and 2009 was $10,636 and $13,576, respectfully.
 
 10
 Table of Contents
  Item2. 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-K for the fiscal year ended March 31, 2010.  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.  From 1997 until early 2005, we focused on the development of voice activated telecommunications services that would allow any consumer the ability to “dial” their calls using their voice.  In the last five years we have focused our efforts on service applications that relate to the delivery of content to end users.
  Our initial introduction to mobile entertainment led us to research the viability of personalized entertainment services that could be delivered through our network. On October 22, 2004 we announced the first commercial launch of a ringback service in the United States with the launch of our Rockin’ Ringback service.  Our personalized ringback service provides a network-based personalized service that enables users to choose an audio file that callers will listen to while the phone is ringing.  We believe that since we already have a relationship with the carrier and are integrated with these carriers customer service departments and billing departments that we have an opportunity to introduce new products with minimal integration effort.  We will continue to research and either develop or acquire additional services that can be deployed through our platform.  As of July 29, 2010 we had nine carrier customers providing My Phone Services Suite service in their marketplace.  Our systems structure is a robust data base system which will allow for scalability and addition of new services to our platform in shorter development cycles than were possible under our previous structure.  Revenue from this product is expected to be slow with no guarantees of market and/or customer acceptance. We also believe that we will continue to see increased competition that along with many other factors may have an impact on the company and its products.
  For the past three years a major portion of the Company’s revenue, approximately 65% has been from one customer.  In early May this customer gave notice that it would be canceling its contract.  If the Company does not replace the income provided by this customer, it will be forced to drastically reduce its current marketing efforts and its operating expenses.
 
 The implementation of our business plan is subject to risks inherent in the establishment and deployment of technology.  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 GAP system works with the telephone switches of all of the major manufacturers;
 ·
achieve user acceptance for our services;
 ·
generate reasonable margins on our services;
 ·
continue to deploy and install GAP systems on a timely and acceptable schedule;
 ·
respond to competitive market developments;
 ·
mitigate risk associated with our technology by obtaining patents and copyrights and other protections of our intellectual property; and
 ·
continually update and add to our product offerings to meet the needs of consumers.
 
 Failure to achieve these objectives could adversely affect our business, operating results and financial condition. Increased competition from other providers of similar services can and have impacted our business.
 
 11
 Table of Contents
 
 Results of Operations
 
 We recorded a net gain of $403,055 or $.07 per share for the period ended June 30, 2010, compared to a net gain of $172,620 or $0.03 per share, for the period ended June 30, 2009.
 
 We anticipate that revenues from the My Phone Services Suite will decline for the year ended March 31, 2011 with the loss of our major customer.
 
 Total Sales
 Total revenue for the period ended June 30, 2010, was $1,467,854 compared to $1,098,125 for the period ended June 30, 2009.  Revenues in both periods consisted of revenue sharing receipts from our customer phone companies, and installation of field systems.
 
 Cost of Sales
 
 Cost of sales for the period ended June 30, 2010 was $727,975 compared to $542,859 for the period ended June 30, 2009.  Cost of sales consisted of costs for systems, network infrastructure such as collocations, connectivity, system access and long distance to end-users and third party content costs during both periods.
 
 Selling, General and Administrative
 
 Selling, general and administrative expenses for the period ended June 30, 2010 were $322,758 compared to $329,872 for the period ended June 30, 2009.  We expect that selling, general and administrative expenses will decline through fiscal year 2011 as we make adjustments for the loss of our major customer.
 
 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 developmentcosts include direct costs incurred subsequent to establishment of technological feasibility for significant product enhancements.  Software development costs capitalized for the periods ended June 30, 2010 and 2009 were $3,049 and $-0- respectively.  The amortization of capitalized software development costs for the periods ended June 30, 2010 and 2009 was $1,614 and $2,194 respectively.
 
 Other Income and Expense
 
 We have recognized income from the sale of excess equipment of $150, for the period ended June 30, 2010 compared to$-0- for the period ended June 30, 2009.
 
 Interest expenses for the period ended June 30, 2010 were $14,216 compared to $52,774 for the period ended June 30, 2009.
 
 Income Taxes
 
 As of June 30, 2010, we had cumulative federal net operating losses of approximately $19.4 million, which can be used to offset future income subject to federal income tax through the fiscal year 2030.  Net operating loss limitations may be imposed if changes in stock ownership of the company create a change of control as provided in Section 382 of the Internal Revenue Code of 1986.
  12
 Table of Contents
 
 Liquidity and Capital Resources
 
 Our cash and cash equivalents at June 30, 2010 were approximately $333,916, a decrease of $266,731 from $600,647 at March 31, 2010.  We have relied primarily on the issuance of stock, convertible debentures and warrants to fund our operations since January of 1997 when we sold our long-distance resale operation.
  On March 31, 2005, pursuant to Section 4(2) of the Securities Act and Regulation D thereunder, we completed the sale of 97.5 units (“Units”) with each Unit consisting of a 3-year, 6% Convertible Debenture in the principal amount of $10,000, and 10,000 5-year warrants to purchase a share of Common Stock, $.001 par value per share, of the Company at an exercise price of $.60 for an aggregate of $975,000.  The balance of these debentures at June 30, 2010 was $-0-.
 
