<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: March 31, 1998

                                       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: 16,297,690 shares of common
stock, no par value, as of May 11, 1998.



<PAGE>   2
                            PREFERRED NETWORKS, INC.



                               INDEX TO FORM 10-Q



<TABLE>
<CAPTION>
                                                                                            PAGE
                                                                                            NUMBER
                                                                                            ------
<S>     <C>       <C>                                                                       <C>
PART I.           FINANCIAL INFORMATION                                                     

        Item 1.   Financial Statements

                  Condensed Consolidated Balance Sheets, March 31, 1998
                  (Unaudited) and December 31, 1997...................................       3

                  Condensed Consolidated Statements of Operations for the
                  three months ended March 31, 1998 and 1997 (Unaudited)..............       4

                  Condensed Consolidated Statements of Cash Flows for the three
                  months ended March 31, 1998 and 1997 (Unaudited)....................       5

                  Notes to Condensed Consolidated Financial Statements (Unaudited) ...       6

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


PART II.          OTHER INFORMATION

        Item 2.   Changes in Securities and Use of Proceeds...........................      13

        Item 6.   Exhibits and Reports on Form 8-K....................................      13

                  Signatures .........................................................      14
</TABLE>










                                       2
<PAGE>   3


                            PREFERRED NETWORKS, INC.


                      CONDENSED CONSOLIDATED BALANCE SHEETS





<TABLE>
<CAPTION>
                                                          MARCH 31,        DECEMBER 31,
                                                            1998               1997
                                                        ------------       ------------
                                                         (UNAUDITED)
                                     ASSETS
<S>                                                     <C>                <C>         
Current assets
   Cash and cash equivalents .....................      $ 12,634,691       $  7,562,978
   Accounts receivable, net ......................         3,403,797          3,969,026
   Inventory .....................................         2,361,366          2,890,647
   Prepaid expenses and other current assets .....           637,218            325,130
                                                        ------------       ------------
     Total current assets ........................        19,037,072         14,747,781

Property and equipment, net ......................        24,919,880         25,569,209
Goodwill, net ....................................        13,150,810         13,396,459
FCC licenses, net ................................         9,374,760          9,544,622
Other assets, net ................................         2,877,556          2,974,409
                                                        ============       ============
                                                        $ 69,360,078       $ 66,232,480
                                                        ============       ============

                    LIABILITIES, REDEEMABLE PREFERRED STOCK,
                            AND STOCKHOLDERS' EQUITY
Current liabilities
   Accounts payable ..............................      $  1,945,233       $  3,091,994
   Accrued liabilities ...........................           743,559            832,656
   Accrued compensation ..........................           650,114            797,302
   Current portion of notes payable
     and capital lease obligations ...............         2,277,762          2,123,248
                                                        ------------       ------------
     Total current liabilities ...................         5,616,668          6,845,200

Notes payable and capital lease obligations,
  less current portion ...........................        17,536,389         17,658,608

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 ......        14,436,919         13,956,123

Class B Senior Redeemable Preferred Stock,
   no par value, $1.50 per share
   redemption price; 5,500,000
   shares authorized in 1998,
   5,333,336 shares issued and
   outstanding in 1998 ...........................         7,016,258                 --
                                                        ------------       ------------
     Total liabilities and Redeemable
     Preferred Stock .............................        44,606,234         38,459,931

Stockholders' equity
   Preferred stock, no par value,
     11,000,000 and 16,500,000 shares
     authorized in 1998 and 1997,
     respectively; no shares issued
     and outstanding .............................                --                 --
   Common Stock, no par value,
     100,000,000 shares authorized
     in 1998 and 1997; 16,295,028
     and 16,200,552 issued and
     outstanding in 1998 and 1997,
     respectively ................................        63,315,924         62,900,973
   Accretion of Redeemable Preferred Stock .......          (357,619)          (245,726)
   Accumulated deficit ...........................       (38,204,461)       (34,882,698)
                                                        ------------       ------------
                                                          24,753,844         27,772,549
                                                        ============       ============
                                                        $ 69,360,078       $ 66,232,480
                                                        ============       ============
</TABLE>


           See notes to condensed consolidated financial statements.



