<PAGE>   1

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                   FORM 10-Q

(Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended: June 30, 1999

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

         For the transition period from__________________to_____________________

                        Commission File Number: 0-27658

                            PREFERRED NETWORKS, INC.
             (Exact name of Registrant as Specified in its Charter)

                    GEORGIA                              58-1954892
         (State or other jurisdiction of              (I.R.S. Employer
         incorporation or organization)            Identification Number)

                       850 Center Way, Norcross, GA 30071
                    (Address of principal executive offices)
                                   (Zip Code)
                                 (770) 582-3500
              (Registrant's telephone number including area code)

                                 Not Applicable
              (Former name, former address and former fiscal year,
                          if changed since last year)

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 such shorter period 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 [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 16,369,302 shares of common
stock, no par value, as of August 16, 1999.

<PAGE>   2

                           PREFERRED NETWORKS, INC.



                               INDEX TO FORM 10-Q



<TABLE>
<CAPTION>
 PART I.                 FINANCIAL INFORMATION                                                    PAGE
                                                                                                  NUMBER
                                                                                                  ------
<S>           <C>        <C>                                                                      <C>
              Item 1.    Financial Statements

                         Condensed Consolidated Balance Sheets, June 30, 1999
                         (Unaudited) and December 31, 1998....................................        2

                         Condensed Consolidated Statements of Operations for the
                         six months ended June 30, 1999 and 1998 (Unaudited) .................        3

                         Condensed Consolidated Statements of Cash Flows for the six
                         months ended June 30, 1999 and 1998 (Unaudited) .....................        4

                         Notes to Condensed Consolidated Financial Statements (Unaudited) ....        5

              Item 2.    Management's Discussion and Analysis of Financial Condition
                         and Results of Operations ...........................................        8

              Item 3.    Quantitative and Qualitative Disclosure of Market Risk ..............       14


PART II.                 OTHER INFORMATION

              Item 3.    Defaults Upon Senior Securities .....................................       14

              Item 6.    Exhibits and Reports on Form 8-K ....................................       14

                         Signatures ..........................................................       15
</TABLE>

<PAGE>   3

                           PREFERRED NETWORKS, INC.


                     CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                   JUNE 30,       DECEMBER 31,
                                                                                    1999              1998
                                                                                 ------------     ------------
                                                                                 (UNAUDITED)
<S>                                                                              <C>              <C>
                                               ASSETS
Current assets
   Cash and cash equivalents ..............................................      $  4,125,666     $  6,474,139
   Accounts receivable, net ...............................................         4,315,738        3,029,334
   Inventory ..............................................................         2,375,228        2,928,217
   Prepaid expenses and other current assets ..............................         1,267,078          417,829
   Current assets of discontinued operations ..............................                --        1,809,249
                                                                                 ------------     ------------
     Total current assets .................................................        12,083,710       14,658,768

Property and equipment, net ...............................................        18,687,518       20,447,962
Property and equipment of discontinued operations, net ....................                --        1,107,655

Goodwill, net .............................................................        11,341,104       11,788,554
Goodwill of discontinued operations, net ..................................                --          639,025

FCC licenses, net .........................................................         8,665,316        8,838,444
Other assets, net .........................................................           728,195        2,552,135
                                                                                 ------------     ------------
                                                                                 $ 51,505,843     $ 60,032,543
                                                                                 ============     ============

                               LIABILITIES, REDEEMABLE PREFERRED STOCK,
                                       AND STOCKHOLDERS' EQUITY
Current liabilities
   Accounts payable .......................................................      $  5,833,547     $  4,356,885
   Accrued liabilities ....................................................         1,302,098        1,060,966
   Accrued compensation ...................................................           460,822          394,989
   Current portion of notes payable and capital lease obligations .........        11,849,621       18,635,308
   Current liabilities of discontinued operations .........................                --          714,678
                                                                                 ------------     ------------
     Total current liabilities ............................................        19,446,088       25,162,826

Notes payable and capital lease obligations, less current portion of
    continuing operations .................................................         4,175,272          218,389
Notes payable and capital lease obligations, less current portion of
    discontinued operations ...............................................                --          127,557

Class A Redeemable Preferred Stock, no par value, $1.50 per
   share redemption price; 13,500,000 shares authorized,
   10,000,000 shares issued and outstanding (including $3,052,169
   and $2,308,333 of undeclared dividends in 1999 and 1998, respectively)          16,840,902       15,879,309

Class B Senior Redeemable Preferred Stock, no par value, $1.50
   per share redemption price; 5,500,000 shares authorized,
   5,333,336 shares issued and outstanding (including $1,591,408
    and $945,161 of undeclared dividends in 1999 and 1998, respectively) ..         8,818,383        8,088,693
                                                                                 ------------     ------------
     Total liabilities and Redeemable Preferred Stock .....................        49,280,644       49,476,774

Stockholders' equity
   Common Stock, no par value, 100,000,000 shares authorized
     in 1999 and 1998; 16,369,302 and 16,334,377 issued and
     outstanding in 1999 and 1998, respectively ...........................        60,111,853       61,458,690
   Accretion of  Redeemable Preferred Stock ...............................        (1,140,062)        (828,788)
   Accumulated deficit ....................................................       (56,746,593)     (50,074,133)
                                                                                 ------------     ------------
       Total Stockholders' equity .........................................         2,225,198       10,555,769
                                                                                 ------------     ------------
                                                                                 $ 51,505,843     $ 60,032,543
                                                                                 ============     ============
</TABLE>

           See notes to condensed consolidated financial statements.


                                       2
<PAGE>   4

                           PREFERRED NETWORKS, INC.


