<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


[X]       Quarterly report pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934 for the quarterly period ended September 30, 1999

[ ]       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 0-23862

                                fonix corporation
             (Exact name of registrant as specified in its charter)

                              Delaware 22-2994719
          (State of incorporation) (I.R.S. Employer Identification No.)

                     60 East South Temple Street, Suite 1225
                           Salt Lake City, Utah 84111
              (Address of principal executive offices and zip code)

                                 (801) 328-8700
              (Registrant's telephone number, including area code)


                         (Former address of registrant)

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or Section 15(d) of the  Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.  Yes X or No

As of November 22, 1999,  96,814,658 shares of the issuer's Class A Common Stock
and 1,985,000  shares of Class B Non-Voting  Common Stock,  par value $.0001 per
share, were issued and outstanding.





<PAGE>



PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

           Interim  unaudited  condensed  consolidated  financial  statements as
           required by Rule 10-01 of Regulation S-X follow immediately.


                                       2
<PAGE>

                      Fonix Corporation and Subsidiaries
                        [A Development Stage Company]

                  CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)

<TABLE>
<CAPTION>
ASSETS
                                                                           September 30             December 31,
                                                                               1999                     1998
                                                                           ------------             ------------
Current assets:
<S>                                                                        <C>                      <C>
     Cash and cash equivalents                                             $  2,048,257             $ 20,045,539
     Notes receivable                                                                -                   245,000
     Accounts receivable, net of allowance for doubtful
          accounts of $74,000 and $8,000 respectively                      $    331,451             $    219,908
     Prepaid expenses                                                             7,901                   51,866
     Inventory                                                                    1,894                    4,804
     Interest and other receivables                                              20,712                    3,722
     Employee advances                                                               -                    67,231
                                                                           ------------             ------------

         Total current assets                                                 2,410,215               20,638,070

Cash held in escrow                                                           2,500,000                       -

Property and equipment, net of accumulated depreciation
     of $1,740,234 and $1,168,023, respectively                               1,347,061                2,145,031

Intangible assets, net of accumulated amortization
     of $3,757,780 and $1,770,668, respectively                              16,034,270               19,437,290

Other assets                                                                    106,538                  107,945

Net long term assets of discontinued operations                                      -                19,584,455
                                                                           ------------             ------------

         Total assets                                                      $ 22,398,084             $ 61,912,791
                                                                           ============             ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Bank overdraft                                                        $         -              $    138,034
     Revolving notes payable                                                         -                20,038,193
     Notes payable - related parties                                             77,625                8,491,880
     Notes payable - other                                                           -                   560,000
     Capital lease obligation                                                     5,180                   52,225
     Accounts payable                                                         1,756,032                3,536,074
     Accrued liabilities                                                      2,659,267                  981,774
     Accrued liabilities - related parties                                    1,998,590                  900,004
     Income taxes payable                                                       250,000                       -
     Deferred revenues                                                           63,722                   20,000
     Net current liabilities of discontinued operations                              -                   598,861
                                                                           ------------             ------------

         Total current liabilities                                            6,810,416               35,317,045

Series C 5% convertible debentures                                            3,971,107                      -
                                                                           ------------             ------------

         Total liabilities                                                   10,781,523               35,317,045
                                                                           ------------             ------------

Common stock and related repricing rights subject to redemption;
     1,801,802 shares and repricing rights outstanding
     (aggregate redemption value of $2500,000                                 1,830,000                1,830,000
                                                                           ------------             ------------

Commitments and contingencies (Notes 8, 9, and 15)

Stockholders' equity:
     Preferred stock, $.0001 par value;  20,000,000 shares authorized;
         Series A, convertible; 166,667 shares outstanding
            (aggregate liquidation preference of $6,055,012)                    500,000                  500,000
         Series D, 4% cumulative convertible; 876,667 and 958,334
             shares outstanding, respectively
            (aggregate liquidation preference of $18,299,103)                20,705,530               22,200,936
         Series E, 4% cumulative convertible; 250,000 shares outstanding
             in 1998                                                                 -                 3,257,886
     Common stock, $.0001 par value; 100,000,000 shares authorized;
         83,750,179 and 64,324,480 shares outstanding, respectively               8,375                    6,432
     Additional paid-in capital                                              99,217,980               88,517,711
     Outstanding warrants                                                     3,585,399                3,323,258
     Deferred consulting expense                                                     -                  (106,700)
     Deficit accumulated during the development stage                      (114,230,725)             (92,933,777)
                                                                           ------------             ------------

         Total stockholders' equity                                           9,786,559               24,765,746
                                                                           ------------             ------------

         Total liabilities and stockholders' equity                        $ 22,398,082             $ 61,912,791
                                                                           ============             ============
</TABLE>


       See accompanying notes to condensed consolidated financial statements.



                                       3
<PAGE>
                       Fonix Corporation and Subsidiaries
                          [A Development Stage Company]

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                               October 1,
                                                                                                                  1993
                                                        Three Months Ended            Nine Months Ended       (Inception) to
                                                          September 30,                 September 30,         September 30,
                                                   ----------------------------- ----------------------------
                                                        1999           1998          1999          1998           1999
                                                   --------------- ------------- ------------- -------------- --------------
<S>                                                <C>             <C>           <C>           <C>            <C>
Revenues                                           $        65,707 $      95,500 $     351,083 $    2,567,785 $    2,955,807
Cost of revenues                                             7,919         7,372        21,159         31,561         56,599
                                                   --------------- ------------- ------------- -------------- --------------

     Gross margin                                           57,788        88,128       329,924      2,536,224      2,899,208
                                                   --------------- ------------- ------------- -------------- --------------

Expenses:
     Selling, general and administrative                 2,864,400     2,672,252     7,537,577      6,112,765     38,197,067
     Product development and research                    1,906,968     4,296,938     6,278,318      9,958,433     37,681,038
     Amortization of goodwill and purchased
       core technology                                     630,609       500,776     1,962,443      1,100,336      3,674,710
     Purchased in-process research and development              -      3,821,000            -      13,136,000     13,136,000
                                                   --------------- ------------- ------------- -------------- --------------

         Total expenses                                  5,401,977    11,290,966    15,778,338     30,307,534     92,688,815
                                                   --------------- ------------- ------------- -------------- --------------

Loss from operations                                    (5,344,189)  (11,202,838)  (15,448,414)   (27,771,310)   (89,789,607)
                                                   --------------- ------------- ------------- -------------- --------------

Other income (expense):
     Interest income                                        26,198       292,241        46,752        856,123      3,713,840
     Interest expense                                   (1,577,413)     (365,902)   (4,314,809)      (960,803)    (9,638,041)
     Other expense                                        (154,940)           -       (154,940)            -        (154,940)
     Cancellation of common stock reset provision               -     (6,111,577)           -      (6,111,577)    (6,111,577)
                                                   --------------- ------------- ------------- -------------- --------------

         Total other income (expense), net              (1,706,155)   (6,185,238)   (4,422,997)    (6,216,257)   (12,190,718)
                                                   --------------- ------------- ------------- -------------- --------------

Loss from continuing operations                         (7,050,344)  (17,388,076)  (19,871,411)   (33,987,567)  (101,980,325)

Discontinued operations:
     Operating loss from discontinued HealthCare
         Solutions Group                                (2,962,147)   (1,205,049)   (5,953,726)    (1,205,049)    (8,408,033)
     Gain on disposal of HealthCare Solutions Group,
         net of income taxes of $250,000                 6,616,646            -      6,616,646              -      6,616,646
                                                   --------------- ------------- ------------- -------------- --------------

Loss before extraordinary items                         (3,395,845)  (18,593,125)  (19,208,491)   (35,192,616)  (103,771,712)

Extraordinary items:
     Loss on extinguishment of debt                             -             -             -              -        (881,864)
     Gain on forgiveness of accounts payable and
         accrued interest                                  372,061            -        372,061             -         402,609
                                                   --------------- ------------- ------------- -------------- --------------

Net loss                                           $    (3,023,784)$ (18,593,125)$ (18,836,430)$ (35,192,616) $ (104,250,967)
                                                   =============== ============= ============= ============== ==============


Basic and diluted net loss per common share        $         (0.05)$       (0.39)$      (0.31) $        (0.75)
                                                   =============== ============= ============= ==============
</TABLE>


    See accompanying notes to condensed consolidated financial statements.

                                       4

<PAGE>
                     Fonix Corporation and Subsidiaries
                        [A Development Stage Company]

               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                 Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                                                                       October 1,
                                                                        Nine Months Ended                 1993
                                                                          September 30,              (Inception) to
                                                                    ---------------------------       September 30,
                                                                        1999          1998              1999
                                                                    ------------  -------------      ------------
Cash flows from operating activities:
<S>                                                                 <C>           <C>                <C>
     Net loss                                                       $(18,836,430) $ (35,192,616)     $(104,250,967)
     Adjustments to reconcile net loss to net cash
       used in operating activities:
       Issuance of common stock for services                             100,000             -           5,587,554
       Issuance of common stock for patent                                    -         100,807            100,807
       Non-cash expense related to issuance of notes payable,
          debentures, warrants, preferred and common stock             2,270,000      6,111,577         12,348,914
       Non-cash compensation expense related to issuance
         of stock options                                                119,240        133,375          2,615,540
       Non-cash expense related to issuance of notes payable
          and accrued expense for services                                     -        857,000            857,000
       Non-cash exchange of notes receivable for services                      -        150,000            150,000
       Non-cash portion of purchased in-process research and
          development                                                         -      12,635,768         13,136,000
       Loss on disposal of property and equipment                        154,940            (88)           154,940
       Gain on sale of HealthCare Solutions Group                     (6,616,646)            -          (6,615,365)
       Depreciation and amortization                                   4,423,595      1,802,814          8,199,049
       Extraordinary loss on extinguishment of debt                           -              -             881,864
       Extraordinary gain on forgiveness of accounts payable
          and accrued interest                                          (372,061)            -            (402,609)
       Changes in assets and liabilities, net of effects of
          acquisitions and disposition:
          Accounts receivable                                           (391,982)      (183,418)          (540,480)
          Employee advances                                                 (755)            -             (67,986)
          Interest and other receivables                                  (4,436)       (74,009)            (9,919)
          Inventory                                                       (7,509)        (8,358)           (27,730)
          Prepaid assets                                                  40,465       (100,281)            (7,001)
          Other assets                                                       270        (80,212)          (119,575)
          Accounts payable                                            (1,558,666)     2,381,610          3,455,070
          Accrued liabilities                                          1,632,083        482,568          2,273,872
          Accrued liabilities - related party                          1,249,271       (370,966)         1,397,030
          Deferred revenues                                              568,115          2,126            649,381
                                                                    ------------  -------------      -------------

       Net cash used in operating activities                         (17,230,506)   (11,352,303)       (60,234,611)
                                                                    ------------  -------------      -------------

Cash flows from investing activities, net of effects of
     acquisitions and disposition:
     Proceeds from sale of HealthCare Solutions Group                 21,305,982             -          21,305,982
     Acquisition of subsidiaries, net of cash acquired                        -     (14,738,495)       (15,323,173)
     Proceeds from sale of property and equipment                         50,000            500             50,000
     Purchase of property and equipment                                  (99,089)    (1,240,540)        (3,435,559)
     Investment in intangible assets                                          -         (94,789)          (164,460)
     Issuance of notes receivable                                             -      (1,322,139)        (3,228,600)
     Payments received on notes receivable                               245,000             -           2,128,600
                                                                    ------------  -------------      -------------

       Net cash provided by (used in) investing activities            21,501,893    (17,395,463)         1,332,790
                                                                    ------------  -------------      -------------

Cash flows from financing activities:
     Bank overdraft                                                     (138,034)       178,757                 -
     Net proceeds (payments) from revolving note payable             (20,038,193)     1,422,264            (49,250)
     Net proceeds (payments) from revolving note payable -
          related parties                                             (7,895,178)      (514,296)        (7,813,537)
     Net proceeds from other notes payable                             6,953,760        100,000          9,865,427
     Payments on other notes payable                                  (7,788,000)       (49,250)        (9,567,806)
     Principal payments on capital lease obligations                     (55,504)       (36,284)          (148,210)
     Proceeds from issuance of convertible debentures, net             6,254,240             -           9,439,240
     Proceeds from sale of warrants                                      438,240        322,928          1,511,168
     Proceeds from sale of common stock, net                                  -      17,471,155         38,175,700
     Proceeds from sale of preferred stock, net                               -       9,403,846         17,707,346
     Proceeds from sale of common stock and related repricing
          rights subject to redemption, net                                   -              -           1,830,000
                                                                    ------------  -------------      -------------

       Net cash (used in) provided by financing activities           (22,268,669)    28,299,120         60,950,078
                                                                    ------------  -------------      -------------

Net (decrease) increase in cash and cash equivalents                 (17,997,282)      (448,646)         2,048,257

Cash and cash equivalents at beginning of period                      20,045,539     20,501,676                 -
                                                                    ------------  -------------      -------------

Cash and cash equivalents at end of period                          $  2,048,257  $  20,053,030      $   2,048,257
                                                                    ============  =============      =============
</TABLE>


    See accompanying notes to condensed consolidated financial statements.

                                       5

<PAGE>
                    Fonix Corporation and Subsidiaries
                       [A Development Stage Company]

          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
                                 (Unaudited)


<TABLE>
<CAPTION>
                                                                                                       October 1,
                                                                                                          1993
                                                                           Nine Months Ended         (Inception) to
                                                                             September 30,           September 30,
                                                                    ---------------------------
Supplemental disclosure of cash flow information:                         1999         1998               1999
                                                                    ------------  -------------      -------------

<S>                                                                 <C>           <C>                <C>
      Cash paid during the period for interest                      $  1,068,882  $     747,629      $   4,498,888
</TABLE>

Supplemental Schedule of Non-cash Investing and Financing Activities:

      For the Nine Months Ended September 30, 1999:

     The Company  entered into capital  lease  obligations  for equipment in the
     amount of $57,332.

     Advances  to  employees  totaling  $59,986  were  applied as  payments on a
     related-party note payable.