                                       3
<PAGE>   4
                            PREFERRED NETWORKS, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                                 MARCH 31,
                                                      -------------------------------
                                                          1998                1997
                                                      ------------       ------------
<S>                                                   <C>                <C>         
Revenues
    Network services ...........................      $  3,263,018       $  2,565,588
    Product sales ..............................         3,894,594          2,933,325
    Other services .............................         2,506,865          2,617,438
                                                      ------------       ------------
           Total revenues ......................         9,664,477          8,116,351

Costs of revenues
    Network services ...........................         2,154,372          1,908,208
    Product sales ..............................         3,232,300          3,079,918
    Other services .............................         1,964,680          2,026,161
                                                      ------------       ------------
           Total costs of revenues .............         7,351,352          7,014,287
                                                      ------------       ------------
Gross margin ...................................         2,313,125          1,102,064

Selling, general and administrative expenses ...         3,623,047          4,092,276
Depreciation and amortization ..................         1,759,653          1,645,902
                                                      ------------       ------------
           Operating loss ......................        (3,069,575)        (4,636,114)
Interest expense ...............................          (326,583)          (226,798)
Interest income ................................            74,395            138,436
                                                      ------------       ------------
           Net loss ............................        (3,321,763)        (4,724,476)

Accretion of Redeemable Preferred Stock ........          (111,893)                --
Redeemable Preferred Stock dividend requirements          (420,161)                --
                                                      ============       ============
           Net loss attributable to Common Stock      $ (3,853,818)      $ (4,724,476)
                                                      ============       ============


Net loss per share of Common Stock .............      $      (0.24)      $      (0.30)
                                                      ============       ============

Weighted average number of common shares
 used in calculating net loss per share of
 Common Stock ..................................        16,179,250         15,860,004
                                                      ============       ============
</TABLE>




           See notes to condensed consolidated financial statements.






                                       4
<PAGE>   5

                            PREFERRED NETWORKS, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                                              THREE MONTHS ENDED
                                                                                  MARCH 31,
                                                                        -------------------------------
                                                                            1998               1997
                                                                        -------------      ------------
<S>                                                                     <C>                <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .........................................................      $ (3,321,763)      $ (4,724,476)
Adjustments to reconcile net loss to net cash used in operating
activities:
   Depreciation and amortization .................................         1,759,653          1,645,902
   Bad debt expense ..............................................            62,731            145,526
   Stock option and restricted stock grant compensation expense ..            16,581              7,333
   Changes in operating assets and liabilities:
     Accounts receivable .........................................           502,498         (1,529,719)
     Inventory ...................................................           529,281            826,716
     Prepaid expenses and other assets ...........................           (92,188)          (245,060)
     Accounts payable ............................................        (1,146,761)          (905,544)
     Accrued liabilities .........................................           (89,097)          (397,628)
     Accrued compensation ........................................          (147,188)          (217,796)
                                                                        ------------       ------------
Net cash used in operating activities ............................        (1,926,253)        (5,394,746)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment ...........................................          (384,227)        (1,737,001)
Purchases of other assets and FCC licenses .......................          (213,633)            47,988
Payment for acquisitions, net of cash acquired ...................                --        (10,543,350)
                                                                        ------------       ------------
Net cash used in investing activities ............................          (597,860)       (12,232,363)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings .........................................           500,000                 --
Repayments of borrowings .........................................          (467,705)          (968,111)
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 ..........             8,531                 --
                                                                        ------------       ------------
Net cash provided by (used in) financing activities ..............         7,595,826           (968,111)
                                                                        ------------       ------------

Net increase (decrease) in cash and cash equivalents .............         5,071,713        (18,595,220)
Cash and cash equivalents, beginning of period ...................         7,562,978         21,645,354
                                                                        ------------       ------------
Cash and cash equivalents, end of period .........................      $ 12,634,691       $  3,050,134
                                                                        ============       ============
</TABLE>



           See notes to condensed consolidated financial statements.