                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED                  SIX MONTHS ENDED
                                                                           JUNE 30,                           JUNE 30,
                                                               -------------------------------     -------------------------------
                                                                   1999               1998             1999               1998
                                                               ------------       ------------     ------------       ------------
<S>                                                            <C>                <C>              <C>                <C>
Revenues
     Network services ...................................      $  3,365,419       $  3,295,398     $  6,671,573       $  6,558,416
     Product sales ......................................         1,937,341          3,620,890        5,783,031          7,515,484
     Other services .....................................         4,629,571          2,201,068        7,123,837          4,318,869
                                                               ------------       ------------     ------------       ------------
              Total revenues ............................         9,932,331          9,117,356       19,578,442         18,392,769

Costs of revenues
     Network services ...................................         2,019,139          2,186,420        4,144,187          4,340,792
     Product sales ......................................         1,719,095          3,104,771        4,924,744          6,337,071
     Other services .....................................         3,737,627          1,677,697        5,945,534          3,385,452
                                                               ------------       ------------     ------------       ------------
              Total costs of revenues ...................         7,475,861          6,968,888       15,014,465         14,063,315
                                                               ------------       ------------     ------------       ------------
Gross margin ............................................         2,456,470          2,148,468        4,563,976          4,329,454

Selling, general and administrative expenses ............         3,187,282          3,381,075        6,548,017          6,924,925
Depreciation and amortization ...........................         1,311,167          1,583,002        2,707,262          3,294,762
                                                               ------------       ------------     ------------       ------------
              Operating loss ............................        (2,041,980)        (2,815,609)      (4,691,303)        (5,890,233)
Interest expense ........................................          (493,714)          (293,375)        (982,603)          (619,958)
Interest income .........................................            19,166            125,867           56,327            200,262
Gain/(loss) on asset disposal ...........................           (74,520)                --          (74,520)                --
                                                               ------------       ------------     ------------       ------------
Income from continuing operations before income taxes
  and cumulative effect of change in accounting principle        (2,591,048)        (2,983,117)      (5,692,099)        (6,309,929)
Income tax benefit ......................................           280,000                 --          280,000                 --
                                                               ------------       ------------     ------------       ------------
Net loss from continuing operations before cumulative
  effect of change in accounting principle ..............        (2,311,048)        (2,983,117)      (5,412,099)        (6,309,929)
Discontinued operations:
     Net income (loss) from discontinued operations, net
       of income tax.....................................          (133,522)             6,934          (72,884)            11,983
     Gain on sale of PTS, net of income tax .............           644,922                 --          644,922                 --
                                                               ------------       ------------     ------------       ------------
     Net income from discontinued operations ............           511,400              6,934          572,038             11,983
Cumulative effect of change in accounting principle .....                --                 --       (1,832,398)                --
                                                               ------------       ------------     ------------       ------------
              Net loss ..................................        (1,799,648)        (2,976,183)      (6,672,459)        (6,297,946)
                                                               ------------       ------------     ------------       ------------

Accretion of Redeemable Preferred Stock .................          (155,632)          (159,241)        (311,283)          (271,134)
Redeemable Preferred Stock dividend requirements ........          (715,083)          (675,000)      (1,390,083)        (1,095,161)
                                                               ------------       ------------     ------------       ------------
              Net loss attributable to Common Stock .....      $ (2,670,363)      $ (3,810,424)    $ (8,373,825)      $ (7,664,241)
                                                               ============       ============     ============       ============
Net income (loss) per share of Common Stock from:
     Continuing operations before cumulative effect of
        change in accounting principle ..................      $       (.20)      $       (.24)    $       (.44)      $       (.47)
     Discontinued operations, net of income tax .........      $        .03       $        .00     $        .04      $         .00
     Cumulative effect of change in
        accounting principle ............................      $         --       $         --     $       (.11)      $         --
Net loss per share of Common Stock ......................      $       (.16)      $       (.23)    $       (.51)      $       (.47)

Weighted average number of common shares used in
  calculating net loss per share of Common Stock.........        16,304,639         16,242,004       16,287,665         16,210,627

Pro forma net loss assuming change in accounting
  principle is applied retroactively.....................        (1,799,648)        (2,956,806)      (4,840,061)        (6,181,617)

Pro forma net loss attributable to Common Stock assuming
  change in accounting principle is applied
  retroactively .........................................      $ (2,670,363)      $ (3,791,047)    $ (6,541,418)      $ (7,547,912)

Pro forma net loss per share ............................      $       (.16)      $       (.23)    $       (.40)      $       (.46)
</TABLE>


                                       3
<PAGE>   5

                           PREFERRED NETWORKS, INC.


                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)



<TABLE>
<CAPTION>
                                                                               SIX MONTHS ENDED
                                                                                   JUNE 30,
                                                                         -----------------------------
                                                                            1999              1998
                                                                         -----------       -----------
<S>                                                                      <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations ...............................      $(6,599,576)      $(6,321,912)
Net income (loss) from discontinued operations ....................          (72,884)           11,983

Adjustments to reconcile net loss to net cash used in
operating activities:
   Cumulative effect of change in accounting principle ............        1,832,398                --
   Depreciation and amortization ..................................        2,707,262         3,294,762
   Loss on asset disposal .........................................           74,520                --
   Gain on sale of PTS, net of income taxes .......................         (644,922)
   Bad debt expense ...............................................          222,430           157,663
   Stock option and restricted stock grant compensation expense ...           33,180            33,162
   Changes in operating assets and liabilities:
        Accounts receivable .......................................       (1,508,834)          369,570
        Inventory .................................................          552,989          (464,783)
        Prepaid expenses and other assets .........................            7,433           (75,944)
        Accounts payable ..........................................        1,476,662        (1,101,351)
        Accrued liabilities .......................................          (38,868)         (257,820)
        Accrued compensation ......................................           65,833           (82,802)
                                                                         -----------       -----------
   Net cash used in operating activities by continuing operations         (1,819,493)       (4,449,455)
   Net cash used in operating activities by discontinued operations         (126,481)          (51,055)
                                                                         -----------       -----------
   Net cash used in operating activities ..........................       (1,945,974)       (4,500,510)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment ............................................         (266,104)         (836,671)
Purchases of equipment for discontinued operations ................         (151,752)          (14,932)
Purchases of other assets and FCC licenses ........................           (8,609)         (346,667)
Proceeds from sale of PTS .........................................        3,079,583                --
                                                                         -----------       -----------
   Net cash used in investing activities ..........................        2,653,118        (1,198,270)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings ..........................................          492,136           900,000
Repayments of borrowings ..........................................       (3,320,940)         (995,627)
Payment of deferred loan costs ....................................               --          (220,000)
Net proceeds from issuance of Redeemable Preferred Stock ..........               --         6,965,000
Net proceeds from issuance of Common Stock purchase warrants ......               --           810,000
Issuance of Common Stock upon exercise of stock options ...........               --           121,155
                                                                         -----------       -----------
   Net cash provided by financing activities of continuing ........       (2,828,804)        7,580,528
operations
   Net cash used in financing activities of discontinued operations         (226,813)               --
                                                                         -----------       -----------
   Net cash provided by financing activities ......................       (3,055,617)        7,580,528