     A total of 143,230 shares of common stock  previously  pledged to a bank by
     certain  officers and  directors of the Company as  collateral  for Company
     credit  card debt were sold by the bank and the  proceeds  were used to pay
     the debt and the related accrued interest in full totaling $244,824.

     A total of 100,000 shares of common stock previously  pledged to a law firm
     by certain  officers and directors of the Company as  collateral  for legal
     work were sold by the law firm and the proceeds  were used to pay for legal
     services totaling $72,335.

     A total of  970,586  shares  of common  stock  previously  held by  certain
     shareholders  and  originally  valued at  $1,000,916  were  returned to the
     Company in settlement of litigation.

     The Company issued 6,000,000 shares of common stock valued at $3,278,893 to
     the  guarantors of the Series C convertible  debentures as  indemnification
     for the sale of their  shares by the  holders of the  Series C  convertible
     debentures  held as  collateral  for  these  debentures.  The  proceeds  of
     $3,278,893 received by the holders were used to pay liquidation damages and
     retire  Series C  convertible  debentures  in the amounts of  $750,000  and
     $2,528,893, respectively.

     Preferred  stock  dividends  of  $997,146  were  recorded  related  to  the
     beneficial conversion features of Series D and Series E preferred stock.

     Preferred stock dividends of $635,160 were accrued on Series D and Series E
     preferred stock.

     Dividends totaling $828,212 were accrued relating to the liquidation damage
     provisions  of  Series  D  and  Series  E  preferred  stock  and  Series  C
     convertible debentures.

     The Company issued 200,000 shares of common stock to an unrelated party for
     consulting fees valued at $100,000.

     A total of 131,667 shares of Series D preferred stock and related dividends
     of $96,193 were converted into 8,468,129 shares of common stock.

     A total of 135,072 shares of Series E preferred stock and related dividends
     of $66,015 were converted into 5,729,156 shares of common stock.

     In connection with the sale of HealthCare  Solutions  Group,  $2,500,000 of
     the sales price was placed into an escrow account.

     A  revolving  note  payable in the  amount of $50,000  was paid by a former
     employee and is included as an account payable.

     Promissory notes held by certain  shareholders  were reduced by $414,991 in
     settlement of litigation.

For the Nine Months Ended September 30, 1998:

     The Company had a stock subscription receivable in the amount of $2,000,000
     in  connection  with  the  issuance  of  100,000  shares  of  Series  E  4%
     Convertible  Preferred Stock that was consummated as of September 30, 1998.
     This receivable was collected subsequent to period end.

     Preferred  Stock  Dividends  of  $1,553,001  were  recorded  related to the
     beneficial  conversion  features  of Series D and  Series E 4%  Convertible
     Preferred Stock.

     The Company issued  1,390,476  shares of common stock and 608,334 shares of
     Series D 4% Convertible Preferred Stock in connection with the cancellation
     of existing  reset  provisions  and costs  associated  with the issuance of
     Series D 4% Convertible Preferred Stock.

     Preferred  Stock  Dividends  of  $1,000,000  were  recorded  related to the
     issuance  of  1,390,476  common  shares and  608,334  shares of Series D 4%
     Convertible Preferred Stock in connection with the cancellation of existing
     reset provisions.

     Preferred   Stock  Dividends  of  $73,889  were  accrued  on  Series  D  4%
     Convertible Preferred Stock.

     The Company exchanged  150,000 shares of Series D 4% Convertible  Preferred
     Stock for 150,000 shares of Series E 4% Convertible Preferred Stock.

     The Company issued  5,140,751 shares of common stock (having a market value
     of  $8,353,720)  and notes payable of  $4,747,339  in  connection  with the
     acquisition of Articulate Systems, Inc.

     Preferred  Stock  Dividends  of  $131,660  were  recorded  related  to  the
     beneficial  conversion  features  of  Series  B and  Series  C  Convertible
     Preferred Stock.

     A total of 27,500 shares of Series B Preferred Stock and related  dividends
     of $8,531 were converted into 193,582 shares of common stock.

     A total of 185,000 shares of Series C Preferred Stock and related dividends
     of $123,129 were converted into 1,295,919 shares of common stock.

     The Company issued  2,692,216 shares of common stock (having a market value
     of $16,995,972) in connection with the acquisition of AcuVoice, Inc.

    See accompanying notes to condensed consolidated financial statements.

                                       6



<PAGE>


                       Fonix Corporation and Subsidiaries
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis  of  Presentation  - The  accompanying  unaudited  condensed  consolidated
financial  statements of Fonix Corporation and subsidiaries  (collectively,  the
"Company" or "Fonix")  have been  prepared by the Company  pursuant to the rules
and regulations of the Securities and Exchange  Commission.  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,  although the Company believes
that the following  disclosures are adequate to make the  information  presented
not misleading.

These  condensed  consolidated  financial  statements  reflect  all  adjustments
(consisting  only of normal  recurring  adjustments)  that,  in the  opinion  of
management,  are necessary to present fairly the financial  position and results
of  operations  of the Company as of the balance sheet dates and for the periods
presented.

Operating results for the three and nine months ended September 30, 1999 are not
necessarily  indicative  of the results that may be expected for the year ending
December  31,  1999.  The Company  suggests  that these  condensed  consolidated
financial  statements be read in  conjunction  with the  consolidated  financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.

Recently Enacted Accounting  Standards - In June 1998, the Financial  Accounting
Standards Board issued Statement of Financial  Accounting Standards ("SFAS") No.
133,  "Accounting  for  Derivative  Instruments  and Hedging  Activities."  This
statement   establishes   accounting  and  reporting  standards  requiring  that
derivative  instruments  be recorded in the balance  sheet as either an asset or
liability  measured at its fair value and that changes in the derivative's  fair
value be  recognized  currently in earnings  unless  specific  hedge  accounting
criteria are met.  SFAS No. 133 is effective  for fiscal years  beginning  after
June 15, 2000. The adoption of this statement is not expected to have a material
effect on the Company's  consolidated  financial  statements as the Company does
not currently hold any derivative or hedging instruments.

Reclassifications - Certain reclassifications have been made in the prior period
condensed  consolidated  financial statements to conform with the current period
presentation.

Net Loss Per Common  Share - Basic and  diluted  net loss per  common  share are
calculated  by dividing  net loss  attributable  to common  stockholders  by the
weighted average number of shares of common stock outstanding during the period.
At September 30, 1999 and 1998, there were outstanding  common stock equivalents
to purchase 90,535,319 and 38,413,473 shares of common stock, respectively, that
were not  included in the  computation  of diluted net loss per common  share as
their effect would have been anti-dilutive,  thereby decreasing the net loss per
common  share.  Net loss per common  share  amounts  have been  restated for all
periods presented to reflect basic and diluted per share presentations.

The following table is a  reconciliation  of the net loss numerator of basic and
diluted net loss per common share for the three and nine months ended  September
30, 1999 and 1998:

                                       7
<PAGE>


<TABLE>
<CAPTION>
                                                               Three months ended September 30,
                                               -------------------------------------------------------------------------------
                                                         1999                                     1998
                                              -------------------------------------     -------------------------------------
                                                                          Per share                                 Per share
                                                        Loss               Amount                 Loss               Amount
                                               -------------------------------------     -------------------------------------
<S>                                                    <C>               <C>                     <C>               <C>
Loss from continuing operations                        $   (7,050,344)                           $ (17,388,076)
Preferred stock dividends                                  (1,031,288)                              (2,626,890)
                                                       ---------------                           --------------
Net loss from continuing operations
    attributable to common stockholders                    (8,081,632)   $    (0.11)               (20,014,966)    $    (0.37)
Discontinued operations                                     3,654,499          0.05                 (1,205,049)         (0.02)
Extraordinary items                                           372,061          0.01                         -             -
                                                       ---------------   -----------             --------------    -----------
Loss attributable to common stockholders               $   (4,055,072)   $    (0.05)             $ (21,220,015)    $    (0.39)
                                                       ===============   ===========             ==============    ===========

Weighted average common shares
    outstanding                                             76,479,555                               54,020,736
                                                       ===============                           ==============
</TABLE>


<TABLE>
<CAPTION>
                                                                Nine months ended September 30,
                                               -------------------------------------------------------------------------------
                                                                     1999                                     1998
                                               -------------------------------------     -------------------------------------
                                                                          Per share                                 Per share
                                                        Loss                Amount                Loss                Amount
                                               -------------------------------------     -------------------------------------
<S>                                                    <C>               <C>                     <C>               <C>
Loss from continuing operations                        $  (19,871,411)                           $ (33,987,567)
Preferred stock dividends                                  (2,460,518)                              (2,626,890)
                                                       ---------------                           --------------
Net loss from continuing operations
    attributable to common stockholders                   (22,331,929)   $    (0.33)               (36,614,457)    $    (0.73)
Discontinued operations                                        662,920         0.01                 (1,205,049)         (0.02)
Extraordinary items                                            372,061         0.01                         -            -
                                                       ---------------   -----------             --------------    -----------
Loss attributable to common stockholders               $  (21,296,948)   $    (0.32)             $ (37,819,506)    $    (0.75)
                                                       ===============   ===========             ==============    ===========

Weighted average common shares
    outstanding                                             68,678,645                               50,385,468
                                                       ===============                           ==============
</TABLE>



2.   SALE OF THE HEALTHCARE SOLUTIONS GROUP

In  September  1999,  the Company  completed  the sale of the  operations  and a
significant portion of the assets (the "Sale") of its HealthCare Solutions Group
("HSG") to Lernout & Hauspie Speech  Products N.V.  ("L&H"),  an unrelated third
party, for $28,000,000,  of this sales price, $21,500,000,  less certain credits
of $194,018 was paid at closing,  $2,500,000 is being held in an 18 month escrow
account  in  connection  with the  representations  and  warrantees  made by the
Company in the sales  transaction and the remaining  $4,000,000 is to be paid as
an earnout in two installments of

                                       8

<PAGE>


                       Fonix Corporation and Subsidiaries
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


$2,000,000  each over the next two years based on the  performance  of HSG.  The
proceeds  from  the  sale  were  used to  reduce a  significant  portion  of the
Company's liabilities and to provide working capital for the Company's marketing
and distribution  opportunities for its Interactive  Technology Solutions Group.
The assets sold include  inventory,  property  and  equipment,  certain  prepaid
expenses,  purchased core technology and other assets of HSG. Additionally,  L&H
assumed the capital and operating lease  obligations  related to the HSG and the
obligations related to certain of the Company's deferred revenues.

On September 2, 1999, upon the closing of the Sale, the Company discontinued the
operations  of the HSG. The results of  operations of the HSG have been reported
separately as discontinued operations in the accompanying condensed consolidated
statements  of  operations.  Prior year  results  have been  restated to provide
comparability.  The net assets (liabilities) of the HSG in the December 31, 1998
condensed consolidated balance sheet consist of the following:

<TABLE>
<CAPTION>
<S>                                                    <C>
           Inventory                                   $      72,582
           Other receivables                                   4,554
           Deferred revenues                                (675,997)
                                                       --------------
                Net current assets (liabilities)       $    (598,861)
                                                       --------------

           Property and equipment, net of
              accumulated depreciation of $27,367      $     182,981
           Intangible assets, net of accumulated
              amortization of $828,886                    19,379,131
           Other assets                                       22,343
                                                       --------------

               Net long-term assets                    $  19,584,455
</TABLE>


Revenues from HSG's  operations  were  $1,726,262 for the period from January 1,
1999 to September 2, 1999 and $103,517 for the nine months ended  September  30,
1998..  These  amounts  have not  been  included  in  revenues  reported  in the
accompanying condensed consolidated statements of operations.

3.  FORGIVENESS OF TRADE PAYABLES AND ACCRUED INTEREST

In September 1999, the Company negotiated  reductions of $221,376 in amounts due
various  trade  vendors.  Additionally,  the Company  negotiated  reductions  of
$150,685 in accrued  interest owed to certain note  holders.  These amounts have
been  accounted  for as an  extraordinary  item  in the  accompanying  condensed
consolidated statements of operations.

4.  ACQUISITIONS

The  Company  acquired  AcuVoice,  Inc.  ("AcuVoice")  in March  1998.  AcuVoice
developed and marketed text-to-speech ("TTS") technologies and products directly
to end-users,  systems integrators and original equipment  manufacturers for use
in the  telecommunications,  multi-media,  education  and  assistive  technology
markets.  In  addition,   the  Company  acquired  PAI  and  Papyrus  Development
Corporation  ("PDC")  (together  with  PAI,  "Papyrus")  in  October  1998.  PAI
developed,  marketed and supported printing and cursive handwriting  recognition
software for "personal digital assistants",  pen tablets and mobile phones under
the  trademark,  Allegro(TM).  PDC  was  a  systems  integration  provider  with
expertise and intellectual  property in embedded  systems and enhanced  Internet
applications.  The  products  and  services  formerly  provided by AcuVoice  and
Papyrus are now provided by the  Company's  Interactive  Technologies  Solutions
Group   ("ITSG").   The  Company  also   acquired   Articulate   Systems,   Inc.
("Articulate") in September 1998. Articulate was a provider of voice recognition
products  to  specialized   segments  of  the  healthcare   industry  under  the
PowerScribe(R)  trade name. The Company operated the Articulate business through
its HSG. The operations and substantially all the assets of the HSG were sold on
September  2, 1999 (see Note 2). All of the  acquisitions  discussed  above were
accounted for as purchases.

                                       9

<PAGE>


                       Fonix Corporation and Subsidiaries
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



The following  unaudited pro forma  financial  statement  data for the three and
nine months ended  September  30, 1998 present the results of  operations of the
Company as if the  acquisitions  of AcuVoice and Papyrus had occurred at January
1, 1998. The pro forma results have been prepared for comparative  purposes only
and do not  purport  to be  indicative  of  what  would  have  occurred  had the
acquisitions  been made at January 1, 1998, or of future results.  Purchased in-
process  research  and  development  related to the  acquisition  of AcuVoice of
$9,315,000  was  expensed  at the date of the  AcuVoice  acquisition  and is not
presented in the  following  pro forma  financial  statement  data since it is a
non-recurring  charge  directly  attributable  to  the  acquisition.  Pro  forma
financial information for the acquisition of Articulate has not been included in
the following pro forma financial  statement as the operations and substantially
all  the  assets  of  the  HSG  were  sold  September  2,  1999  (see  Note  2).
Additionally,  the historical  operating  results of Articulate from the date of
acquisition  through  September  30, 1998 have been  excluded from the pro forma
information.