                                       5
<PAGE>   6
                            PREFERRED NETWORKS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1998
                                   (UNAUDITED)


1.       THE COMPANY

         Preferred Networks, Inc., 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 wholesale paging
         networks as one of the largest carrier's carriers in the U.S., and
         through its wholly-owned subsidiaries: Preferred Technical Services,
         Inc., a provider of paging network equipment installation, maintenance
         and engineering services; and EPS Wireless, Inc., 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 include 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 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, 1997, 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 during the three months ended March 31, 1998 and 1997 were
         approximately $388,000 and $365,000, respectively. There were no
         significant federal or state income taxes paid or refunded for the
         three months ended March 31, 1998 and 1997.

4.       LOSS PER SHARE

         Net loss per share was computed and restated, in the case of periods
         prior to the fourth quarter of 1997, 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 period presented:


<TABLE>
<CAPTION>
                                                          Three Months ended
                                                              March 31,
                                                    ----------------------------
                                                      1998                1997
                                                    ------------      ----------
                  <S>                               <C>               <C>      
                  Common Stock Options                2,311,995        1,705,983
                  Common Stock Warrants              17,322,353          422,354
                  Unvested Restricted Stock              85,000           60,000
                                                    ===========       ==========
                  Total                              19,719,348        2,188,337
                                                    ===========       ==========
</TABLE>



                                       6
<PAGE>   7
                            PREFERRED NETWORKS, INC.


5.       ACQUISITIONS

         In January 1997, the Company acquired the stock of Mercury Paging &
         Communications, Inc. ("Mercury") and its affiliated companies for
         approximately $14.2 million of which approximately $10.0 million was
         paid in cash and the remainder by the issuance of 624,321 shares of
         Common Stock. Proceeds from the Company's revolving credit facility
         which were drawn in December 1996 were used to fund the majority of the
         cash portion of the purchase price, with working capital being used to
         fund the remainder. The transaction was accounted for as a purchase as
         of January 31, 1997. Mercury is a reseller-based paging carrier in the
         states of New York, New Jersey, and Connecticut. Prior to closing, the
         Company earned revenues from Mercury under an agency agreement.

6.       ISSUANCE OF CLASS B SENIOR REDEEMABLE PREFERRED STOCK AND COMMON STOCK
         PURCHASE WARRANTS

         In March 1998, the Company issued 5,333,336 shares of Class B Senior
         Redeemable Preferred Stock (the "Class B Preferred") and warrants to
         purchase up to 5.4 million shares of Common Stock for a total purchase
         price of $8 million. Dividends accrue at the rate of 15% per annum, are
         cumulative and compound annually. The Class B Preferred may be redeemed
         at any time at the option of the Company at a price equal to $1.50 per
         share plus accrued dividends and if the holder so demands, five years
         from the date of issuance, the Class B Preferred must be redeemed by
         the Company at a price equal to $1.50 per share plus accrued dividends.
         In the event of redemption of the Company's Class A Redeemable
         Preferred Stock (the "Class A Preferred"), the Company must
         simultaneously redeem the Class B Preferred. Each warrant is
         exercisable for five years following the issuance of the Class B
         Preferred and entitles the holder to purchase one share of Common Stock
         for $1.50 per share subject to possible downward adjustment based on
         any private placement of the Company's Preferred or Common Stock for
         less than $1.50 per share. The Class B Preferred is recorded at cost,
         net of expenses, plus accretion and undeclared dividends.

7.       IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 1997, the Financial Accounting Standards Board issued Statement
         No. 131 "Disclosures about Segments of an Enterprise and Related
         Information" ("FAS 131"), which establishes standards for the way
         public business enterprises report information about operating segments
         in their financial statements. FAS 131 also establishes standards for
         related disclosures about products and services, geographic areas, and
         major customers. FAS 131 is effective for financial statements for
         periods beginning after December 15, 1997. The Company will adopt FAS
         131 in 1998 and does not expect the effect of adoption to be material
         to its consolidated financial statements but additional disclosures may
         be required.