Net increase (decrease) in cash and cash equivalents ..............       (2,348,473)        1,881,748
Cash and cash equivalents, beginning of period ....................        6,474,139         7,379,254
                                                                         -----------       -----------
Cash and cash equivalents, end of period ..........................      $ 4,125,666       $ 9,261,002
                                                                         ===========       ===========
</TABLE>


                                       4
<PAGE>   6

                           PREFERRED NETWORKS, INC.


              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 199
                                  (UNAUDITED)

1.   THE COMPANY

     Preferred Networks, Inc. ("PNI" or "the Company"), headquartered in
     metropolitan Atlanta, provides outsourcing solutions to the wireless
     industry which allow companies to offer branded wireless services directly
     to subscribers, while relying on PNI to provide high-quality network,
     technical, and product services. PNI offers its services through its
     Network Services Division, PNI Access Services ("Access"), a provider of
     wholesale paging network service as one of the largest carrier's carriers
     in the U.S., and through its wholly-owned subsidy: EPS Wireless, Inc.
     ("EPS"), a national provider of paging and cellular product repair
     services, sales of new, used and refurbished paging and cellular products
     and inventory management services.

     The Company has formed wholly-owned subsidiaries and limited liability
     companies to execute certain business transactions. All significant
     intercompany activity has been eliminated.

2.   BASIS FOR PRESENTATION

     The interim condensed consolidated financial information contained herein
     has been prepared by the Company, without audit, pursuant to the rules and
     regulations of the Securities and Exchange Commission ("SEC") and includes
     in the opinion of management, all adjustments, which are of a normal
     recurring nature necessary for a fair presentation of the financial
     position, results of operations and cash flows for the periods presented.
     Certain information and footnote disclosures normally included in
     financial statements prepared in accordance with generally accepted
     accounting principles ("GAAP") have been condensed or omitted pursuant to
     such rules and regulations. The Company believes, however, that its
     disclosures are adequate to make the information presented not misleading.
     These financial statements and related notes should be read in conjunction
     with the financial statements and notes as of December 31, 1998, included
     in the Company's Annual Report on Form 10-K (File No. 0-27658). Results of
     operations for the periods presented herein are not necessarily indicative
     of results to be expected for the full year or any other interim period.

3.   SUPPLEMENTAL CASH FLOW INFORMATION

     Cash and cash equivalents include investments in money market instruments,
     which are carried at fair market value. Cash payments made for interest,
     net of capitalized interest, during the six months ended June 30, 1999 and
     1998 were approximately $932,000 and $750,500 respectively. There were no
     significant federal or state income taxes paid or refunded for the six
     months ended June 30, 1999 and 1998.

4.   LOSS PER SHARE

     Net loss per share was computed using the requirements of Statement of
     Financial Accounting Standards No. 128, Earnings per Share, and Staff
     Accounting Bulletin No. 98. Net loss per share-basic was computed by
     dividing net loss attributable to common stock by the weighted average
     number of shares of common stock outstanding during the period excluding
     unvested shares of restricted stock. The denominator for net loss per
     share-diluted also considers the dilutive effect of outstanding stock
     options, warrants, and convertible preferred stock. Due to the Company's
     net loss, the amounts reported for basic and diluted are the same. The
     following securities could potentially dilute basic earnings per share in
     the future and were not included in the computation of diluted net loss
     per share because they would have been antidilutive for the periods
     presented:

<TABLE>
<CAPTION>
                                              Six months ended
                                                 June 30,
                                         -------------------------
                                            1999           1998
                                         ----------     ----------
<S>                                      <C>            <C>
Common Stock Options                      2,445,168      2,134,113
Common Stock Warrants                    17,322,353     17,322,353
Unvested Restricted Stock                    48,000         69,000
                                         ----------     ----------
Total Securities                         19,815,521     19,525,466
                                         ==========     ==========
</TABLE>


                                       5
<PAGE>   7

                           PREFERRED NETWORKS, INC.

5.   DISCONTINUED OPERATIONS

     On May 31, 1999, the Company completed the sale of substantially all of the
     assets of its wholly-owned subsidiary, Preferred Technical Services
     ("PTS"). Under the terms of the agreement, an affiliate of Saratoga
     Partners, a New York based merchant bank, paid the Company approximately
     $4.5 million for PTS, subject to certain purchase price adjustments, with
     $3.5 million less holdbacks paid in cash and the balance paid in the form
     of a $1 million credit for maintenance services to be provided by PTS to
     the Company for its paging networks. Simultaneously, the Company entered
     into an agreement to purchase $1 million of such maintenance services from
     PTS over the next twelve months, which is payable with the aforementioned
     credit. The Company used $1.4 million of the cash proceeds from the sale of
     PTS to reduce its outstanding notes payable. A principal of Saratoga
     Partners serves as a director of the Company.

     Revenues for PTS for the five months ended May 31, 1999 and the six months
     ended 1998 were $2.7 million and $1.1 million, respectively. Net income
     (loss) of PTS for the five months ended May 31, 1999 and 1998 was ($73,000)
     and $12,000, respectively. This subsidiary has been presented as a
     discontinued operation in the accompanying financial statements.