<TABLE>
<CAPTION>
                                                    Three Months Ended             Nine Months Ended
                                                      September 30,1998           September 30, 1998

<S>                                                    <C>                          <C>
Revenues                                               $       145,185              $   2,804,667

Net loss from continuing operations                        (13,932,394)               (22,211,826)

Net loss from continuing operations
   attributable to common stockholders                     (16,559,284)               (24,970,376)

Basic and diluted net loss
   per common share                                              (0.31)                     (0.49)
</TABLE>

5. PAPYRUS SETTLEMENT

After the Papyrus  acquisition closed in October 1998, the Company  investigated
some of the representations and warranties made by Papyrus to induce the Company
to acquire the Papyrus  companies.  The Company  determined  that certain of the
representations  made by  Papyrus  and its  executive  officers  appeared  to be
inaccurate. On February 26, 1999, the Company filed an action against the former
shareholders of Papyrus alleging  misrepresentation  and breach of contract.  In
March and April 1999,  five of the former  shareholders of Papyrus filed actions
against the Company  alleging  default under the terms of the  promissory  notes
issued to them in  connection  with the Papyrus  acquisition  and certain  other
claims.  Subsequently,  the Company entered into agreements with the five former
Papyrus  shareholders  for  dismissal  of the  actions and  cancellation  of the
promissory  notes upon payment to the former  shareholders  of  $1,217,384  (the
"Settlement  Payment") and return of 970,586  shares of restricted  common stock
previously  issued  to the  five  former  shareholders  in  connection  with the
acquisition  of Papyrus.  The Company paid the  Settlement  Payment in September
1999 and the lawsuits described above have been dismissed.

6.  INTANGIBLE ASSETS

Intangible assets consist of purchased core technology and goodwill arising from
the  acquisitions  of  AcuVoice  and Papyrus  and direct  costs  incurred by the
Company in applying  for patents  covering  its  technologies.  Amortization  is
computed on a straight-line  basis over the estimated  useful lives ranging from
five  to  eight  years.  Total  accumulated   amortization  was  $3,757,780  and
$1,770,668 at September 30, 1999 and December 31, 1998, respectively,  excluding
amortization  of $828,886  related to HSG at December 31, 1998. The  unamortized
portion of the purchased core technology and goodwill related to the purchase of
Articulate  have  been as a result  of the  Sale.  Additionally,  the  amount of
goodwill  associated  with the  purchase  of PAI was  reduced by  $1,415,908  in
connection with the settlement payment in September 1999 (see Note 5).

                                       10

<PAGE>


                       Fonix Corporation and Subsidiaries
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



7.  RELATED-PARTY AND OTHER NOTES PAYABLE

As of September  30, 1999,  the Company had  unsecured  notes  payable to former
Papyrus stockholders in the aggregate amount of $77,625, which notes were issued
in connection with the acquisition of Papyrus. The notes were payable in various
amounts  through  September  30, 1999.  The holders of these notes have not made
demand for payment.

During the nine months ended  September 30, 1999, the Company paid, or otherwise
reduced through agreement (see Note 4), notes payable to various related parties
totaling $8,818,355, plus accrued interest.

In September  1999,  the Company paid other notes  payable to unrelated  parties
aggregating $610,000 plus accrued interest.

A revolving note payable in the amount of $19,988,193 at December 31, 1998, plus
accrued interest, was paid in full in January 1999.

8.  SERIES C 5% CONVERTIBLE DEBENTURES

On January 29, 1999, the Company  entered into a Securities  Purchase  Agreement
with  four  investors  pursuant  to which  the  Company  sold  its  Series C 5%,
Convertible  Debentures (the "Debentures") in the aggregate  principal amount of
$4,000,000. The outstanding principal amount of the Debentures is convertible at
any time at the option of the holders into shares of the Company's  common stock
at a conversion  price equal to the lesser of $1.25 or 80 percent of the average
of the closing bid price of the Company's common stock for the five trading days
immediately  preceding the  conversion  date. The Company  recorded  $687,500 as
interest  expense upon the issuance of the  Debentures in  connection  with this
beneficial  conversion  feature.  The Company  also issued  400,000  warrants to
purchase an equal  number of the  Company's  common  shares at a strike price of
$1.25 per share in connection with this financing.  The warrants are exercisable
for a period of three years from the date of grant.  The estimated fair value of
the warrants of $192,000, as computed under the Black-Scholes pricing model, was
recorded as interest  expense upon the issuance of the  Debentures.  On March 3,
1999,  the  Company  executed a  supplemental  agreement  pursuant  to which the
Company agreed to sell another $2,500,000  principal amount of Debentures on the
same  terms  and  conditions  as the  January  29,  1999  agreement,  except  no
additional  warrants were issued.  The Company  recorded  $1,062,500 as interest
expense upon the issuance of the  additional  Debentures in connection  with the
beneficial  conversion feature.  The obligations of the Company for repayment of
the  Debentures,  as  well  as its  obligation  to  register  the  common  stock
underlying  the potential  conversion of the  Debentures and the exercise of the
warrants  issued  in  these  transactions,  are  personally  guaranteed  by  the
Guarantors  (see Note 10). In  connection  with the March 3, 1999  funding,  the
Company  agreed to grant a lien on the patent  covering the Company's  Automated
Speech  Recognition  ("ASR")  technologies  as  collateral  for repayment of the
debentures.  However,  to date  no lien on the  patent  has  been  granted.  The
Guarantors  guaranteed  the  obligations of the Company under the Debentures and
pledged  6,000,000 shares of common stock of the Company  beneficially  owned by
them as collateral security for their obligations under their guarantee.

In March 1999 the holders of the  Debentures  notified the  Guarantors  that the
Guarantors  were in  default  of  certain  terms of the stock  pledge  agreement
executed by the  Guarantors in favor of the holders as a result of the Company's
failure to register the resale of the shares underlying the Debentures, and that
the holders may therefore exercise their right to sell the shares pledged by the
Guarantors. The holders of the Debentures have subsequently informed the Company
that they have sold the  6,000,000  shares  pledged by the  Guarantors  and that
proceeds from the sale of the pledged shares has aggregated $3,278,893.  Of this
total,  $406,250  has  been  allocated  to  penalties  attributable  to  default
provisions of the stock pledge agreement and recorded as interest expense by the
Company in the accompanying condensed consolidated  statements of operations for
the three and nine months ended September 30, 1999. An additional  $2,528,893 of
the  proceeds  was  applied  as a  reduction  of the  principal  balance  of the
Debentures as of September 30,

                                       11

<PAGE>


                       Fonix Corporation and Subsidiaries
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1999.  Additional  interest payable under the provisions of the stock pledge and
related  indemnification  agreements  has been  recorded  by the  Company  as an
accrued  liability in the amount of $731,250.  Under its indemnity  agreement in
favor of the Guarantors,  the Company will issue 6,000,000 replacement shares to
the  Guarantors  for the shares sold by the holders and reimburse the Guarantors
for any costs  incurred  as a result of the  holders'  sales of the  Guarantors'
shares (see Note 10).

On June 29,  1999,  the Company  received  notice from the Nasdaq  Stock  Market
("Nasdaq") indicating that unless the minimum bid price for the Company's common
stock returned to at least $1.00 per share for at least ten consecutive  trading
days prior to September 29, 1999,  the  Company's  shares would be delisted from
the Nasdaq  SmallCap  Market on October 1, 1999 (see Note 13). The Company filed
an appeal with Nasdaq and  participated in a hearing on the listing issue before
Nasdaq on October  28,  1999.  A decision  from the  hearing  panel has not been
received by the Company and its common  stock  continues to be listed on Nasdaq.
If the Company's common stock is delisted from the Nasdaq SmallCap Market and is
not relisted  within three  trading days, an event of default would result under
the terms of the  Debentures.  Upon the  occurrence of an event of default,  the
unpaid principal amount of the Debentures, together with accrued interest, would
become immediately due and payable.

9.  STOCKHOLDERS' EQUITY

Series D and E Preferred  Stock - During the nine  months  ended  September  30,
1999,  131,667 shares of Series D preferred stock and 135,072 shares of Series E
preferred  stock,  together with related  dividends on each, were converted into
8,468,129  shares and 5,729,156  shares,  respectively,  of the Company's common
stock.  After the above  conversions  876,667 shares of Series D preferred stock
remain outstanding.

On February 3, 1999,  certain  holders of Series D and Series E preferred  stock
forwarded  conversion  notices to the Company  converting  (1) 27,500  shares of
Series D preferred  stock and related  dividends  into 315,379  shares of common
stock and (2) 77,500  shares of Series E preferred  stock and related  dividends
into  1,955,346  shares  of  common  stock.  Due to an error  in the  conversion
calculations and a subsequent delay in receiving further clarifying instructions
from the holders,  the common shares issuable upon such  conversions  were never
issued to the Series D and  Series E holders,  although  the  Company's  records
reflected  that such shares had been  issued.  Subsequently,  because the common
stock had not been  received,  the Series D and Series E holders  rescinded  the
February 3 conversions.  The effects of this  recission have been  retroactively
reflected in the accompanying condensed consolidated financial statements.

Should the Company's stock be delisted from Nasdaq and not relisted within three
trading days,  the terms of the Series D preferred  stock require the Company to
pay to each  holder  of Series D  preferred  stock a fee of two  percent  of the
purchase  price of the Series D  preferred  stock in cash for each month  during
which the stock is delisted.

Common Stock - The Company  incurred an obligation to issue 6,000,000  shares of
common stock to two individuals who are executive officers and directors and one
individual who is a former  officer and director of the Company in  satisfaction
of an indemnification agreement wherein the Company was required to pay any sums
the three  individuals  paid for the  benefit of the  Company.  The shares  were
issued to replace shares beneficially owned by the three individuals and sold by
the holders of the Debentures and Series D and E preferred shares (see Note 10).

On June 2, 1999,  the Company  issued  200,000  shares of common stock (having a
market value of $100,000 on that date) to an unrelated individual in payment for
consulting services rendered.

In April 1999, five former PAI  shareholders  agreed to cancel 970,586 shares of
common stock to the Company reducing the total shares they had received from the
Company  in the 1998  acquisition  of PAI from  3,111,114  shares  to  2,140,528
shares.  The shares were  effectively  canceled in September  1999 in connection
with the  settlement  payment  (see Note 4). The  original  fair market value of
$1,000,917  associated  with the canceled  shares is reflected as a reduction to
goodwill associated with the purchase of PAI.

                                       12

<PAGE>


                       Fonix Corporation and Subsidiaries
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



Common Stock  Options - During the nine months  ended  September  30, 1999,  the
Company  granted  754,500 stock options to employees at exercise  prices ranging
from $0.59 to $1.78 per share. Additionally, 9,500 stock options were granted to
two consultants for services  provided to the Company.  The fair market value of
the  consultant  options  was $1.30 per share,  or  $12,540 in total,  using the
Black-Scholes  pricing model and was charged to product development and research
expense.  The term of all options  granted  during this nine month period is ten
years  from the date of  grant.  Of the stock  options  issued,  726,334  vested
immediately,  18,834  vest six months  after  issuance  and 18,832 vest one year
after  issuance.  The  weighted  average  fair value of the  options  granted to
employees  during the nine months ended  September  30, 1999 was $1.31 per share
using the Black-Scholes pricing model. Had compensation expense for the issuance
of these options been recorded in accordance with the method  prescribed by SFAS
No. 123, "Accounting for Stock-Based Compensation",  the Company's net loss from
continuing  operations  attributable  to  common  stockholders  would  have been
$22,281,723 or $0.32 per share for the nine months ended  September 30, 1999. As
of  September  30,  1999,  the  Company  had  a  total  of  15,536,582   options
outstanding.

Effective May 7, 1998, the Company entered into a one-year professional services
agreement with a public relations firm. The minimum monthly retainer was $15,000
per month. In connection  with this  agreement,  the firm was granted options to
purchase 100,000 shares of the Company's common stock at $3.75 per share. In May
1999, the Company  negotiated a termination of this agreement for a cash payment
of approximately $33,000 and the grant of options was rescinded.

Common Stock  Warrants - During the nine months ended  September  30, 1999,  the
Company granted  warrants to L&H in connection with loans made to the Company in
April and May 1999 totaling  $6,000,000.  These  warrants  allow L&H to purchase
850,000  shares of common stock of the Company at exercise  prices  ranging from
$0.60 to $0.70 per share.  Of these  warrants,  250,000 expired October 18, 1999
without being exercised. The remaining 600,000 warrants expire May 17, 2001. The
fair value of the  warrants  was $0.14 and $0.35 per share for the  250,000  and
600,000 warrants, respectively, using the Black-Scholes pricing model. The value
of the warrants totaled  $246,240 and was amortized as a financing  expense over
the term of the loans.

On February 11,  1998,  the Company  entered into a First  Statement of Work and
License Agreement with Siemens Semiconductor Group of Siemens Aktiengesellschaft
("Siemens")  under  which the Company  and  Siemens  are  jointly  pursuing  the
development of Siemens' integrated circuits  incorporating ASR and other related
technologies for use in certain telecommunications  applications.  In connection
with the license  agreement  Siemens  purchased  warrants  to acquire  1,000,000
shares of restricted  common stock at an average exercise price of $20 per share
with expiration dates ranging from December 31, 1998 to December 31, 1999. As of
September 30, 1999,  800,000 of the warrants  originally  issued had expired and
200,000 of the  warrants  remain  outstanding  at an average  exercise  price of
$30.00 per share.

As of  September  30,  1999,  the  Company  had a total  of  2,475,000  warrants
outstanding.