         In April 1998, the Accounting Standards Executive Committee (AcSEC)
         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 as the cumulative effect of a change in
         accounting principle SOP 98-5 is effective January 1, 1999. The Company
         will adopt SOP 98-5 by the required date and will write off the
         unamortized balance of its market entry costs and cease to capitalize
         such costs at that time. Market entry costs net of accumulated
         amortization at March 31, 1998 were approximately $2.6 million. Amounts
         capitalized net of amortization, during the three months ended March
         31, 1998 and 1997 were $(97,000) and $225,000, respectively.







                                       7
<PAGE>   8

                            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 three months ended March 31, 1998 and
1997, respectively, as a percentage of total revenues.

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                                  MARCH 31,
                                                          ---------------------
                                                            1998         1997
                                                          --------     --------
<S>                                                       <C>          <C>  
Revenues
   Network services ..............................          33.8%        31.6%
   Product sales .................................          40.3         36.1
   Other services ................................          25.9         32.3
                                                          ------        -----
     Total revenues ..............................         100.0        100.0

Cost of revenues
   Network services ..............................          22.3         23.5
   Products sales ................................          33.5         37.9
   Other services ................................          20.3         25.0
                                                          ------        -----
     Total cost of revenues ......................          76.1         86.4
                                                          ------        -----

Gross margin .....................................          23.9         13.6
Selling, general and administrative expenses .....          37.5         50.4
Depreciation and amortization ....................          18.2         20.3
                                                          ------        -----
     Operating loss ..............................         (31.8)       (57.1)
Interest expense .................................          (3.4)        (2.8)
Interest income ..................................           0.8          1.7
                                                          ------        -----
     Net loss ....................................         (34.4)%      (58.2)%
                                                          ======        =====

EBITDA ...........................................         (13.6)%      (36.8)%
</TABLE>

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

<TABLE>
<CAPTION>
                                              MARCH 31,          PERCENTAGE INCREASE IN 
                                          -----------------      ---------------------- 
                                            1998      1997          1998      1997      
                                          -------   -------        ------    ------     
<S>                                       <C>       <C>          <C>         <C>        
Units in service                                                                        
   Reseller units......................   308,238   295,709          4.2%    112.4%     
   Colocation/interconnection units....   168,238    97,458         72.6%    150.7%     
                                          -------   -------                              
   Total units in service..............   476,476   393,167         21.2%    120.8%     
                                          =======   =======       
</TABLE>


RESULTS OF OPERATIONS

Total revenues increased by $1.5 million, or 19.1%, to $9.7 million for the
three months ended March 31, 1998 from $8.1 million for the three months ended
March 31, 1997 due to increased revenue in both network services and product
sales.

Revenues from network services increased by $697,000, or 27.2%, to $3.3 million
for the three months ended March 31, 1998 from $2.6 million for the three months
ended March 31, 1997. The Company has experienced an 



                                       8
<PAGE>   9
                            PREFERRED NETWORKS, INC.

increase in network services revenue as unit growth and the associated recurring
revenue stream have continued both in existing markets and in new markets as
well as from the acquisition of Mercury Paging & Communications, Inc.
("Mercury"), a reseller-based paging carrier acquired in January 1997. The
Company expanded to 27 markets at March 31, 1998 from 23 markets at March 31,
1997. Units in service increased by 83,309, or 21.2%, to 476,476 from 393,167
over the prior year three month period. Airtime revenue per unit decreased by
$0.09 for the three months ended March 31, 1998 compared to the three months
ended March 31, 1997. This decrease is primarily due to an increase in units in
service from colocation/interconnection customers as a percentage of total units
in service. The Company incurs minimal marginal cost in supplying only airtime
to its colocation/interconnection customers and therefore charges these
customers substantially less per unit in service per month than it charges its
reseller customers.