6.   IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In April 1998, the Accounting Standards Executive Committee issued
     Statement of Position 98-5, "Reporting on the Costs of Start-Up
     Activities" ("SOP 98-5"). SOP 98-5 requires entities to charge to expense
     start-up costs, including organizational costs, as incurred. In addition,
     SOP 98-5 requires a write-off of any previously capitalized start-up or
     organization costs, and must be reported as the cumulative effect of a
     change in accounting principle. SOP 98-5 became effective January 1, 1999.
     The Company adopted SOP 98-5 on January 1, 1999 and has written off the
     unamortized balance of its market entry costs of $1.8 million and no
     longer capitalizes such costs.

     Pro forma amounts reflect adjustments to cease capitalization and
     amortization as if SOP 98-5 had been adopted prior to 1998. Additional
     amounts capitalized net of amortization expense during the three and six
     months ended June 30, 1998 were $(20,000) and $(117,000), respectively.


                                       6
<PAGE>   8

                           PREFERRED NETWORKS, INC.


8.   SEGMENT INFORMATION

In its continuing operations, the Company has two reportable segments organized
by products or services sold: (i) one-way wireless networks, whereby companies
purchase non-branded, wholesale network services from the Company for resale to
their customers (through its PNI Access Services Division) and (ii) pager and
cellular product repair services, product sales and inventory management and
fulfillment (through EPS Wireless, Inc.).

The Company evaluates performance and allocates resources based on earnings
before interest, depreciation and other non-cash items. The accounting policies
of the reportable segments are the same as those described in the summary of
significant accounting policies. Intersegment sales are recorded with profit,
which is then eliminated upon consolidation.

<TABLE>
<CAPTION>
                                                          PNI ACCESS
                                                          SERVICES AND           EPS
                                                             OTHER*         WIRELESS, INC.     INTERSEGMENT          TOTALS
                                                          ------------      --------------     ------------       ------------
<S>                                                       <C>               <C>                <C>                <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenues ...........................................      $  9,216,934       $ 10,361,508        $       --       $ 19,578,442

Interest expense / income (net) ....................           917,279              8,997                --            926,276
Depreciation and amortization expense ..............         2,362,100            345,162                --          2,707,262

Segment income (loss) after cumulative
  effect of change in accounting principle .........        (6,567,190)           (32,447)               --         (6,599,637)
Segment assets .....................................        76,711,280          5,056,894       (30,262,331)        51,505,843

SIX MONTHS ENDED JUNE 30, 1998
Revenues ...........................................         9,478,211          9,422,969          (248,077)        18,392,769
Interest expense / income (net) ....................           399,237             20,459                --            419,696
Depreciation and amortization expense ..............         2,362,100            166,436                --          3,294,762
Segment income (loss) after cumulative
  effect of change in accounting principle .........        (6,456,083)           145,977               201         (6,309,929)
Segment assets .....................................        96,167,839          5,637,582       (34,768,200)        66,040,494
</TABLE>

     * "Other" includes overhead expenses primarily in the area of S,G&A
relating to executive management, information services, public reporting and
other similar expenses. The cumulative effect of the change in accounting
principle is reflected in PNI Access Services.


                                       7
<PAGE>   9

                           PREFERRED NETWORKS, INC.

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS.

OVERVIEW

In this section, the Company makes reference to "EBITDA" which represents
earnings before interest expense, interest income, taxes, depreciation and
amortization. EBITDA is a financial measure commonly used in the
telecommunications industry and should not be construed as an alternative to
operating income (as determined in accordance with generally accepted
accounting principles ("GAAP")), as an alternative to cash flows from operating
activities (as determined in accordance with GAAP), or as a measure of
liquidity.

The table below provides the components of the Company's consolidated
statements of operations and EBITDA for each of the six months ended June 30,
1999 and 1998, respectively, as a percentage of total revenues.

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED          SIX MONTHS ENDED
                                                                       JUNE 30,                  JUNE 30,
                                                                 ------------------        ------------------
                                                                  1999         1998         1999         1998
                                                                 -----        -----        -----        -----
<S>                                                              <C>          <C>          <C>          <C>
Revenues
   Network services .....................................         33.9%        36.2%        34.1%        35.7%
   Product sales ........................................         19.5         39.7         29.5         40.8
   Other services .......................................         46.6         24.1         36.4         23.5
                                                                 -----        -----        -----        -----
     Total revenues .....................................        100.0        100.0        100.0        100.0
Cost of revenues
   Network services .....................................         20.4         24.0         21.2         23.6
   Products sales .......................................         17.3         34.1         25.2         34.5
   Other services .......................................         37.6         18.3         30.3         18.4
                                                                 -----        -----        -----        -----
     Total cost of revenues .............................         75.3         76.4         76.7         76.5
                                                                 -----        -----        -----        -----
Gross margin ............................................         24.7         23.6         23.3         23.5
Selling, general and administrative expenses ............         32.1         37.1         33.4         37.7
Depreciation and amortization ...........................         13.2         17.4         13.8         17.9
                                                                 -----        -----        -----        -----
     Operating loss .....................................        (20.6)       (30.9)       (23.9)       (32.1)
                                                                 -----        -----        -----        -----
Interest expense ........................................         (5.0)        (3.2)        (5.0)        (3.4)
Interest income .........................................          0.2          1.4          0.3          1.0
Gain/(loss) on asset disposal ...........................         (0.8)          --         (0.4)          --
Income from continuing operations before income taxes
  and cumulative effect of change in accounting principle        (26.1)       (32.7)       (29.1)       (34.3)
Income tax benefit ......................................          2.8           --          1.4           --
Net loss from continuing operations before cumulative ...        -----        -----        -----        -----
  of change in accounting principle .....................        (23.3)       (32.7)       (27.6)       (34.3)
Discontinued operations:
     Income (loss) from operations, net of income tax ...         (1.3)         0.1         (0.4)         0.1
     Gain on disposal of PTS, net of income tax .........          6.5           --          3.3           --
                                                                 -----        -----        -----        -----
     Net income from discontinued operations ............          5.1          0.1          2.9          0.1
Cumulative effect of change in accounting principle .....           --           --         (9.4)          --
                                                                 -----        -----        -----        -----
 Net loss ...............................................        (18.1)       (32.6)       (34.1)       (34.2)
         Net loss attributable to Common Stock ..........        (26.9)       (41.8)       (42.8)       (41.7)
EBITDA ..................................................         (7.4)       (13.5)       (10.1)       (14.1)
                                                                 =====        =====        =====         =====
</TABLE>

The table below provides information about the Company's units in service on
the Company's networks by customer type.