10.  RELATED-PARTY  TRANSACTIONS

Related-party  transactions  with  entities  owned  by two  individuals  who are
executive  officers and directors and one individual who is a former officer and
director of the Company for the nine months  ended  September  30, 1999 and 1998
were as follows:

<TABLE>
<CAPTION>
                                            1999                  1998
                                       -------------        ---------------
Expenses:
<S>                                    <C>                  <C>
     Base rent                         $   93,312           $     83,788
     Leasehold improvements            $       -            $     35,247
</TABLE>


                                       13

<PAGE>


                       Fonix Corporation and Subsidiaries
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


The Company  rents  office  space  under a  month-to-month  lease from  Studdert
Companies  Corporation ("SCC"). SCC is owned by the three individuals  described
above.  The lease from SCC is  guaranteed  by the three  individuals.  The lease
requires  monthly  payments of $10,368.  The Company  believes  the terms of the
related-party  lease are at least as  favorable to the Company as the terms that
could  have  been  obtained  from  an  unaffiliated  third  party  in a  similar
transaction. related-party lease are at least as favorable to the Company as the
terms  that could  have been  obtained  from an  unaffiliated  third  party in a
similar transaction.

Guaranty of Company Obligations and Related Indemnity Agreement - The Guarantors
have guaranteed  certain  obligations of the Company (see Note 8), including the
Company's  obligations  under  the  Debentures.  As  security  for  some  of the
guarantees,  the Guarantors  pledged  shares of Fonix common stock  beneficially
owned by them. In September  1999, the Company paid in full a note payable to an
unrelated third party that had previously been guaranteed by the Guarantors. The
Guarantors  pledged 6,000,000 shares of the Company's common stock  beneficially
owned by them as collateral security for the Company's obligations regarding the
Debentures.

The Company  agreed to indemnify the Guarantors if they were required to pay any
sums for the benefit of the Company  under their  guaranty of  provisions of the
Debentures.  The indemnity agreement provides that the Company will issue shares
of the Company's common stock of sufficient value to reimburse the Guarantors in
full,  plus  interest at 10 percent  per annum,  for all costs  associated  with
meeting  the  guarantee   commitment,   including  any  income  taxes  resulting
therefrom. Additionally, in consideration for the pledge of the Company's common
shares as collateral for the Debentures,  the Board of Directors  authorized the
issuance to the Guarantors of one common stock purchase  warrant for every three
shares pledged.  However,  subsequent to the Board of Directors'  authorization,
the Guarantors declined to accept the warrants and they were not issued.

As of September 30, 1999, the holders of the Debentures  notified the Guarantors
that the  Guarantors  were in  default  of  certain  terms of the  stock  pledge
agreement as a result of the  Company's  failure to register in a timely  manner
the resale of the shares  underlying  the  Debentures,  and that the holders may
exercise their right to sell the shares pledged by the  Guarantors.  The holders
of the Debentures have subsequently  informed the Company that proceeds from the
sale of the 6,000,000 pledged shares has aggregated  $3,278,893.  Of this total,
$406,250 has been allocated to pay penalties  attributable to default provisions
of the stock pledge agreement and recorded as interest expense by the Company in
the accompanying condensed  consolidated  statements of operations and $343,750,
related to  provisions  of the Series D and  Series E  Preferred  Stock has been
recorded as  preferred  dividends  for the three  months and nine  months  ended
September 30, 1999. An additional $2,528,893 of the proceeds has been applied as
a reduction of the principle balance of the Debentures as of September 30, 1999.
Under  its  indemnity  agreement  in favor of the  Guarantors,  the  Company  is
obligated to issue 6,000,000 replacement shares to the Guarantors for the shares
sold by the holders of the Debentures.  Additionally, the Company has recorded a
related party liability of $1,296,600 as a  reimbursement  to the Guarantors for
the income taxes incurred by the Guarantors as a result of the holders' sales of
the Guarantors' shares.

In December 1998, the Guarantors  guaranteed certain  additional  obligations of
the Company. As security for some of the guarantees, the Guarantors also pledged
shares of the Company's common stock  beneficially owned by them. In March 1999,
143,230 of the shares  previously  pledged by the Guarantors to a bank were sold
by the bank and the proceeds  were used to pay Company  credit card balances and
the related accrued interest in full totaling $244,824.  In May 1999, 100,000 of
the shares  previously  pledged by the  Guarantors  to another  creditor  of the
Company were sold by the creditor and the proceeds,  totaling $72,335, were used
to pay amounts owed by the Company.

The Company  anticipates  that in the future the Guarantors may request that the
Company provide  indemnity  and/or  compensation  for the  guarantees,  advances
and/or pledges by the  Guarantors for the benefit of the Company.  To the extent
such  requests,  if any,  are  reasonable  and of a nature  similar  to what the
Company would grant to unrelated  parties in similar  transactions,  the Company
presently  anticipates  that it will  submit any such  requests  to the Board of
Directors for consideration.

                                       14

<PAGE>


                       Fonix Corporation and Subsidiaries
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



11.  PRODUCT DEVELOPMENT AND RESEARCH

Synergetics  - In October  1993,  the Company  entered  into an  agreement  with
Synergetics,  a research and development entity, to develop certain technologies
related to the Company's ASR  technologies.  Under the terms of the  Synergetics
agreement,  the Company expended $186,455 during the nine months ended September
30, 1999 for product  development and research efforts. No amounts were expended
during the three months ended September 30, 1999.

IMC2 - In March 1998, the Company entered into a professional services agreement
with IMC2, a research  and  development  entity,  to provide  assistance  to the
Company in the development of specific ASR  technologies.  The President of IMC2
is also the President of Synergetics. The professional services agreement is for
a term of 36 months  and  requires  the  Company  to make  monthly  payments  of
$22,000.  Under the terms of the  agreement,  the Company  expended  $66,000 and
$198,000   during  the  three  and  nine  months  ended   September   30,  1999,
respectively.

Adiva-  Beginning in 1998,  the Company  utilized  the research and  development
services of Adiva.  The president of Adiva is also the president of  Synergetics
and IMC2. The Company  expended  $63,395 during the nine months ended  September
30, 1999 for research and development  efforts.  No amounts were expended during
the three months ended September 30, 1999.

12.  COMMITMENTS AND CONTINGENCIES

Employment  Agreements - In January 1998,  the Company  entered into  employment
contracts  with two employees  which expire in January 2001.  The minimum annual
salary payments required by these contracts total $405,000. In January 1999, the
Company announced a cost reduction program for the Company's 1999 operating year
wherein the two employees referred to above agreed that their compensation would
be reduced 30 percent effective February 1999.

Executive Employment  Agreements - On November 1, 1996, the Company entered into
employment  contracts with three executive officers (one of whom is no longer an
executive  officer)  which expire on December  31, 2001.  The annual base salary
pursuant  to the  contracts  with  each  executive  officer  for the year  ended
December 31, 1999 is $425,000.  In January  1999,  the Company  announced a cost
reduction  program  for  the  Company's  1999  operating  year  wherein  the two
remaining  executive  officers  agreed that their annual  compensation  would be
reduced to  $297,500  commencing  February  1999.  At the same time,  Stephen M.
Studdert  resigned as the Company's  Chief  Executive  Officer.  His  employment
agreement  was canceled and he entered into a separation  agreement  pursuant to
which he will be paid  $250,000 per year  through  January 31, 2001 and $100,000
for the year ended January 31, 2002.

Sublease of Office Facilities - Effective May 14, 1999, the Company entered into
an agreement to sublease  10,224 square feet of its Draper,  Utah facility to an
unrelated third party.  The agreement  requires the sublessee to pay $13,961 per
month, or approximately 40 percent of the Company's monthly obligation under the
primary lease agreement  through December 31, 2000. The sublessee has the option
to extend the term by two additional three-month periods.

Effective May 25, 1999, the Company  entered into an agreement to sublease 8,048
square feet of a total 10,048 square feet of its Cupertino,  California facility
to an unrelated  third party.  The  remaining  2,000 square feet occupied by the
Company may be turned over to the  sublessee no sooner than six months nor later
than nine months from the commencement of the sublease.  The agreement  requires
the  sublessee  to pay $28,346  per month,  or  approximately  80 percent of the
Company's  obligation under the primary lease agreement  through the six to nine
month  period of reduced  occupancy  by the Company  and 100 percent  thereafter
through May 31, 2003.

                                       15

<PAGE>


                       Fonix Corporation and Subsidiaries
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Operating  Lease - In March 1999, the Company entered into an agreement to lease
office space in Cleveland, Ohio for sales and installation personnel of the HSG.
The lease is for three  years at a monthly  rate of $4,260 and became  effective
May 1, 1999. Future aggregate minimum obligations under this operating lease are
$144,840.  Under the terms of the sale of the HSG,  L&H assumed  this  operating
lease obligation in September 1999.

Capital  Lease  Obligations  - In  January  1999,  the  Company  entered  into a
noncancelable  capital  lease  arrangement  for  telephone  equipment at its HSG
facility  in Woburn,  Massachusetts.  In May 1999,  the Company  entered  into a
noncancelable  capital  lease  arrangement  for  telephone  equipment at its HSG
facility in Cleveland,  Ohio. Future aggregate  minimum  obligations under these
capital leases, net of amounts representing  interest,  aggregate  approximately
$51,000. Under the terms of the sale of the HSG, L&H assumed these capital lease
obligations in September 1999.

Royalty  Agreements - The Company has entered into  various  technology  license
agreements.  Generally,  the agreements  require the Company to pay royalties at
specified  dollar  amounts in  connection  with each product sold that  utilizes
technologies licensed by the Company under these agreements.  Royalty expense is
accrued at the time product revenues incorporating the licensed technologies are
recognized.  There  were no  sales  of  products  incorporating  these  licensed
technologies  during the nine months ended September 30, 1998.  Royalty expenses
of $37,238 and $100,763,  all related to the HSG, were incurred during the three
and nine months ended September 30, 1999,  respectively,  and have been included
in the loss from discontinued operations.

Potential  Delisting of the  Company's  Common  Stock by Nasdaq - The  Company's
common stock currently trades on the Nasdaq SmallCap Market which requires,  for
continued  listing, a minimum bid price of at least $1.00 per share. At June 29,
1999,  the  Company's  common  stock  had  traded  below  $1.00 for more than 30
consecutive  trading days. On June 29, 1999, the Company  received a letter from
Nasdaq  indicating  that unless the minimum bid price for the  Company's  common
stock returned to at least $1.00 per share for at least 10  consecutive  trading
days prior to September 29, 1999,  the  Company's  shares would be delisted from
the Nasdaq SmallCap  Market on October 1, 1999. The Company  requested a hearing
with  respect to the  Nasdaq  notice and at that  hearing on October  28,  1999,
further  requested  that Nasdaq defer a decision to delist the Company's  common
stock  while  the  Company  completes  its  plans  to  improve  its  equity  and
operations.  The Company has not received a response  from Nasdaq  regarding its
request and the Company's common stock continues to be listed for trading on the
Nasdaq SmallCap Market.

If the Company's common stock is delisted from the Nasdaq SmallCap  Market,  the
Company  believes  that its common  stock  would  qualify for listing on the OTC
Bulletin Board. However, the result of delisting from the Nasdaq SmallCap Market
could be a reduction in the liquidity of any investment in the Company's  common
stock,  even if the Company's  shares are thereafter  traded on the OTC Bulletin
Board.  Further,  delisting could reduce the ability of holders of the Company's
common stock to purchase or sell shares as quickly and as  inexpensively as they
have done historically.

If the Company's common stock is delisted from the Nasdaq SmallCap Market and is
not relisted  within three  trading days, an event of default would result under
the terms of the  Debentures.  Upon the  occurrence of an event of default,  the
unpaid principal amount of the Debentures,  together with accrued interest would
become  immediately  due and payable.  Also,  if the  Company's  common stock is
delisted  from the Nasdaq  SmallCap  Market  and is not  relisted  within  three
trading days,  the terms of the Series D preferred  stock require the Company to
pay to each  holder  of Series D  preferred  stock a fee of two  percent  of the
purchase price of the Series D preferred  stock, in cash for each month that the
stock is delisted.

13. LITIGATION

Clarke - On August 28, 1998, John R. Clarke and Perpetual Growth Fund, a company
Clarke's  spouse  purportedly  owns,  commenced an action against the Company in
federal court for the Southern District of New York. Clarke and Perpetual Growth
asserted claims for breach of contract relating to certain financing the Company
received during 1998.

                                       16

<PAGE>


                       Fonix Corporation and Subsidiaries
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


Specifically,  Clarke and  Perpetual  Growth  alleged  that they  entered into a
contract  with  the  Company  under  which  the  Company  agreed  to pay  them a
commission  of five  percent of all  financing  provided to Fonix by  Southridge
Capital  Management or its affiliates.  Clarke and Perpetual claim that they are
entitled to  commissions  with  respect to  approximately  $3,000,000  of equity
financing to the Company in July and August 1998, and the Company's offerings of
Series D and Series E preferred stock, totaling together $12,000,000,  in August
and September 1998.

The Company believes that the Clarke lawsuit is without merit and filed a motion
to  dismiss  based  upon the  court's  lack of  personal  jurisdiction  over the
Company. The court granted the Company's motion to dismiss. Clarke and Perpetual
Growth appealed the dismissal and their appeal has been denied.  The Company has
filed a suit  against  Clarke  and  Perpetual  Growth in  federal  court for the
Central District of Utah seeking a declaratory judgment that it does not owe any
money to Clarke and Perpetual  Growth.  Now that the action in New York has been
dismissed and the appeal denied,  the Company  intends to vigorously  pursue the
Utah action.  However, the lawsuit in New York could be reinstated on appeal and
Clarke and Perpetual  Growth could  prevail in that  lawsuit,  in which case the
Company may be required to pay  significant  amounts of money damages awarded by
the court.

&&&Jeff, do we need disclosure of:
           OGI arbitration dispute re fees owed??


In addition to the above,  the Company is involved in various  lawsuits,  claims
and  actions  arising in the  ordinary  course of  business.  In the  opinion of
management,  after consultation with legal counsel,  the ultimate disposition of
these matters will not materially affect the consolidated  financial position or
results of operations of the Company.

14.  REPORTABLE SEGMENTS

The  Company  has  adopted  SFAS No.  131,  "Disclosures  about  Segments  of an
Enterprise and Related Information". This statement requires disclosures related
to components of a company for which separate financial information is available
and evaluated  regularly by the Company's  chief  operating  decision  makers in
deciding how to allocate resources and in assessing performance.  As a result of
the sale of the HSG in September 1999 (see Note 2), management believes that the
Company has only one  operating  segment  because the Company's  remaining  core
business consists only of operations  derived from the Interactive  Technologies
Solutions Group.