Revenues from product sales increased by $1.0 million, or 32.8%, to $3.9 million
for the three months ended March 31, 1998 from $2.9 million for the three months
ended March 31, 1997. The increase in revenues from product sales resulted from
growth during 1998 of sales of new, used and refurbished pager and cellular
products.

Other services revenues decreased by $111,000, or 4.2%, to $2.5 million for the
three months ended March 31, 1998 from $2.6 million for the three months ended
March 31, 1997. The decrease is primarily due to decreased revenue charged per
unit for pager repair and refurbishment services, which the Company believes
will be offset in the future by higher volumes of units serviced.

Cost of network services increased by $246,000, or 12.9%, to $2.2 million for
the three months ended March 31, 1998 from $1.9 million for the three months
ended March 31, 1997, but decreased as a percentage of network services revenue
to 66.0% for the three months ended March 31, 1998 from 74.4% for the three
months ended March 31, 1997. 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 increased by $152,000, or 4.9%, to $3.2 million for the
three months ended March 31, 1998 from $3.1 million for the three months ended
March 31, 1997. Cost of product sales as a percentage of product sales decreased
to 83.0% for the three months ended March 31, 1998 from 105.0% for the three
months ended March 31, 1997 primarily due to EPS's profits on product sales, and
to a lesser extent due to decreasing cost to the Company of purchasing pagers
for resale to its network customers. The Company also reduced the carrying cost
of its inventory by $288,000 as of March 31, 1998 to the lower of cost or market
compared to $787,000 as of March 31, 1997.

Cost of other services decreased by $61,000, or 3.0% to $2.0 million for the
three months ended March 31, 1998 from $2.0 million for the three months ended
March 31, 1997. The decrease in cost is primarily due to the decrease in
revenues discussed above.

Selling, general and administrative expenses (S,G&A) decreased by $469,000, or
11.5%, to $3.6 million for the three months ended March 31, 1998 from $4.1
million for the three months ended March 31, 1997, and decreased as a percentage
of total revenues to 37.5% for the three months ended March 31, 1998 from 50.4%
for the three months ended March 31, 1997. Because the Company does not market
directly to end-users, it does not incur subscriber-related acquisition costs
and, accordingly, its S,G&A expenses do not increase in direct proportion to its
revenue growth.

Depreciation and amortization increased by $114,000, or 6.9%, to $1.8 million
for the three months ended March 31, 1998 from $1.6 million for the three months
ended March 31, 1997 due to additional assets purchased or constructed for
expansion into new markets, increased amortization of market entry costs as the
Company opens new markets and they generate revenue, and amortization of
goodwill primarily related to the acquisition of Mercury in January 1997.
Depreciation and amortization decreased as a percentage of total revenues to
18.2% for the three months ended March 31, 1998 from 20.3% for the three months
ended March 31, 1997.

Interest expense, net of capitalized amounts, increased by $100,000, or 44.0%,
to $327,000 million for the three months ended March 31, 1998 from $227,000 for
the three months ended March 31, 1997 due to the financing of the network
buildout, and borrowings related to the January 1997 acquisition of Mercury.

Interest income decreased by $64,000 or 46.3% to $74,000 for the three months
ended March 31, 1998 from $138,000 for the three months ended March 31, 1997 due
to the higher level of funds available for investment in early 1997 as a result
of the proceeds of the Company's IPO in March 1996.



                                       9
<PAGE>   10
                            PREFERRED NETWORKS, INC.

Net loss for the three months ended March 31, 1998 as compared to the three
months ended March 31, 1997 decreased to $3.3 million from $4.7 million due to
substantial increases in gross margin combined with decreases in S,G&A, as
described above. The net loss attributable to common stock decreased due to the
lower net loss, offset in part by higher accretion and dividends related to the
Class A Redeemable Preferred Stock ("the Class A Preferred") and the Class B
Senior Redeemable Preferred Stock ("the Class B Preferred"), issued in June 1997
and March 1998, respectively.