<TABLE>
<CAPTION>
                                                      June 30, 1999          Percentage Increase in
                                                  --------------------     --------------------------
                                                    1999         1998         1999            1998
                                                  -------      -------     ----------      ----------
<S>                                               <C>          <C>         <C>             <C>
Units in service
  Reseller units ...........................      307,150      317,446       -5.9%             4.4%
  Direct Access units ......................      231,320      184,670       16.4%            22.2%
                                                  -------      -------
  Total units in service ...................      538,470      501,516        2.5%            10.3%
                                                  =======      =======
</TABLE>


On May 31, 1999, the Company completed the sale of substantially all of the
assets of its wholly-owned


                                       8
<PAGE>   10

                           PREFERRED NETWORKS, INC.


subsidiary, Preferred Technical Services ("PTS"). Under the terms of the
agreement, an affiliate of Saratoga Partners, a New York based merchant bank,
paid the Company approximately $4.5 million for PTS, subject to certain purchase
price adjustments, with $3.5 million less holdbacks paid in cash and the balance
paid in the form of a $1 million credit for maintenance services to be provided
by PTS to the Company for its paging networks. Simultaneously, the Company
entered into an agreement to purchase $1 million of such maintenance services
from PTS over the next twelve months, which is payable with the aforementioned
credit. The Company used $1.4 million of the cash proceeds from the sale of PTS
to reduce its outstanding notes payable. A principal of Saratoga Partners serves
as a director of the Company.

Revenues for PTS for the five months ended May 31, 1999 and the six months ended
1998 were $2.7 million and $1.1 million, respectively. Net income (loss) of PTS
for the five months ended May 31, 1999 and 1998 was ($73,000) and $12,000,
respectively. This subsidiary has been presented as a discontinued operation in
the accompanying financial statements.


RESULTS OF OPERATIONS

Total revenues increased by $815,000 or 8.9% to $9.9 million for the three
months ended June 30, 1999 from $9.1 million for the three months ended June
30, 1998. Total revenues increased by $1.2 million, or 6.4%, to $19.6 million
for the six months ended June 30, 1999 from $18.4 million for the six months
ended June 30, 1998.

Revenues from network services increased by $70,000, or 2.1%, to $3.4 million
for the three months ended June 30, 1999 from $3.3 million for the three months
ended June 30, 1998. Revenues from network services increased by $113,000, or
1.7%, to $6.7 million for the six months ended June 30, 1999 from $6.6 million
for the six months ended June 30, 1998. The Company had 28 markets in service
at June 30, 1999. Units in service increased by 36,954, or 7.4%, to 538,470 at
June 30, 1999 from 501,516 at June 30, 1998. Airtime revenue per unit decreased
by $0.23 to $2.06 for the six months ended June 30, 1999 from $2.29 for the six
months ended June 30, 1998. This decrease is primarily due to an increase in
units in service from Direct Access customers as a percentage of total units in
service. Units from Direct Access customers increased to 43.0% of total units
at June 30, 1999 from 36.7% at June 30, 1998. The Company incurs minimal
marginal cost in supplying only airtime to its Direct Access customers and
therefore charges these customers substantially less per unit in service per
month than it charges its reseller customers.

Revenues from product sales decreased by $1.7 million, or 46.5%, to $1.9
million for the three months ended June 30, 1999 from $3.6 million for the
three months ended June 30, 1998. Revenues from product sales decreased by $1.7
million, or 23.1%, to $5.8 million for the six months ended June 30, 1999 from
$7.5 million for the six months ended June 30, 1998. The decreases in product
sales revenue for each of the three and six month periods are due primarily to
decreased sales at EPS of new, used and refurbished pager products and to a
lesser extent, decreased sales of new pagers to network service customers at
PNI Access Services.

Other services revenues increased by $2.4 million, or 110.3%, to $4.6 million
for the three months ended June 30, 1999 from $2.2 million for the three months
ended June 30, 1998. Other services revenues increased by $2.8 million, or
64.9%, to $7.1 million for the six months ended June 30, 1999 from $4.3 million
for the six months ended June 30, 1998. The increases in other services revenue
are due to increases in cellular repair and refurbishment volume and associated
revenue at EPS, offset in part by decreases in pager repair and refurbishment
volume and associated revenue at EPS. Management believes the decrease in pager
repair and refurbishment services resulted primarily from consolidation among
certain of EPS's customers in the second half of 1998, and further believes
that this consolidation may result in increased opportunities for its pager
repair and refurbishment services in the future. Accordingly, EPS's revenues
attributable to pager repair and refurbishment services increased on a
sequential basis for the three months ended June 30, 1999 compared to the three
months ended March 31, 1999.

Total costs of revenues increased by $506,000, or 7.3% to $7.5 million for the
three months ended June 30, 1999 from $7.0 million for the three months ended
June 30, 1998. Total costs of revenues increased by $950,000, or 6.8% to $15.0
million for the six months ended June 30, 1999 from $14.1 million for the six
months ended June 30, 1998.

Cost of network services decreased by $167,000, or 7.7%, to $2.0 million for
the three months ended June 30, 1999 from $2.2 million for the three months
ended June 30, 1998. Cost of network services decreased by $197,000, or


                                       9
<PAGE>   11

                           PREFERRED NETWORKS, INC.