15.  SUBSEQUENT EVENTS

Shareholders  Meeting - At the Company's annual shareholder meeting held October
29,  1999,  59,497,418  shares  were  represented  in person  or by  proxy.  The
shareholders  approved amendments to the Company's  certificate of incorporation
that (A) created a new class of common  stock  designated  as Class B Non-Voting
Common Stock with 1,985,000 Class B shares authorized;  and (B) redesignated the
Company's current common stock as Class A Common Stock and changed each share of
existing  common stock into a share of Class A Common Stock.  Additionally,  the
shareholders approved an amendment to the Company's certificate of incorporation
that  increased  the  number  of common  shares  authorized  to be  issued  from
100,000,000  to  300,000,000  and increased  the number of authorized  preferred
shares from  20,000,000  to  50,000,000.  The Class B shares were  authorized to
provide for the conversion of 1,935,000  common shares issued in the acquisition
of Articulate  Systems,  Inc., to a non-voting class of stock as provided in the
acquisition  agreement.  The  Company  does not intend to  register  its Class B
Non-Voting Common Stock. The shareholders also approved a series of transactions
pursuant to which the Company issued its Series D 4% preferred  stock and Series
E 4% preferred stock.

Appointment  of  Director -  Effective  October  29,  1999,  Mark S.  Tanner was
appointed as a member of the Company's  Board of Directors.  Mr. Tanner  becomes
the  second  new  independent  member of the  Board of  Directors  during  1999.
Previously,  on September 2, 1999, William A. Maasberg,  Jr. was appointed as an
independent member of the Company's Board of Directors.

Conversion  of Series D Preferred  Stock - Subsequent  to September  30, 1999, a
total of 144,933  shares of Series D  preferred  stock,  together  with  related
dividends,  were converted into 13,247,677 shares of the Company's common stock.
After the above  conversions  731,734 shares of Series D preferred  stock remain
outstanding.

                                       17

<PAGE>



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

THIS  QUARTERLY  REPORT  ON  FORM  10-Q  CONTAINS,  IN  ADDITION  TO  HISTORICAL
INFORMATION,  FORWARD-LOOKING  STATEMENTS  THAT  INVOLVE  SUBSTANTIAL  RISKS AND
UNCERTAINTIES.  THE COMPANY'S  ACTUAL RESULTS COULD DIFFER  MATERIALLY  FROM THE
RESULTS  ANTICIPATED  BY  THE  COMPANY  AND  DISCUSSED  IN  THE  FORWARD-LOOKING
STATEMENTS.  FACTORS  THAT COULD CAUSE OR  CONTRIBUTE  TO SUCH  DIFFERENCES  ARE
DISCUSSED  IN THE  COMPANY'S  ANNUAL  REPORT  ON FORM  10-K FOR THE  YEAR  ENDED
DECEMBER 31, 1998.

Overview

Corporate Summary

Fonix is a  development  stage company  engaged in marketing  and  developing of
proprietary human/computer interaction technologies.  Specifically,  the Company
has developed neural network-based automated speech recognition ("ASR"), as well
as  text-to-speech   ("TTS"),   handwriting   recognition   ("HWR")  and  speech
compression  technologies  packaged  in  products  salable  to a wide  range  of
customers.  (ASR,  TTS, HWR and speech  compression  technologies  are sometimes
collectively  referred  to as  "core  technologies".)  The  Company  expects  to
continue to make commercially available products utilizing its core technologies
which enable  computers and electronic  devices to interact with people on human
terms  rather than humans  conforming  to the process of a machine.  The Company
believes  this new  efficient,  intuitive and natural  method of  human/computer
interaction will eventually  replace  traditional  interaction tools such as the
keyboard  and mouse in a broad range of mass  market,  industrial,  embedded and
server-based applications.

Fonix is pursuing  revenue  opportunities  through  generation of  non-recurring
engineering  fees,  technology  access  fees,  product  and  technology  license
royalties,  product sales and product support maintenance contracts. The Company
markets its  products and core  technologies  to software  developers,  hardware
manufacturers (including producers of computer processors or chips), third party
product  developers,   operating  system  developers,   network  and  share-ware
developers and Internet and web related companies. The Company focuses marketing
toward both embedded systems applications and server-based solutions.

Manufacturers of consumer electronic products, software development and Internet
content use Fonix core  technologies  to simplify the use of their  products and
increase product  functionality  resulting in broader market  opportunities  and
significant  competitive  advantage.  Unlike  traditional  stand-alone  consumer
speech and language  technologies,  Fonix solutions support multiple  platforms,
are environment and speaker independent, while providing easy integration within
a small footprint.

Competitive Advantages of Core Technologies

Fonix core technologies enjoy key competitive advantages that differentiate them
from other speech and handwriting development companies.

ASR. Fonix  researchers have developed and patented what the Company believes to
be a  fundamentally  new and unique  approach to the  analysis  of human  speech
sounds and the contextual recognition of speech. The core Fonix automated speech
recognition  technologies  attempt to approximate the techniques employed by the
human auditory system and language understanding centers in the human brain. The
ASR technologies use information in speech sounds  perceptible to humans but not
discernible by current automated speech  recognition  systems.  They also employ
neural network technologies (artificial intelligence techniques) for identifying
speech components and word sequences  contextually,  similar to the way in which
scientists  believe  information  is processed by the human brain.  As presently
developed,  the  phonetic  sound  recognition  engine is  comprised  of  several
components  including audio signal processing,  a feature extraction  process, a
phoneme estimation process, and a linguistic process based on proprietary neural
net technologies that are designed to interpret human speech contextually.  This
development  has yielded a proprietary ASR system  utilizing a unique  front-end
analysis of the acoustic speech signal,  a neural net based phoneme  identifier,
and a completely novel neural net architecture for back-end  language  modeling.
The latter  component is known as MULTCONS or  multi-level  temporal  constraint
satisfaction network. These developments have been the subject of two

                                       18

<PAGE>



issued  patents  and  several  pending  patents.  In  addition,  the Company has
acquired a related patent covering the front-end recognition process.

The Company  believes the reliable  recognition of natural,  spontaneous  speech
spoken by one or more  individuals in a variety of common  environments by means
of a conveniently  placed  microphone,  all based on its ASR technologies,  will
significantly  improve the performance,  utility and convenience of applications
such  as  computer  command  and  control,  voice  activated  navigation  of the
Internet,  data  input,  text  generation,  telephony  transactions,  continuous
dictation,   and  other   applications   in  both   embedded  and  server  based
applications.

Fonix has pursued the  development of these ASR  technologies to produce salable
products  and gain market  share by  overcoming  the  limitations  of  currently
available commercial ASR systems and broadening the market acceptance and use of
human/computer  interaction  technologies.  Key  benefits  resulting  from Fonix
proprietary  ASR  technologies  which   differentiate  Fonix  ASR  products  and
technologies from other currently available competitive products include:

1.         Significantly  reduced computer memory  requirements  allowing speech
           recognition to operate in embedded system  environments,  or enabling
           server-based  systems to operate with significantly more simultaneous
           users because  memory  footprints  do not encumber as much  operating
           space as competitive traditional systems.
2.         Significantly  reduced power  requirements  making Fonix technologies
           available  for  use in a host of  smaller  computing  solutions  with
           limited battery/power  capacity and enable more simultaneous users on
           server-based systems.
3.         Speaker independence  allowing any individual speaker to use the same
           system  without the system  being  trained to that  user's  voice and
           dialect.
4.         Excellent  noise  cancellation  qualities  allowing the ASR system to
           extract ambient  background noise,  thus allowing higher  recognition
           rates in noisy environments.
5.         Highly reduced need for near-field and/or tethered microphones
           (headsets).
6.         Rapid  porting to multiple IC  platforms  (chips)  and  operating
           systems to create broad product demand.
7.         Fonix Accelerated Applications Speech Technology (FAAST) product is a
           leading edge, visual, integrated development environment which allows
           customers to build applications in a rapid time frame with a high
           rate of success and little outside resource help thereby accelerating
           product time to market.

Thus,  the  Company  believes  that its ASR  technologies  offer  unique  speech
processing techniques that will improve a broad range of computing solutions and
accelerate and enhance  integration of human/computer  interaction  technologies
into products, applications, solutions and devices.

Although these plans represent  management's  beliefs and expectations  based on
its current  understanding  of the market and its  experience  in the  industry,
there can be no assurance that actual results will meet these expectations.  See
"Certain  Significant  Risk Factors." In the last two fiscal years,  the Company
has  expended  $9,958,433  and  $13,620,748,   respectively,   on  research  and
development  activities.  Since its inception (October 1, 1993), the Company has
spent $37,681,038 on research and development of ASR. The Company expects that a
substantial  part of its  capital  resources  will  continue  to be  devoted  to
research and development of ASR technologies and other proprietary  technologies
for the foreseeable future.

TTS. Fonix text-to-speech products include a small vocabulary true human-quality
synthetic  voice with full  prosody and an unlimited  vocabulary  text-to-speech
engine initially developed by AcuVoice, Inc. ("AcuVoice") and purchased by Fonix
in 1998. All TTS products are sold under the Fonix brand name.

The  Company's TTS products  began as a new approach to  synthesized  speech,  a
system  using actual  recordings  of "units" of human  speech  (i.e.,  the sound
pulsation).  Since the unit of speech  often  consists  of more than one phoneme
(sound),  Fonix' approach has been called a "large segment  concatenative speech
synthesis"  approach.  Other  companies  such as DEC and AT&T began in the early
1960s and continue until the present to use a method called  "parametric  speech
synthesis."  Parametric  systems are plagued  with  problems of speech  quality,
because their unit is not an actual recording,  but a computer's version of what
a human  voice  sounds  like.  Poor  speech  quality  also  occurs  because  the
parametric unit consists,  for the most part, of a single  phoneme,  such as the
"t" in the word "time." Fonix synthetic  speech products have been recognized as
high  quality,  human  sounding  engines  which  include full voice  inflection,
intonation and clarity. Fonix' large vocabulary TTS (LVTTS) engine won awards as
"best text-to-speech" product at

                                       19

<PAGE>



the  Computer  Technology  Expo '97 and '98 and the best of show  award at AVIOS
'97.  Presently  LVTTS products are sold to end-users,  systems  integrators and
OEMs.in  telecommunications,  multi-media,  educational and assistive technology
markets.

The  products  include  the Fonix AV 1700 TTS system for  end-user  desktop  and
laptop  system  use.  The Fonix AV 2001 SDK is a  software  development  kit for
developers of telephony applications. Run-time software licenses for the AV 2001
are offered for  applications  developed  with the SDK. The SDK  supports  major
computer telephony platforms.

The business operations  previously  conducted by AcuVoice are now part of Fonix
operations.  During the nine  months  ended  September  30,  1999,  the  Company
received in the  aggregate,  $348,726 in revenue  from  licensing or sale of the
AcuVoice technologies and products compared to pro-forma revenue of $283,321 for
the comparable nine month period of 1998.

HWR. In October 1998,  Fonix  acquired  Papyrus  Associates,  Inc.  ("Papyrus"),
including its Allegro handwriting  recognition software. The Allegro handwriting
recognition  software  is a single  letter  recognition  system like the popular
Graffiti  handwriting  recognition  software  for the  PalmPilot  PDA.  However,
Allegro's alphabet is all natural in appearance as lower case letter making. The
Allegro system is easy to use and requires  practically no learning.  Allegro is
sold by Purple  Software  in England for the Psion  Series 5 hand-held  PC. This
software  has also been  licensed to Philips  for its popular  smart cell phone.
Allegro is also the subject of a sales  agreement with Lucent  Technologies  for
use  in its  Inferno  operating  system.  Papyrus  has  also  developed  cursive
handwriting recognition software which recognizes naturally-written whole words.
This  cursive  technology  is  only  available  as a  licensed  product  to  OEM
customers. Both the Allegro and the cursive handwriting recognition software are
user independent and require no training on the software.

During the nine months ended September 30, 1999, the Company  received $2,357 in
revenue  from  licensing  or sale of the  handwriting  recognition  technologies
compared to pro-forma  revenue of $190,147 for the comparable  nine month period
of 1998.

Market Strategy

The  world-wide  market  for ASR,  TTS and HWR  technology  products  is a newly
emerging market. Currently, only a small portion of prospective applications for
these human/computer  interaction technologies has reached the critical point of
commercial viability.  Among the largest current markets developing or employing
speech  technologies  are  applications  in  the  telephony  and  call  centers,
automatic   desktop   dictation   software,    telematic,   personal   hand-held
communication  solutions,  Internet  voice portals and research and  development
markets. Historically,  development of speech products in an emerging market has
been  affected  by  declining  margins,  large  memory  footprint  requirements,
non-extendable  technology,   platform  dependence,   lack  of  integration  and
non-recurring  engineering  dependence.  Recently,  several  forces  have driven
market  trends  toward  accelerated  demand  for  speech  including   technology
convergence (more speech products  companies and proliferation of the world wide
web),  explosive  growth  in mobile  personal  communications  and  organization
devices,  and  legislative  concerns for consumer  safety and handicap access to
technology.

The Company has  strategically  sought markets for its core  technologies  which
enjoy high margins, broad use, rapid development and market  emergence/presence.
Fonix  has also  strategically  avoided  markets  with  low  margins  which  are
commodity  driven,  subject to continuous price compression and require massive,
costly customer support systems.


The Companys'  current  marketing  strategy is governed by the following general
principles:

1.         Specific  focus on markets  where  current  revenues  can be realized
           through a market  driven  approach and away from markets  focusing on
           continued research and development.
2.         Pursuit of customers who enjoy dominant or  significant  market share
           in their  respective  markets and who display  financial  ability and
           marketing organization to rapidly bring products to market.
3.         Pursuit of integration into customer  products where Fonix technology
           is directly  compatible and can go to market with minimal  additional
           development engineering.
4.         Partner with  customers  who have  existing  marketing  channels in
           place and leverage product sales through those

                                       20

<PAGE>



           channels.
5.         Generally  position  Fonix as a  provider  of  second  tier  customer
           support,  providing training and tools for Fonix costumers who create
           excellent front line support systems for their end-user customers.