The net loss per share of Common Stock for the three months ended March 31, 1998
decreased to $0.24 from $0.30 for the three months ended March 31, 1997, due to
the Company's decreased net loss, which was offset in part by higher accretion
and dividends on the Company's outstanding preferred stock. All net loss per
share amounts have been restated to conform to Statement of Financial Accounting
Standards No. 128 and Staff Accounting Bulletin No. 98.


LIQUIDITY AND CAPITAL RESOURCES

The Company's expansion strategy has historically required substantial funds to
finance the expansion of existing operations, the expansion into new markets as
part of the nationwide build-out of its networks, the purchase of network assets
and related FCC licenses, capital expenditures, debt service and general
corporate purposes. Because the Company's network expansion is in its later
stages, the Company expects that its capital expenditures in 1998 will be
reduced compared to 1997.  The timing and construction of additional markets
will depend, among other things, on customer requirements and the timing and
availability of capital.

The Company's net cash used in operations was $2.1 million and $5.4 million for
the three months ended March 31, 1998 and 1997, respectively. The primary
reasons for the reduction in net cash used in operations were the decrease in
the net loss from operations and a decrease in accounts receivable compared to
the prior year period.

Capital expenditures were $384,000 and $5.2 million for the three months ended
March 31, 1998 and 1997, respectively, reflecting the later stage of the
Company's network expansion. 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.

The Company has expanded and augmented its local and wide-area 157.740 MHz
networks by purchasing and consolidating existing local network assets licensed
on the 150 MHz, 450 MHz and 900 MHz frequency bands to offer additional capacity
and flexibility to its customers.  

In June 1997, the Company sold $15 million of Class A Preferred with warrants to
certain stockholders. The Class A Preferred accrues cumulative dividends at a
rate of 10.0% of its original principal value per annum. The holders of the
Class A Preferred were issued warrants to purchase 11.5 million shares of Common
Stock at an exercise price of $1.50 per share.

In March 1998, the Company sold $8.0 million of Class B Preferred with warrants
to one institutional investor and certain of its existing stockholders. The
Class B Preferred accrues cumulative dividends at a rate of 15.0% of its
liquidation value, compounded annually. The holders of the Class B Preferred
were issued warrants to purchase 5.4 million shares of Common Stock at an
exercise price of $1.50 per share.

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 March 31, 1998, there was
$5.7 million outstanding under this facility with $5.7 million available.








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                            PREFERRED NETWORKS, INC.


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 March 31, 1998, there
was $3.9 million outstanding under this facility with no additional
availability.

The Company has a $11.0 million credit facility with a financial institution,
which is to be used to finance paging network acquisitions and for general
working capital purposes. The outstanding balance under this facility bears
interest either of (i) 1% plus the higher of the Federal Funds Rate for each day
plus 1/2% or prime, or (ii) LIBOR plus 3.75%, at the Company's option.
Borrowings under this facility are secured by substantially all the assets of
the Company. This credit facility contains various conditions and financial
covenants, including but not limited to a requirement to maintain a minimum cash
balance of $4 million at all times. The amount outstanding under this facility
as of March 31, 1998 was $9.75 million, with $280,000 in additional
availability. The Company amended this credit facility in March 1998 to increase
its availability for working capital purposes by $1.75 million, bringing the
total facility to $11.0 million. The amendment also extended the maturity of the
facility with monthly installments of principal due beginning in February 1999,
with the remaining principal balance due in July 2000.

At March 31, 1998, the Company had $10.7 million invested in short-term
investment grade securities at various interest rates.

Management believes that cash and cash equivalents on hand together with the
secured credit facilities described above, will be sufficient to meet the
Company's working capital, capital expenditure and debt covenant requirements
for at least the next twelve months without requiring additional vendor or other
financing. 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 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.

ACQUISITIONS

In January 1997, the Company acquired the stock of Mercury and its affiliated
companies for a total purchase price of $14.2 million. The transaction was
accounted for as a purchase as of January 31, 1997. Of this amount, the Company
paid $10.0 million in cash and issued 624,321 shares of Common Stock. Mercury
was a reseller-based paging carrier in the states of New York, New Jersey and
Connecticut. Prior to closing, the Company earned revenues from Mercury under an
agency agreement.