4.5%, to $4.1 million for the six months ended June 30, 1999 from $4.3 million
for the six months ended June 30, 1998. Cost of network services as a
percentage of network services revenue decreased to 60.0% and 62.1% for the
three and six months ended June 30, 1999, respectively, from 66.3% and 66.2%
for the three and six months ended June 30, 1998, respectively. The decreases
in costs of network services for each of the three and six month periods are
the result of the Company's ongoing efforts to reduce its fixed costs primarily
in the areas of transmitter site rent, satellite expense and telco expense. In
addition, as markets generate increased revenue, the decrease in costs as a
percentage of revenue is expected due to the fixed nature of many of these
expenses.

Cost of product sales decreased by $1.4 million, or 44.6%, to $1.7 million for
the three months ended June 30, 1999 from $3.1 million for the three months
ended June 30, 1998. Cost of product sales decreased by $1.4 million, or 22.3%,
to $4.9 million for the six months ended June 30, 1999 from $6.3 million for
the six months ended June 30, 1998. Cost of product sales as a percentage of
product sales revenue increased to 88.7% and 85.2% for the three and six months
ended June 30, 1999, respectively, from 85.7% and 84.3% for the six months
ended June 30, 1998, respectively. The decreases in cost of product sales are
due primarily to the decreases in product sales revenues. The increases in cost
of product sales as a percentage of product revenues are due primarily to the
decreased mix of total product sales revenue attributable to EPS, which sells
used and refurbished pagers and cellular product typically at higher margins
than the new pager product sold by PNI Access Services to its network service
customers. This is partially offset by decreases in costs of product sales as a
percentage of revenues at PNI Access Services, which has generated positive
gross profit from the sale of new pagers for the three and six month periods
ending June 30, 1999, compared to negative gross profit for the three and six
month periods ending June 30, 1998.

Cost of other services increased by $2.1 million, or 122.8% to $3.7 million for
the three months ended June 30, 1999 from $1.7 million for the three months
ended June 30, 1998. Cost of other services increased by $2.6 million, or 75.6%
to $5.9 million for the six months ended June 30, 1999 from $3.4 million for
the six months ended June 30, 1998. Cost of other services as a percentage of
other services revenue increased to 80.7% and 83.5% for the three and six
months ended June 30, 1999, respectively, from 76.2% and 78.4% for the six
months ended June 30, 1998, respectively. The increases in cost of other
services for each of the three and six month periods are due primarily to the
increased costs associated with the rapid increase in cellular repair volume at
EPS. The Company expected EPS to experience some production inefficiencies
associated with a rapid increase in cellular repair volume and expects margins
to improve as volumes achieve more sustained levels.

Selling, general and administrative (SG&A) expenses decreased by $194,000, or
5.7%, to $3.2 million for the three months ended June 30, 1999 from $3.4
million for the three months ended June 30, 1998. Selling, general and
administrative (SG&A) expenses decreased by $377,000, or 4.9%, to $6.6 million
for the six months ended June 30, 1999 from $6.9 million for the six months
ended June 30, 1998. SG&A expenses as a percentage of total revenues decreased
to 32.1% and 33.4% for the three and six months ended June 30, 1999,
respectively, from 37.1% and 37.7% for the three and six months ended June 30,
1998, respectively. The decreases in SG&A are due primarily to reduced sales
and administrative expenses resulting from the decreases in product sales
revenues at EPS. In addition, because the Company does not market directly to
end-users, it does not incur subscriber-related acquisition and customer
support costs and, accordingly, its SG&A expenses do not increase in direct
proportion to its revenue growth.

Depreciation and amortization decreased by $272,000, or 17.2%, to $1.3 million
for the three months ended June 30, 1999 from $1.6 million for the three months
ended June 30, 1998. Depreciation and amortization decreased by $588,000, or
17.8%, to $2.7 million for the six months ended June 30, 1999 from $3.3 million
for the six months ended June 30, 1998. Depreciation and amortization decreased
as a percentage of total revenues to 13.2% and 13.8% for the three and six
months ended June 30, 1999, respectively, from 17.4% and 17.9% for the three and
six months ended June 30, 1998, respectively. The decrease is due primarily to
the absence of amortization expense of market start-up expenses in 1999 as a
result of the adoption of SOP 98-5.

Interest expense, net of capitalized amounts, increased by $200,000, or 68.3%,
to $494,000 for the three months ended June 30, 1999 from $293,000 for the
three months ended June 30, 1998. Interest expense, net of capitalized amounts,
increased by $363,000, or 58.5%, to $983,000 for the six months ended June 30,
1999 from $620,000 for the six months ended June 30, 1998. The increase in
interest expense is primarily due to no interest being capitalized in 1999
since the Company had no construction activities during the six months ended
June 30, 1999 as compared to the six months ended June 30, 1998, when $191,000
was capitalized.


                                      10
<PAGE>   12

                           PREFERRED NETWORKS, INC.


Interest income decreased by $107,000 or 84.8% to $19,000 for the three months
ended June 30, 1999 from $126,000 for the three months ended June 30, 1998.
Interest income decreased by $144,000 or 71.9% to $56,000 for the six months
ended June 30, 1999 from $200,000 for the six months ended June 30, 1998. The
decrease in interest income is due to a corresponding decrease in cash and cash
equivalents.

Net loss from continuing operations before cumulative effect of change in
accounting principle for the three and six months ended June 30, 1999 decreased
to $2.6 million and $5.7 million, respectively, from $3.0 million and $6.3
million for the three and six months ended June 30, 1998, respectively. The
decreased losses are due to increases in total revenues and decreases in SG&A,
as well as decreases in depreciation and amortization expense, as described
above. The cumulative effect of change in accounting principle for the three
and six months ended June 30, 1999 resulting from the write-off of market
start-up costs as required by SOP 98-5 was $0 and $1.8 million, respectively.