 On September 29, 2006, pursuant to Section 4(2) of the Securities Act and Regulation D thereunder, we completed the sale of 117 units (“Units”) with each Unit consisting of a 3-year, 6% Convertible Debenture in the principal amount of $10,000, and 14,286 5-year warrants to purchase a share of Common Stock, $.001 par value per share, of the Company at an exercise price of $.50 for an aggregate of $1,170,000.  The balance of these debentures at June 30, 2010 was $772,200.
 
 Due to uncertainties regarding loss of its major customer and how well new customer contracts that the Company just launched will produce new revenue, it is difficult for management to project the Company's revenue performance, operating profits or loss, or cash requirements for more than a few months.
 
 Off-Balance Sheet Arrangements
 
 We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
 
 Future Obligations
 
 Management projects working capital needs to be approximately $1,140,000 over the next twelve months for corporate overhead to continue to deploy services to carrier customers.  Additionally, as of June 30, 2010, the Company has $772,200 of debentures due on or before September 29, 2010.   Management believes that current cash and cash equivalents and cash that may be generated from operations will not be sufficient to meet both the anticipated capital requirements and the debenture repayment on their maturity date.  Management believes that it can negotiate extensions on the debentures which will allow them to meet working capital needs from anticipated operating cash flows as well as extinguish some portion of the debentures due.   Such projections have been based on revenue trends from current customers and customers which are already under contract utilizing the revenue rates that have been experienced over the past six months with currently installed customers and projected cash requirements to support installation, sales and marketing, and general overhead.   If the Company cannot renegotiate extensions on the debenture maturity dates or operating projections are not realized it may be forced to raise additional capital through the issuance of new shares, the exercise of outstanding warrants, or reduction of current overhead.
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 Item3.Quantitative and Qualitative Disclosures About Market Risk
 
 Not required by smaller reporting companies.
  Item4T. Controls and Procedures
 
 Evaluation of disclosure controls and procedures.  The Chief Executive Officer, who also acts as our Chief Financial Officer, of the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarter covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, the Chief Executive Officer of the Company has concluded that the Company’s disclosure controls and procedures as of the end of the quarter covered by this Quarterly Report on Form 10-Q are effective as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act.
 
 Due to the limited number of Company employees engaged in the authorization, recording, processing and reporting of transactions, there is inherently a lack of segregation of duties. The Company periodically assesses the cost versus benefit of adding the resources that would remedy or mitigate this situation and currently, does not consider the benefits to merit the cost of these resources.
 
 Changes in internal controls.   There were no changes in our internal controls over financial reporting identified in connection with our evaluation that occurred during our last fiscal quarter ended June 30, 2010 that materially affected, or was reasonably likely to materially affect our internal control over financial reporting.
   
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 PART II. OTHER INFORMATION
  Item1. Legal Proceedings
 
 In February, 2008, we were sued by Ring Plus, Inc. in the United States District Court for the Central District of California alleging infringement of its U.S. Patent No. 7,006,608 (the “608 Patent”) which pertains to ringback tone replacement methods and algorithms. Ring Plus, Inc. is seeking declaratory judgment that we have violated the 608 Patent, preliminary and permanent injunctions, an order that we destroy all infringing items, and money damages in a sum according to proof at trial.  We do not believe that we infringe the 608 Patent and we believe we have meritorious defenses to the action.
 
 On July 17, 2009, a Texas court issued a ruling that the 608 Patent was unenforceable.  Ring Plus may appeal the Texas ruling, and therefore the parties in this action have agreed to stay the case against Preferred Voice pending the outcome of the Texas case.
 
 Regardless of the outcome, this litigation could have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of management’s attention and resources, and other factors.
 
 Item1A. Risk Factors
 
 As a smaller reporting company, we are not required to provide the information required by this Item.
 
 Item2. Unregistered Sales of Securities and Use of Proceeds
 
 None.
 
 Item3. Defaults upon Senior Securities
 
 None.
 
 Item4. Removed and Reserved
 
 None
 
 Item5.  Other Information
 
 None
 
 Item6.  Exhibits
 
 a)           Exhibits
  Exhibit Number

Exhibit Description31.1

Certification of Chief Executive Officer and Chief Financial Officer32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 (b)          Reports of 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.Date: August 4, 2010
By:
/s/ Mary G. MerrittMary G. MerrittChairman and Chief Executive Officer(Principal Executive Officer)
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