Because  the  Company is  pursuing  integration  into mass  market,  industrial,
general business and personal electronic products and computing solutions,  lead
time to revenue  generation  is longer than retail,  commodity  driven  software
products.  The Companys' products sold and integrated into customer applications
are  subject to both  customer  production  schedules  and  customer  success in
marketing the products and generating  product sales. The Companys' revenues are
thus  subject  to delays  and  possible  cancellation  resulting  from  customer
integration delays.

To bring the Company's  proprietary  technologies  to market,  Fonix has focused
marketing and product development into two general and distinctive  markets: (1)
Embedded Markets and (2) Server-based Markets.

Embedded Markets

Increasingly  efficient and powerful computing  solutions have rapidly developed
new  markets  by  creating   smaller,   more  convenient   devices  loaded  with
personalized   functions.   These  devices  include  PDA's   (personal   digital
assistants),  cellular phones, web pads, wireless  communications  devices,  and
other consumer  electronics.  A significant  deterrent to full  functionality of
powerful yet small computing devices is the current need for a keyboard and/or a
mouse to interface  with the device.  Recent  integration  of HWR technology has
helped to fuel the drive for natural, intuitive human/computer interactions with
these  devices  and has  helped  markets  to  emerge  ready  to pay  for  speech
recognition and synthetic speech in computing  solutions.  The next step to even
greater  human/computer  interaction is to integrate speech into these products.
Other product  developments are driving  additional  interest in  human/computer
technologies  including new products  (electronic  books,  wearable  computers),
testing of smart appliances and toys (VCRs, Answering machines, wireless phones,
climate control systems) and automotive applications (command and control, hands
free cellular phones and voice activated navigation systems).

Historically,  micro processors did not contain enough memory or computing power
(MIPS) to drive most ASR and TTS engines. This created a significant problem for
embedded  markets.  Adding the hardware  necessary to boost memory and computing
power  would  drive the price of devices  higher  than  consumer  markets  would
tolerate.

Because of proprietary engineering  innovations,  Fonix ASR and TTS technologies
have a memory footprint and power  requirements that fall well within tolerances
needed  to  speech  enable  applications  using  existing  16  bit  and  32  bit
processors.  To  capitalize  on this distinct  competitive  advantage,  Fonix is
pursuing sales and partnership  relationships  with companies  offering embedded
products  for  mass  consumer  markets,  industrial  applications  and  business
computing solutions.

Fonix has identified key embedded market segments which it believes will provide
long  term,  sustainable  revenue  flow  using  proprietary  ASR,  TTS  and  HWR
technologies and which meet Fonix general business  strategy  objectives.  These
strategically focused embedded markets include:

1.         Chip  Manufacturers.   DSP  and  micro  processor  manufacturers  are
           currently highly focused on technology innovations which will support
           and drive sales of chips through third party  vendors.  Because Fonix
           ASR  and  TTS  technologies  have  demonstrated  operating  in  these
           environments,    Fonix   is   pursuing   relationships   with   these
           manufacturers to leverage their existing marketing channels.
2.         Design  and  Development   Contractors.   Firms  designing  reference
           platforms and real  products and  developing  functions  operating on
           those  platforms  through  contracts  with major mass market  product
           suppliers  provide a strong  market for Fonix with  channels to major
           consumer electronics marketers.
3.         Software  Developers.  Many software  developers in multiple  markets
           provide  opportunity  for Fonix to enhance  software  sales for these
           companies  by  enabling  their  software  products  with  one or more
           human/computer interaction technologies, leading to leveraged product
           sales and royalty revenue for Fonix.
4.         Third Party Product Developers.  Many companies are currently seeking
           ASR, TTS and HWR  technologies  to integrate  into a host of consumer
           electronic devices,  commercial  applications and business solutions.
           Fonix evaluates each prospective opportunity and the tradeoff between
           revenue potential and development time

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           required.  Primary markets for these  applications  are in automotive
           and  aviation  telematics,   industrial  wearable  computers,  mobile
           communications devices and PDA's.

Server-Based Markets

Telephony/call center solutions and shrink-wrap desktop dictation software sales
are two of the most  advanced  emerging  markets for automated  speech.  Current
industry  revenue  estimates  indicate that  customized  automated call centers,
virtual  operators,  packaged  call  center  software,  custom  vertical  market
dictation  systems and general desktop  dictation  systems have led server-based
speech applications into the market.  Because speech products have now reached a
point of both acceptable product quality and initial market acceptance,  several
additional  industries  are  currently  researching  and  developing  plans  for
integration  of ASR,  TTS and HWR.  These new product  areas  including  network
systems,  telephone  company e-mail reader services,  software document readers,
Internet  navigation  and  screenless  Internet  access,  web site text readers,
mobile computing solutions and many more.

The Company is addressing this market opportunity from the strengths of its core
technologies.Fonix  is  currently  releasing  version  1  of  its  FAAST  (Fonix
Accelerated  Application  Speech  Technology)  for  Servers.  FAAST for  Servers
provides  application  developers with a tool enabling rapid  development of ASR
and TTS which can be quickly and cleanly  ported into their  product.  FAAST for
Servers is targeted to currently  emerging and newly developing markets expected
to utilize speech applications in the near and mid-term future.

In addition,  the Company is focused on direct  product  development  in server.
This focus is employed in three primary areas:

1.         Internet Voice Portals. Speech enabled access to the Internet and web
           site navigation is a rapidly  emerging need.  Fonix is developing and
           will soon implement  products for voice portals to the Internet which
           may be purchased for use by portal  companies,  web sites and content
           providers, Internet service providers, and browsers.
2.         TTS for Reading Web Sites. Since over 70% of all web content is text,
           demand for  products  allowing  web content to be read to the user is
           rapidly growing. Fonix has developed a highly robust web reader which
           can be added to web sites.  Working in concert with established audio
           players,  this  product is  targeted  toward the  largest web content
           providers  worldwide  in  media,   government,   business  and  other
           industries.
3.         Network Systems Command and Control and E-mail Reader. Fonix provides
           both ASR and TTS  which can be  seamlessly  integrated  into  network
           software to speech enable their software applications.
4.         Video  Captioning.  The Company has developed a means to  effectively
           use ASR to create automatic forced alignment and automatic closed and
           open  captioning  for  video  aftermarket  editing  services.  Future
           versions  of  this  product  will  include   real-time   live  closed
           captioning  systems  utilizing  Fonix  continuous  ASR.  Major  video
           software  developers  and marketers and large scale video editing and
           production facilities are prime targets for this product.



Fonix Product Development and Delivery Focus

The focus of Fonix management is to transition a technology research development
team  focused  on  invention  and proof of concept  into a team  which  delivers
quality product on schedule and within budget, while at the same time continuing
to achieve  technology  upgrades to  maintain  distinct  competitive  technology
advantages.

To accelerate  the delivery of Fonix  technologies  into the market as bona fide
products,  Fonix  management  has  transitioned  the  Research  and  Development
("R&D")oriented  development  organization  into a Product  Delivery/R&D  matrix
organization.  The  new  structure  consists  of  the  traditional  R&D-oriented
organization overlaid by product teams led by Product Managers.

Fonix product  managers are marketing  oriented project managers who are charged
with direct profit and loss responsibilities.  These responsibilities begin with
market  research and with product  definition  and  specification  then end with
delivery  of  quality  products  which  address  real  needs  identified  by the
marketplace, on schedule and within

                                       22

<PAGE>



budget. As identified by industry experience , this is a demanding but necessary
role, and has been found  industry wide to be  indispensable  in  transforming a
company from the R&D phase into the product delivery phase.

Current Fonix products with assigned product managers include:

1.         FAAST for Embedded  Markets.  FAAST for Embedded  Markets  includes a
           Graphical Development Environment that will allow customers to create
           and optimize speech  applications and generate the code that will run
           directly  on  the  target  embedded  platform  of  choice.  Fonix  is
           initially  delivering  this technology on the Intel  StrongARM,  ARM,
           MIPs Core,  Epson E0C33,  and Infineon  TriCore chips with standalone
           and Windows CE versions.
2.         FAAST for Server Markets. FAAST for Server Markets is an SDK targeted
           to  tightly  integrate  Fonix  ASR  and  TTS  technologies  on  large
           platforms  that will  service  hundreds  of  concurrent  users.  This
           technology is primarily  targeted to applications  that provide voice
           in and out for the Internet.
3.         Embedded  Command and Control  Solutions.  Fonix also works  directly
           with  manufacturers  of products to  integrate  speech in and out and
           handwriting  into those products  which include  PDA's,  cell phones,
           automobile command and control and other applications.
4.         Internet  Voice  Portal  Solutions.  Utilizing  the FAAST for  Server
           product,  Fonix  provides the technology to voice enable the Internet
           for devices  which may not have a screen or keyboard,  such as PDA's,
           cell  phones,  or  automotive  applications.  A prime market for this
           product is providing Internet access to the handicapped.
5.         Telephony TTS Solutions.  Fonix AV1700 and AV2001 are products with a
           significant and growing share of the Telephony TTS market.
6.         Closed  Caption.  Fonix is applying ASR  technology to  automatically
           create  closed   caption  text  for  television   programs,   movies,
           commercials, and training videos.
7.         Multcons Solutions,  part of the Fonix commitment to deliver improved
           ASR  technology  for the  future,  Fonix  continues  to  develop  its
           proprietary  neural network  architecture for application into future
           products.



Year 2000 Issue

Many computer  systems and software  products are coded to accept only two digit
entries in the date code field.  These date code fields will need to accept four
digit entries to distinguish  21st century dates from 20th century  dates.  As a
result,  many companies'  software and computer systems will need to be upgraded
or replaced in order to comply with such Year 2000 ("Y2K")  requirements.  Fonix
is subject to the risk that problems encountered with Y2K issues,  either in its
internal  systems,  technologies  and products,  or in external  systems,  could
adversely affect its operations and financial condition.

In  the  ordinary  course  of  its  business,  Fonix  tests  and  evaluates  its
technologies and software and hardware  products.  The Company believes that its
technologies and products are Y2K compliant,  meaning that the use or occurrence
of dates on or after January 1, 2000 will not materially  affect the performance
of such  technologies or products with respect to four digit date dependent data
or the ability of such products to correctly create,  store, process, and output
information related to such data. However, the Company may learn that certain of
its technologies or products do not contain all necessary  software routines and
codes necessary for the accurate calculation, display, storage, and manipulation
of data involving  dates.  In addition,  the Company has warranted or expects to
warrant that the use or occurrence of dates on or after January 1, 2000 will not
adversely affect the performance of its technologies or products with respect to
four digit date dependent  data or the ability to create,  store,  process,  and
output  information  related to such data.  If the end users of any of Company's
technologies  or products  experience  Y2K problems,  those persons could assert
claims for damages.

Fonix uses  third-party  equipment and software that the Company  believes to be
Y2K compliant.  The Company has substantially completed a review of key products
provided  by outside  vendors to  determine  if those  products  comply with Y2K
requirements and presently  believes that all software provided by third parties
that is  critical  to its  business  is Y2K  compliant.  The  Company  has  also
completed a review of all  internal  systems for Y2K  compliance  and  presently
believes the internal systems are Y2K compliant.  If, however,  this third-party
equipment or software does not operate

                                       23

<PAGE>



properly with regard to the Y2K issue, the Company may incur unexpected expenses
to remedy any problems. Such costs may materially adversely affect the Company's
business,  operating  results,  and  financial  condition.  In addition,  if the
Company's key systems, or a significant number of its systems,  fail as a result
of Y2K problems the Company could incur  substantial costs and disruption of its
business.  The Company may also experience  delays in implementing Y2K compliant
software products. Any of these problems may materially adversely affect Fonix's
business, operating results or financial condition.

In addition, the purchasing patterns of Fonix's licensees,  potential licensees,
customers and potential  customers may be affected by Y2K issues. Many companies
are expending  significant  resources to correct their current  software systems
for Y2K compliance.  These expenditures may result in reduced funds available to
license the Company's technologies or to purchase other Fonix products. This may
adversely  affect the  Company's  business,  operating  results,  and  financial
condition.

Results of Operations

Three months ended September 30, 1999 compared with three months ended September
30, 1998

During the three months ended September 30, 1999, the Company recorded  revenues
of  $65,707  from  the  sale of its  Interactive  Technologies  Solutions  Group
products,  a decrease of $29,793 over the same period in the previous  year. The
decrease is due to a  reorganization  and redirection of the sales and marketing
staff in the 1999 period.

Selling,  general and administrative expenses were $2,864,400 and $2,672,252 for
the three  months ended  September  30, 1999 and 1998,  respectively.  Salaries,
wages and related costs were  $1,949,422 and $988,412 for the three months ended
September  30,  1999 and 1998,  respectively,  an  increase  of  $961,010.  This
increase  is  attributable  to  $1,296,600  in  additional  compensation  to two
executive officers and a former executive officer related to the indemnification
of income  taxes  resulting  from the sale of shares  beneficially  owned by the
three  individuals  for  payment  of  Company  obligations  offset  in  part  by
management's cost reduction initiatives  implemented in February 1999. Legal and
accounting expenses decreased $85,626.  This decrease is attributed primarily to
the  costs of legal  and  accounting  services  related  to the  acquisition  of
Articulate and Papyrus and the preparation of registration statements in 1998 in
addition  to a  reduction  in legal  fees  expended  for  litigation  and patent
registration  matters.  Marketing  expenses decreased $37,853 and consulting and
outside  services  decreased by $239,491.  These  decreases are  attributable to
management's  cost  reduction  initiatives  implemented  in February 1999. . The
Company incurred product  development and research expenses of $1,906,968 during
the three months ended  September  30, 1999, a decrease of  $2,389,970  over the
same  period  in  the  previous  year.   This  decrease  was  due  primarily  to
management's  cost  reduction  initiatives  implemented  in February  1999.  The
Company  anticipates similar decreases in product development and research costs
as it begins to complete the  development  of certain TTS  products.  During the
three months ended September 30, 1999 and 1998, the Company  expended a total of
approximately  $100,000  and  $50,000,  respectively,  in  connection  with  the
development  of the  AcuVoice  purchased  in-process  research  and  development
projects.