The net loss from operations from PTS, net of tax, for the three and six months
ended June 30, 1999 were $133,000 and $73,000, respectively, compared to net
income of $7,000 and $12,000 for the three and six months ended June 30, 1998,
respectively. The losses in 1999 were the result of lower revenues from
contract engineering services during the second quarter of 1999.

The net loss per share of Common Stock for the three months ended June 30, 1999
decreased to $.16 from $.23 for the three months ended June 30, 1998. The net
loss per share of Common Stock for the six months ended June 30, 1999 increased
to $.51 from $.47 for the six months ended June 30, 1998. The net loss
attributable to Common Stock for the three months ended June 30, 1999 decreased
due to decreased operating losses and the gain on the sale of PTS. This
decrease was offset for the six month period by an increase in losses due to
the cumulative effect of adopting the new accounting principle for market entry
costs.


LIQUIDITY AND CAPITAL RESOURCES

The Company's net cash used in operations was $1.1 million and $1.9 million for
the three and six months ended June 30, 1999, respectively, compared to $1.8
million and $4.4 million for the three and six months ended June 30, 1998,
respectively. The primary reasons for the reduction in net cash used in
operations were the decrease in the net loss from operations before the effect
of change in accounting principle and an increase in accounts payable compared
to the prior year period.

Capital expenditures were $156,000 and $418,000 for the three and six months
ended June 30, 1999, respectively, compared to $467,000 and $852,000 for the
three and six months ended June 30, 1998, respectively. The Company has funded
its expansion in the past by equity infusions, bank and finance company debt,
loans from stockholders, and vendor and seller financing.

As of December 31, 1998, the Company had an $11.0 million credit facility with a
financial institution, of which $7.25 million was used to finance paging network
acquisitions and $3.75 million represents a revolving credit facility to be used
for working capital purposes. Borrowings under this facility are secured by
substantially all the assets of the Company. This credit facility contains
various conditions, financial covenants and restrictions related to a variety of
issues. In May 1999, the Company received a waiver for certain events of
default, which had existed since January 1, 1999. Pursuant to an amendment to
the senior credit facility executed in May 1999, certain of the Company's
financial covenants were amended, including but not limited to a requirement to
maintain a minimum cash balance of $2.0 million at the end of each calendar
month and a requirement to achieve certain minimum quarterly financial
performance targets. Under the terms of the payments of principal of $121,000
plus interest in arrears are due monthly, the Company used $1 million of the
cash proceeds from the sale of PTS, to reduce the $7.25 million term loan
portion of its senior credit facility. Payments of principal of $121,000 plus
interest in arrears are due monthly. The remaining principal balance is due and
payable in full at April 30, 2000. The outstanding balance under the amended
facility bears interest at the prime rate of the lender plus 1 1/2% through
September 30, 1999 and 2% through April 30, 2000. The amount outstanding under
this facility as of December 31, 1998 and June 30, 1999 was $10.5 million and
$8.6 million, respectively.  At June 30, 1999 there was $413,000 additional
availability.

The Company has a secured credit facility for $12.0 million of vendor financing
bearing interest at the five-year U.S. Treasury rate plus 6.5% payable in
various monthly installments of principal and interest over 60 months. This
credit facility contains various conditions, financial covenants and
restrictions and is secured by paging equipment. As of June 30, 1999, there was
$4.4 million outstanding under this facility, and no additional amounts were


                                      11
<PAGE>   13

                           PREFERRED NETWORKS, INC.


available. In May 1999, the Company amended certain terms and conditions of this
facility, under which the Company received a waiver for certain events of
default and deferral of $1.4 million payments of monthly principal until May
2000. Interest only is payable during 1999 and monthly payments of principal and
interest of approximately $156,000 will resume in January 2000. With the waiver
to the $11 million credit facility described above, the Company remedied its
default of certain covenants of this $12.0 million facility, which had existed
since January 1, 1999.

The Company has a secured credit facility for $5.0 million to finance paging
system equipment from a finance company bearing interest between 10% and 11%
payable in various monthly installments of principal and interest over 60
months. This credit facility contains various conditions, financial covenants
and restrictions and is secured by paging equipment. As of June 30, 1999, there
was $2.7 million outstanding under this facility with no additional
availability. In May 1999, the Company amended certain terms and conditions of
this facility, under which the Company received deferral of payments of $672,000
of monthly principal amortization until May 2000. Interest only is payable
during this time period and monthly principal payments of $61,000 will resume in
May 2000. With the waiver to the $11 million credit facility described above,
the Company remedied its default of certain covenants of this $5.0 million
facility, which had existed since January 1, 1999.

At June 30, 1999, the Company had $2.0 million invested in short-term
investment grade securities at various interest rates.

The Company operates in the wireless communications industry which has
experienced and continues to experience significant challenges including
competing technologies, shifts in customers' strategies, changes in the FCC
regulatory environment, and limited sources of capital. As a result, the
Company is continually required to address these and other matters, in its
business strategy and operations.

Since its March 1996 initial public offering, the Company has invested $62
million in building its network infrastructure, acquiring FCC licenses and
other paging networks, and acquiring related companies. As a result of this
expansion and the development of the Company's business and the overall
wireless industry, the Company has experienced net losses and negative cash
flows, and future cash flows have been difficult to project.

The Company's projections include significant growth in revenues, from existing
products and services and also from new switching technologies which it has
recently developed, and improved profitability due to greater utilization of
the existing base of assets. The Company's business plan may change, or
unforeseen events may occur, requiring the Company to raise additional funds.
Additionally, the Company may consider selling certain assets. The amounts of
funds required by the Company will depend on many factors, including successful
deployment of the Company's proprietary, patented switch technology, "Platform
1(TM)", its sales to customers, and the expected cost savings to the Company in
its own networks.