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. Although the Company's
evaluation is not yet complete, the Company currently believes that most of its
software is already Year 2000 compliant and the cost, if any, of modifying its
remaining software will not be material, or require extensive time.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Annual
Report on Form 10-K 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,



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                            PREFERRED NETWORKS, INC.

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 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.























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<PAGE>   13

                            PREFERRED NETWORKS, INC.





PART II - OTHER INFORMATION


ITEM 2.       CHANGES IN SECURITIES AND USE OF PROCEEDS.

(a)      As a result of the issuance of the Class B Preferred Stock, 5,333,336
         shares of Class B Preferred are outstanding, which have dividend,
         voting, redemption, and liquidation rights which in some respects are
         superior to those of the Common Stock and the Class A Preferred.

(b)      On March 17, 1998, the Company issued 5,333,336 shares of Class B
         Preferred and warrants to purchase 5,400,000 shares of Common Stock to
         one institutional investor and certain of the Company's existing
         stockholders for an aggregate consideration of $8,000,000 in cash. The
         transaction was exempt from the Securities Act of 1933 by reason of
         Section 4(2) thereof and Regulation D promulgated thereunder. The
         warrants are exercisable for five years and entitle the holder to
         purchase one share of Common Stock for $1.50 per share, subject to
         possible downward adjustment based on any private placement of the
         Company's Preferred or Common Stock.


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

(a)   Exhibits:

<TABLE>
        <S>       <C>                                              
        10.1      Class B Senior Redeemable Stock Purchase Agreement dated as of
                  March 17, 1998, by and among the Company, Alta Communications
                  VI, L.P., Alta Comm S By S, LLC, Centennial Fund IV, L.P., PNC
                  Capital Corp., Saugatuck Capital Company Limited Partnership
                  III, Primus Capital Fund III Limited Partnership, Fleet Equity
                  Partners VI, L.P., Fleet Venture Resources, Inc., T/W Alfred
                  W. Putnam GST Exempt, Anne L. Putnam, Edward B. Putnam,
                  Custodian for Fitzgerald B. Putnam Under the Uniform Transfers
                  to Minor Act, Pennsylvania, Webbmont Holdings L.P., Spotted
                  Dog Farm, L.P., RTM, Inc., Mark H. and Marcia M. Dunaway, and
                  John J. and Sylvia Hurley (incorporated by reference to
                  Exhibit 10.35 to the Company's Annual Report on Form 10-K for
                  the 1997 fiscal year, filed on March 30, 1998).

        10.2      Fourth Amendment to Credit Agreement dated as of March 19,
                  1998, by and among the Company, PNI Systems, LLC, and
                  NATIONSBANK, N.A., as successor to NationsBank, N.A. (South)
                  (incorporated by reference to Exhibit 10.36 to the Company's
                  Annual Report on Form 10-K for the 1997 fiscal year, filed on
                  March 30, 1998).

        10.3      Second Amendment to Registration Rights Agreement dated as of
                  March 17, 1998 (incorporated by reference to Exhibit D of
                  Exhibit 10.35 to the Company's Annual Report on Form 10-K for
                  the 1997 fiscal year, filed on March 30, 1998).

        27        Financial Data Schedule (for SEC use only)
</TABLE>

(b)      Reports on Form 8-K:

         The registrant did not file any reports on Form 8-K during the three
         months ended March 31, 1998.








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<PAGE>   14

                            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:  May 12, 1998                   By: /s/ Mark H. Dunaway
                                          -------------------------------------
                                          Mark H. Dunaway
                                          Chief Executive Officer



Date:  May 12, 1998                   By: /s/ Michael J. Saner
                                          -------------------------------------
                                          Michael J. Saner
                                          President



Date:  May 12, 1998                   By: /s/ Kathryn Loev Putnam
                                          -------------------------------------
                                          Kathryn Loev Putnam
                                          Senior Vice President and 
                                          Chief Financial Officer
                                          (Principal Financial Officer and
                                          Principal Accounting Officer)















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