Amortization  of goodwill and  purchased  core  technologies  were  $630,609 and
$500,776 for the three months ended  September 30, 1999 and 1998,  respectively,
representing an increase of $129,833. This increase is primarily attributable to
the   amortization  of  intangible   assets  acquired  in  connection  with  the
acquisitions of Papyrus.

The Company incurred losses from operations of $5,344,189 and $11,202,838 during
the three months ended September 30, 1999 and 1998,  respectively.  The decrease
in losses from  operations  is due  primarily  to  management's  cost  reduction
initiatives  implemented in February 1999, and purchased in process research and
development costs incurred in the acquisition of Articulate in 1998. The Company
anticipates that its investment in ongoing  scientific  product  development and
research  will  continue at decreased  levels for the  remainder of fiscal 1999,
assuming availability of working capital.

Net other expense was $1,706,155 for the three months ended  September 30, 1999,
a decrease of $4,479,083  over the three months ended  September  30, 1998.  The
decrease was due  primarily to costs  attributed to the  cancellation  of common
stock reset  provisions  that  occurred  in 1998 and to a reduction  in interest
income of $266,043 from  certificates  of deposit that were converted to cash to
retire a bank line of credit in January 1999, offset in part by an increase in

                                       24

<PAGE>



interest  expense of  $1,211,511  attributable  to the  issuance of the Series C
Convertible Debentures issued in January and March 1999.

Nine months ended  September 30, 1999 compared with nine months ended  September
30, 1998

During the nine months ended September 30, 1999, the Company  recorded  revenues
of $351,083, a decrease of $2,216,702 over the same period in the previous year.
In the 1998 period the Company  received its first  revenues of  $2,472,285,  of
which,  $2,368,138 was paid by Siemens as a non-refundable license fee for which
the  Company  had no  further  obligation  of any kind.  The 1999  revenues  are
primarily  from sales and  licensing  fees related to the TTS  technologies  and
products.

Selling,  general and administrative expenses were $7,537,577 and $6,112,765 for
the nine months ended September 30, 1999 and 1998, respectively. Salaries, wages
and related  costs were  $4,090,525  and  $2,584,164  for the nine months  ended
September  30, 1999 and 1998,  respectively,  an increase  of  $1,506,361.  This
increase  is  attributable  to  $1,296,600  in  additional  compensation  to two
executive officers and a former executive officer related to the indemnification
of income  taxes  resulting  from the sale of shares  beneficially  owned by the
three  individuals  for  payment  of  Company  obligations  and to  management's
redirection of labor resources from core development and research  activities to
selling,  business  development and marketing  activities and to the salaries of
Papyrus  personnel  acquired  in late 1998 offset in part by  management's  cost
reduction  initiatives  implemented  in  February  1999.  Legal  and  accounting
expenses increased $207,505,  the increase is attributed  primarily to the costs
of  services  related  to the sale of the HSG  assets to L&H and to the costs of
securities  filings.  Marketing  expenses  decreased  $20,837 and consulting and
outside  services  decreased by $98,178.  These  decreases are  attributable  to
management's cost reduction initiatives implemented in February 1999.

The Company  incurred  product  development and research  expenses of $6,278,318
during the nine months ended  September 30, 1999, a decrease of $3,680,115  over
the same  period in the  previous  year.  This  decrease  was due  primarily  to
management's  cost  reduction  initiatives  implemented  in February  1999.  The
Company  anticipates similar decreases in product development and research costs
as it begins to complete the  development  of certain TTS  products.  During the
nine months ended  September 30, 1999 and 1998, the Company  expended a total of
approximately  $250,000  and  $80,000,  respectively,  in  connection  with  the
development  of the  AcuVoice  purchased  in-process  research  and  development
projects.

Amortization  of goodwill and purchased  core  technologies  was  $1,962,443 and
$1,100,336 for the nine months ended September 30, 1999 and 1998,  respectively,
representing an increase of $862,107. This increase is primarily attributable to
the   amortization  of  intangible   assets  acquired  in  connection  with  the
acquisitions of AcuVoice and Papyrus.

The Company  incurred  losses from  operations of  $15,448,414  and  $27,771,310
during the nine months  ended  September  30, 1999 and 1998,  respectively.  The
decrease in losses from  operations is due primarily to the  $13,136,000  charge
for  in-process  research  and  development  costs  during the nine months ended
September 30, 1998 and a decrease in product development and research, offset in
part  by  increases  in  selling,   general  and  administrative   expenses  and
amortization  expense.  The Company  anticipates  that its investment in ongoing
scientific  product  development and research will continue at decreased  levels
for the remainder of fiscal 1999, assuming availability of working capital.

Net other expense was $4,422,997 for the nine months ended September 30, 1999, a
decrease of  $1,793,260  over the nine months ended  September  30,  1998.  This
decrease was due primarily to $6,111,577 in costs attributed to the cancellation
of common  stock reset  provisions  that  occurred in 1998 and to a reduction in
interest income of $809,371 from  certificates of deposit that were converted to
cash to  retire a bank  line of credit  in  January  1999,  offset in part by an
increase in interest  expense of $3,354,006  attributable to the issuance of the
Series C Convertible Debentures issued in January and March 1999.

In-Process Research and Development

At the dates of acquisition of AcuVoice,  management estimated that the acquired
in-process  research and development  projects of AcuVoice were approximately 75
percent  complete  and that an  additional  $1.0  million  would be  required to
develop  these  projects  to  commercial  viability.  Additionally,   management
anticipated release dates of the fourth

                                       25

<PAGE>



quarter of 1999 for the AcuVoice projects. As of September 30, 1999, the Company
has expended a total of  approximately  $380,000 in connection with the AcuVoice
and  Articulate   acquired   in-process   research  and  development   projects,
respectively,  and management  estimates that a total of approximately  $620,000
will be required to complete the AcuVoice  projects.  Management  also estimates
that the AcuVoice projects are 85 percent complete as of September 30, 1999, and
that the release dates are the same as anticipated at the date of acquisition.

Liquidity and Capital Resources

The  Company  must  raise  additional  funds  to be able  to  satisfy  its  cash
requirements during the next 12 months. The scientific research and development,
corporate  operations and marketing expenses will continue to require additional
capital. In addition,  the Company's recent acquisitions of AcuVoice and Papyrus
place further requirements on the Company's limited cash resources.  Because the
Company presently has only limited revenue from operations,  the Company intends
to continue to rely  primarily on  financing  through the sale of its equity and
debt  securities  or sales of existing  technologies  or  businesses  to satisfy
future capital requirements until such time as the Company is able to enter into
additional  third party licensing or  co-development  arrangements  such that it
will be able to finance  ongoing  operations  out of license,  royalty and sales
revenue.  There can be no assurance  that the Company will be able to enter into
such  agreements.  Furthermore,  the  issuance  of  equity  securities  or other
securities  which are or may become  convertible  into equity  securities of the
Company in connection with such financing (or in connection  with  acquisitions)
would  result in dilution  to the  stockholders  of the  Company  which could be
substantial.

In  September  1999,  the Company  completed  the sale of the  operations  and a
significant portion of the assets (the "Sale") of its HealthCare Solutions Group
("HSG") to Lernout & Hauspie Speech  Products N.V.  ("L&H"),  an unrelated third
party, for $28,000,000,  of this sales price, $21,500,000,  less certain credits
of $194,018 was paid at closing,  $2,500,000 is being held in an 18 month escrow
account  in  connection  with the  representations  and  warrantees  made by the
Company in the sales  transaction and the remaining  $4,000,000 is to be paid as
an earnout in two  installments of $2,000,000 each over the next two years based
on the  performance  of HSG.  The  proceeds  from the sale were used to reduce a
significant portion of the Company's  liabilities and to provide working capital
for the Company's  marketing and distribution  opportunities for its Interactive
Technology  Solutions  Group.  The assets sold include  inventory,  property and
equipment,  certain prepaid expenses, purchased core technology and other assets
of HSG.  Additionally,  L&H assumed the capital and operating lease  obligations
related to the HSG and the  obligations  related  to  certain  of the  Company's
deferred revenues..

The Company had  positive  working  capital of  $612,111 at  September  30, 1999
compared to negative  working  capital of  $14,678,975 at December 31, 1998. The
current  ratio was 1.14:1 at September  30, 1999  compared to 0.59:1 at December
31, 1998.  Current assets  decreased by $15,804,991 to $4,910,215  from December
31, 1998 to September 30, 1999. Current liabilities  decreased by $31,096,077 to
$4,298,104 during the same period. The increase in working capital from December
31, 1998 to  September  30, 1999,  was  primarily  attributable  to decreases in
accounts  and notes  payable,  notes  payable to related  parties  and  deferred
revenues  offset in part by  increases  in  accrued  liabilities,  income  taxes
payable  and  decreases  in  cash  and  notes  receivable.   Total  assets  were
$22,398,084 at September 30,1999 compared to $61,989,927 at December 31, 1998.

In September 1999, the Company negotiated  reductions of $221,376 in amounts due
various  trade  vendors.  Additionally,  the Company  negotiated  reductions  of
$150,685 in accrued  interest owed to certain note  holders.  These amounts have
been  accounted  for as an  extraordinary  item  in the  accompanying  condensed
consolidated statements of operations.

After the Papyrus  acquisition closed in October 1998, the Company  investigated
some of the representations and warranties made by Papyrus to induce the Company
to acquire the Papyrus  companies.  The Company  determined  that certain of the
representations  made by  Papyrus  and its  executive  officers  appeared  to be
inaccurate. On February 26, 1999, the Company filed an action against the former
shareholders of Papyrus alleging  misrepresentation  and breach of contract.  In
March and April 1999,  five of the former  shareholders of Papyrus filed actions
against the Company  alleging  default under the terms of the  promissory  notes
issued to them in  connection  with the Papyrus  acquisition  and certain  other
claims.  Subsequently,  the Company entered into agreements with the five former
Papyrus  shareholders  for  dismissal  of the  actions and  cancellation  of the
promissory notes upon payment to the former shareholders of

                                       27

<PAGE>



$1,217,384 (the "Settlement Payment") and return of 970,586 shares of restricted
common stock  previously  issued to the five former  shareholders  in connection
with the  acquisition  of Papyrus.  The Company paid the  Settlement  Payment in
September 1999 and the lawsuits described above have been dismissed.

As of September  30, 1999,  the Company had  unsecured  notes  payable to former
Papyrus stockholders in the aggregate amount of $77,625, which notes were issued
in connection with the acquisition of Papyrus. The notes were payable in various
amounts  through  September  30, 1999.  The holders of these notes have not made
demand for payment.

During the nine months ended  September 30, 1999, the Company paid, or otherwise
reduced through  agreement  notes payable to various  related  parties  totaling
$8,818,355, plus accrued interest.

In September  1999,  the Company paid other notes  payable to unrelated  parties
aggregating $610,000 plus accrued interest.

A revolving note payable in the amount of $19,988,193 at December 31, 1998, plus
accrued interest, was paid in full in January 1999.

On January 29, 1999, the Company  entered into a Securities  Purchase  Agreement
with four  investors  pursuant to which the Company sold its Series C Debentures
in the aggregate  principal  amount of  $4,000,000.  The  outstanding  principal
amount of the Debentures is convertible at any time at the option of the holders
into shares of the  Company's  common stock at a  conversion  price equal to the
lesser of $1.25 or 80 percent of the  average  of the  closing  bid price of the
Company's  common  stock for the five  trading days  immediately  preceding  the
conversion  date.  The Company  recorded  $687,500 as interest  expense upon the
issuance  of the  Debentures  in  connection  with  this  beneficial  conversion
feature. The Company also issued 400,000 warrants to purchase an equal number of
the  Company's  common shares at a strike price of $1.25 per share in connection
with this  financing.  The warrants are  exercisable for a period of three years
from the date of grant. The estimated fair value of the warrants of $192,000, as
computed under the Black-Scholes pricing model, was recorded as interest expense
upon the issuance of the  Debentures.  On March 3, 1999, the Company  executed a
supplemental  agreement  pursuant  to which the Company  agreed to sell  another
$2,500,000  principal  amount of the Debentures on the same terms and conditions
as the January 29, 1999  agreement,  except no additional  warrants were issued.
The Company  recorded  $1,062,500  as interest  expense upon the issuance of the
supplemental  Debentures in connection with the beneficial  conversion  feature.
The obligations of the Company for repayment of the  Debentures,  as well as its
obligation to register the common stock  underlying the potential  conversion of
the  Debentures and the exercise of the warrants  issued in these  transactions,
are personally guaranteed by two officers and directors and a former officer and
director of the Company (the "Guarantors"). In connection with the March 3, 1999
funding, the Company agreed to grant a lien on the patent covering the Company's
Automated Speech Recognition ("ASR") technologies as collateral for repayment of
the  Debentures.  However,  to date no lien on the patent has been granted.  The
Guarantors  guaranteed  the  obligations of the Company under the Debentures and
pledged  6,000,000 shares of common stock of the Company  beneficially  owned by
them as collateral security for their obligations under their guarantees.

Subsequent to the March 3, 1999 funding,  the holders of the Debentures notified
the Company and the  Guarantors  that the  Guarantors  were in default under the
terms of the pledge and that the holders  intended to exercise  their  rights to
sell some or all of the pledged shares of the  Guarantors.

The Guarantors  guaranteed certain other obligations of the Company. As security
for some of the guarantees,  the Guarantors have pledged shares of the Company's
common stock  beneficially  owned by them. In March 1999,  143,230 of the shares
previously  pledged  by the  Guarantors  to a bank were sold by the bank and the
proceeds were used to pay Company  credit card balances and the related  accrued
interest  in  full  totaling  $244,824.  In May  1999,  100,000  of  the  shares
previously  pledged by the  Guarantors  to another  creditor of the Company were
sold by the  creditor  and the  proceeds,  totaling  $72,335,  were  used to pay
amounts owed by the Company.  In September 1999, the Company paid in full a note
payable  to an  unrelated  third  party  in the  amount  of  $588,000  that  had
previously been guaranteed by the Guarantors.