The outcome of the uncertainties surrounding the Company and the industry are
difficult to predict. These uncertainties could affect the Company's ability to
recover the carrying value of its long-lived assets from its future cash flows
and operations, although management's current projections indicate that such
values will be recovered. Currently, generally accepted accounting principles
require companies to assess future cash flows and record impairment losses on
long-lived assets based on estimates of future cash flows if insufficient to
recover the carrying values. Should the Company's future projections not
materialize, the Company could experience an impairment of its long-lived
assets requiring a charge to its income statement. As of December 31, 1998 and
June 30, 1999, the Company had $45 million and $39 million, respectively, in
net book value of long-lived assets, including property and equipment, FCC
licenses, market entry costs and goodwill.

Due to the uncertainties described above, combined with the Company's $11.0
million credit facility which matures in the next twelve months and has not yet
been refinanced, management is unable to conclude whether the Company has
sufficient cash and cash equivalents on hand to meet its working capital,
capital expenditure and debt service requirements for the next twelve months.
The Company may need additional funds in the form of equity, bank debt or other
debt financing in the future to execute its business plan. However, no


                                      12
<PAGE>   14

                           PREFERRED NETWORKS, INC.


assurances can be given that if additional funds are required, such funds will
be available on terms acceptable to the Company, if at all, and the failure to
obtain such funds could have a material adverse effect on the Company.

YEAR 2000 COMPUTER ISSUE

Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "00." This may cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken.

The Company utilizes software and related computer technologies essential to
its operations that will be affected by the Year 2000 issue.

In 1998, the Company designated a cross-functional team with members of its
Information Technology, Engineering, Finance and Administration departments to
evaluate the impact of the Year 2000 problem. Initially, this team organized
and explained each member's role in the process. Second, the team established
an inventory of potential areas where a problem could exist. The inventory
included an assessment of the Company's desktop and server hardware; software
systems; telephone system; billing system; accounting system; paging terminals;
paging transmitters; and other paging network equipment. Third, the team
established a plan and assigned responsibility. According to the established
plan, the Company's mission critical systems will all be Year 2000 compliant by
December 1999. Assessment of mission critical systems and applications has been
substantially completed and most third party vendors who supply these mission
critical systems have been contacted.

The Company intends to bring its mission critical systems into Year 2000
compliance through hardware and software upgrades, software replacement and
internally developed enhanced software. The Company has purchased maintenance
agreements with respect to its desktop and server hardware, software systems
and telephone system. These maintenance agreements have allowed the Company to
upgrade and remedy where necessary in order to become compliant at minimal
additional cost. The Company's subscriber control system is compliant. During
1998 and 1999, the Company contracted with a consultant to provide services
specifically related to an upgrade of its accounting software package. These
consulting services consist primarily of programming services and this upgrade
is expected to be completed during the third and fourth quarters of 1999. The
Company's paging terminals, transmitters and other paging network equipment are
not date sensitive.

The Company has not conducted its assessment of the reasonably likely worst
case scenario of systems failures and their related consequences. It is
expected that the planned testing of systems and the completed testing of
systems will greatly reduce the need for substantial contingency planning.

The Company believes that the cost of modifying its software and related
computer technologies will not exceed $250,000, of which approximately $20,000
was incurred and expensed in 1998 and $109,000 was incurred and expensed in the
first six months of 1999. The remainder will be incurred in the third and
fourth quarters of 1999. Costs of the Year 2000 project are based on current
estimates and actual results may vary from such estimates once plans are fully
implemented.


FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report on Form 10-Q and other materials filed or to be filed by the Company
with the Securities and Exchange Commission (as well as information included in
oral statements or other written statements made or to be made by the Company)
contains statements that are or will be forward-looking, such as statements
relating to acquisitions, construction and other business development
activities, future capital expenditures, timing of the Company's need for
additional capital, financing sources and availability and the effects of laws
and regulations (including FCC regulations) and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, uncertainties affecting the paging and wireless industries
generally, risks relating to the Company's acquisition, construction and other
business development activities, risks relating to technological change in the
paging and wireless industries, risks relating to


                                      13
<PAGE>   15

                           PREFERRED NETWORKS, INC.


leverage and debt service (including availability of financing terms acceptable
to the Company), risks relating to the ability of the Company to obtain
additional funds in the form of debt or equity, risks relating to the
availability of transmitters, terminals, network project management services
and network engineering support, fluctuations in interest rates, and the
existence of and changes to federal and state laws and regulations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

There have been no significant changes since December 31, 1998. See
Management's Discussion and Analysis.



PART II - OTHER INFORMATION

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES.

Beginning in 1999 and continuing through May 1999, the Company was not in
compliance with certain of the financial covenants under its senior credit
facility, which would have allowed the lender to declare a default and
accelerate the maturity of the debt. In addition, beginning in 1999 and
continuing through May 1999, the Company had not made principal payments under
its equipment vendor credit facility, which would have allowed the lender to
declare an event of default. In addition, due to cross-default provisions under
these agreements, such noncompliance could have triggered an acceleration of
all of the Company's other debt, excluding capital lease obligations. However,
at May 31, 1999, the Company received waivers for these violations and amended
these facilities according to the terms and conditions further discussed in
Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources". As of the date of
this filing, the Company was in compliance of its debt covenants.


ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibit:

         27     Financial Data Schedule (For SEC use only)

(b)      Reports on Form 8-K:

         The registrant filed a report on Form 8-K on June 14, 1999 and a Form
8-K/A on August 13, 1999 with respect to the sale of PTS.


                                      14
<PAGE>   16

                           PREFERRED NETWORKS, INC.


                                   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 NETWORKS, INC.


Date:  August 16, 1999     By: /s/ Mark H. Dunaway
                               -------------------------------------------------
                               Mark H. Dunaway
                               Chief Executive Officer



Date:  August 16, 1999     By: /s/ Kathryn Loev Putnam
                               -------------------------------------------------
                               Kathryn Loev Putnam
                               Senior Vice President and Chief Financial Officer
                               (Principal Financial Officer and
                               Principal Accounting Officer)


                                      15