                                       27

<PAGE>



On June 29,  1999,  the Company  received  notice from the Nasdaq  Stock  Market
("Nasdaq") indicating that unless the minimum bid price for the Company's common
stock returned to at least $1.00 per share for at least ten consecutive  trading
days prior to September 29, 1999,  the  Company's  shares would be delisted from
Nasdaq on October 1, 1999. If the Company's common stock is delisted from Nasdaq
and is not relisted  within three trading days, an event of default would result
under the terms of the  Debentures.  Upon the occurrence of an event of default,
the full $6,500,000  principal  amount of all of the  Debentures,  together with
accrued  interest and all other amounts owing in respect  thereof,  would become
immediately  due and  payable  in cash.  To date,  the  Company's  common  stock
continues to be listed for trading on Nasdaq.

During the nine months  ended  September  30, 1999,  131,667  shares of Series D
preferred  stock and 135,072 shares of Series E preferred  stock,  together with
related  dividends on each,  were converted into 8,468,129  shares and 5,729,156
shares, respectively, of the Company's common stock. After the above conversions
876,667 shares of Series D preferred stock remain outstanding.

On February 3, 1999,  certain  holders of Series D and Series E preferred  stock
forwarded  conversion  notices to the Company  converting  (1) 27,500  shares of
Series D preferred  stock and related  dividends  into 315,379  shares of common
stock and (2) 77,500  shares of Series E preferred  stock and related  dividends
into  1,955,346  shares  of  common  stock.  Due to an error  in the  conversion
calculations and a subsequent delay in receiving further clarifying instructions
from the holders,  the common shares issuable upon such  conversions  were never
issued to the Series D and  Series E holders,  although  the  Company's  records
reflected  that such shares had been  issued.  Subsequently,  because the common
stock had not been  received,  the Series D and Series E holders  rescinded  the
February 3 conversions.  The effects of this  recission have been  retroactively
reflected in the accompanying condensed consolidated financial statements.

Should the Company's stock be delisted from Nasdaq and not relisted within three
trading days,  the terms of the Series D preferred  stock require the Company to
pay to each  holder  of Series D  preferred  stock a fee of two  percent  of the
purchase  price of the Series D  preferred  stock in cash for each month  during
which the stock is delisted.

The Company issued  6,000,000  shares of common stock to two individuals who are
executive  officers and directors and one individual who is a former officer and
director of the Company in satisfaction of an indemnification  agreement wherein
the Company  was  required  to pay any sums the three  individuals  paid for the
benefit of the Company. The shares will be issued to replace shares beneficially
owned by the three  individuals  and sold by the holders of the  Debentures  and
Series D and E preferred shares.

On June 2, 1999,  the Company  issued  200,000  shares of common stock (having a
market value of $100,000 on that date) to an unrelated individual in payment for
consulting services rendered.

In April 1999, five former PAI  shareholders  agreed to cancel 970,586 shares of
common stock to the Company reducing the total shares they had received from the
Company  in the 1998  acquisition  of PAI from  3,111,114  shares  to  2,140,528
shares.  The shares were  effectively  canceled in September  1999 in connection
with the  settlement  payment.  The  original  fair market  value of  $1,000,917
associated  with the  canceled  shares is  reflected  as a reduction to goodwill
associated with the purchase of PAI.

During the nine months ended  September 30, 1999,  the Company  granted  754,500
stock  options to employees at exercise  prices  ranging from $0.59 to $1.78 per
share.  Additionally,  9,500 stock options were granted to two  consultants  for
services  provided  to the  Company.  The fair  market  value of the  consultant
options  was $1.30 per  share,  or  $12,540  in total,  using the  Black-Scholes
pricing model and was charged to product  development and research expense.  The
term of all options  granted during this nine month period is ten years from the
date of grant. Of the stock options issued,  726,334 vested immediately,  18,834
vest six months after  issuance and 18,832 vest one year after  issuance.  As of
September 30, 1999, the Company had a total of 15,536,582 options outstanding.

During the nine months ended September 30, 1999, the Company granted warrants to
L&H in connection  with loans made to the Company in April and May 1999 totaling
$6,000,000.  These warrants allow L&H to purchase 850,000 shares of common stock
of the  Company at exercise  prices  ranging  from $0.60 to $0.70 per share.  Of
these warrants,  250,000 expired October 18, 1999 without being  exercised.  The
remaining 600,000 warrants expire May 17, 2001.


                                       28

<PAGE>



On February 11,  1998,  the Company  entered into a First  Statement of Work and
License Agreement with Siemens Semiconductor Group of Siemens Aktiengesellschaft
("Siemens")  under  which the Company  and  Siemens  are  jointly  pursuing  the
development of Siemens' integrated circuits  incorporating ASR and other related
technologies for use in certain telecommunications  applications.  In connection
with the license  agreement  Siemens  purchased  warrants  to acquire  1,000,000
shares of restricted  common stock at an average exercise price of $20 per share
with expiration dates ranging from December 31, 1998 to December 31, 1999. As of
September 30, 1999,  800,000 of the warrants  originally  issued had expired and
200,000 of the  warrants  remain  outstanding  at an average  exercise  price of
$30.00 per share.

As of  September  30,  1999,  the  Company  had a total  of  2,475,000  warrants
outstanding.

The Company  presently has no plans to purchase any new research and development
assets or office facilities.

Potential  Delisting of the  Company's  Common  Stock by Nasdaq - The  Company's
common stock currently trades on the Nasdaq SmallCap Market which requires,  for
continued  listing, a minimum bid price of at least $1.00 per share. At June 29,
1999,  the  Company's  common  stock  had  traded  below  $1.00 for more than 30
consecutive  trading days. On June 29, 1999, the Company  received a letter from
Nasdaq  indicating  that unless the minimum bid price for the  Company's  common
stock returned to at least $1.00 per share for at least 10  consecutive  trading
days prior to September 29, 1999,  the  Company's  shares would be delisted from
the Nasdaq SmallCap  Market on October 1, 1999. The Company  requested a hearing
with  respect to the  Nasdaq  notice and at that  hearing on October  28,  1999,
further  requested  that Nasdaq defer a decision to delist the Company's  common
stock  while  the  Company  completes  its  plans  to  improve  its  equity  and
operations.  The Company has not received a response  from Nasdaq  regarding its
request and the Company's common stock continues to be listed for trading on the
Nasdaq SmallCap Market.

If the Company's common stock is delisted from the Nasdaq SmallCap  Market,  the
Company  believes  that its common  stock  would  qualify for listing on the OTC
Bulletin Board. However, the result of delisting from the Nasdaq SmallCap Market
could be a reduction in the liquidity of any investment in the Company's  common
stock,  even if the Company's  shares are thereafter  traded on the OTC Bulletin
Board.  Further,  delisting could reduce the ability of holders of the Company's
common stock to purchase or sell shares as quickly and as  inexpensively as they
have done historically.

If the Company's common stock is delisted from the Nasdaq SmallCap Market and is
not relisted  within three  trading days, an event of default would result under
the terms of the  Debentures.  Upon the  occurrence of an event of default,  the
unpaid principal amount of the Debentures,  together with accrued interest would
become  immediately  due and payable.  Also,  if the  Company's  common stock is
delisted  from the Nasdaq  SmallCap  Market  and is not  relisted  within  three
trading days,  the terms of the Series D preferred  stock require the Company to
pay to each  holder  of Series D  preferred  stock a fee of two  percent  of the
purchase price of the Series D preferred  stock, in cash for each month that the
stock is delisted.

                Special Note Regarding Forward-Looking Statements

Certain statements contained herein under, "Management's Discussion and Analysis
of Financial  Condition  and Results of  Operations"  and  "Outlook,"  including
statements  concerning (i) the Company's strategy,  (ii) the Company's expansion
plans,  (iii)  the  market  for  and  potential  applications  of the  Company's
technologies,  (iv) the results of product development and research efforts, and
(v)  the  growth  of the  Company's  business  contain  certain  forward-looking
statements  concerning  the  Company's  operations,   economic  performance  and
financial  condition.  Because such statements  involve risks and uncertainties,
actual  results may differ  materially  from those  expressed or implied by such
forward-looking  statements.  Factors that could cause such differences include,
but are not  necessarily  limited to, those  discussed in the  Company's  Annual
Report on Form 10-K for the year ended December 31, 1998.


                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

Clarke - On August 28, 1998, John R. Clarke and Perpetual Growth Fund, a company
Clarke's  spouse  purportedly  owns,  commenced an action against the Company in
federal court for the Southern District of New York. Clarke and Perpetual

                                       29

<PAGE>



Growth asserted claims for breach of contract  relating to certain financing the
Company received during 1998. Specifically,  Clarke and Perpetual Growth alleged
that they  entered  into a contract  with the  Company  under  which the Company
agreed to pay them a  commission  of five percent of all  financing  provided to
Fonix by Southridge Capital  Management or its affiliates.  Clarke and Perpetual
claim that they are  entitled  to  commissions  with  respect  to  approximately
$3,000,000 of equity  financing to the Company in July and August 1998,  and the
Company's offerings of Series D and Series E preferred stock,  totaling together
$12,000,000, in August and September 1998.

The Company believes that the Clarke lawsuit is without merit and filed a motion
to  dismiss  based  upon the  court's  lack of  personal  jurisdiction  over the
Company. The court granted the Company's motion to dismiss. Clarke and Perpetual
Growth have appealed the dismissal.  The Company has filed a suit against Clarke
and Perpetual Growth in federal court for the Central District of Utah seeking a
declaratory  judgment  that it does not owe any  money to Clarke  and  Perpetual
Growth. Now that the action in New York has been dismissed,  the Company intends
to vigorously pursue the Utah action.  However, the lawsuit in New York could be
reinstated  on appeal and  Clarke and  Perpetual  Growth  could  prevail in that
lawsuit, in which case the Company may be required to pay significant amounts of
money damages awarded by the court.

Papyrus - After the  Papyrus  acquisition  closed in October  1998,  the Company
investigated  some of the  representations  and  warranties  made by  Papyrus to
induce the Company to acquire  Papyrus.  The Company  determined that certain of
the representations  made by Papyrus and their executive officers appeared to be
inaccurate. On February 26, 1999, the Company filed an action against Papyrus in
the United States  District  Court for the District of Utah,  Central  Division,
wherein   the   Company   alleged   claims  for   misrepresentation,   negligent
misrepresentation,  breach of contract,  breach of the implied  covenant of good
faith and fair dealing and  rescission.  On March 11, 1999,  three of the former
shareholders of Papyrus filed an action against the Company in the United States
District Court for the District of  Massachusetts,  alleging a default under the
terms of the  promissory  notes  issued to them in  connection  with the Papyrus
acquisition.  On April 2, 1999, the three former Papyrus  shareholders  filed an
amended  complaint  against the Company seeking  additional  remedies  including
violation of Massachusetts  unfair and deceptive acts and practices statutes and
copyright  infringement.  On April 8, 1999, a fourth former Papyrus  shareholder
filed an action  against the Company  alleging a default  under the terms of the
promissory  notes issued to him in connection  with the Papyrus  acquisition and
seeking  additional  remedies  including  violation of Massachusetts  unfair and
deceptive acts and practices statutes and copyright  infringement.  On April 13,
1999,  a  fifth  former   Papyrus   shareholder   filed  a  similar   action  in
Massachusetts.  Subsequently,  the Company has entered into  agreements with the
five former Papyrus  shareholders  for dismissal of the actions and cancellation
of the promissory  notes upon payment to the former  shareholders  of $1,188,909
(the "Settlement Payment") and return for cancellation by the Company of 970,586
shares of  restricted  common  stock issued to the five former  shareholders  in
connection  with the  acquisition.  The  Company  agreed  to pay the  Settlement
Payment on or before  August 31,  1999 or, if the  definitive  proxy  soliciting
consents from the  shareholders  of the Company is effective prior to August 31,
1999, upon the closing of the sale of the HSG assets or the Company and the five
former Papyrus shareholders are free to pursue their respective claims.

OGI - On July 28, 1999,  Oregon  Graduate  Institute  ("OGI")  filed a notice of
default,  demand for  mediation  and demand for  arbitration  with the  American
Arbitration  Association.  In its demand, OGI asserted that Fonix was in default
under three separate  agreements between the Company and OGI in the total amount
of $175,000.00.  On or about September 23, 1999, the Company  responded to OGI's
demand  and  denied  the  existence  of a default  under  the  three  agreements
identified by OGI. Moreover,  the Company asserted a counterclaim against OGI in
an amount not less than $250,000.00.  The Company  anticipates that the American
Arbitration  Association  will conduct a scheduling  conference  within the next
twenty  days of  which  dates  for the  proceeding,  including  the  arbitration
hearing, will be set.

In addition to the above,  the Company is involved in various  lawsuits,  claims
and  actions  arising in the  ordinary  course of  business.  In the  opinion of
management,  after consultation with legal counsel,  the ultimate disposition of
these matters will not materially affect the consolidated  financial position or
results of operations of the Company.


Item 2.  CHANGES IN SECURITIES

Series D and E Preferred  Stock - During the nine  months  ended  September  30,
1999,  131,667 shares of Series D preferred stock and 135,072 shares of Series E
preferred  stock,  together with related  dividends on each, were converted into
8,468,129  shares and 5,729,156  shares,  respectively,  of the Company's common
stock. After the above  conversions,  876,667 shares of Series D preferred stock
remain outstanding.

Common  Stock Issued - On June 2, 1999,  the Company  issued  200,000  shares of
common  stock  (having a market  value of $100,000 on that date) to an unrelated
individual in payment for consulting services rendered.

In September 1999, five former Papyrus  shareholders  returned 970,586 shares of
common stock to the Company  under an  agreement in which the five  shareholders
agreed to reduce the total shares they had received from the Company in

                                       30

<PAGE>



the 1998 acquisition of Papyrus from 3,111,114 shares to 2,140,528  shares.  The
original  cost of  $1,000,917  associated  with the  issuance of these shares is
reflected  as a  reduction  of goodwill  previously  recorded at the time of the
acquisition.


Item 4.  Submission of Vote of Security Holders

At the Company's  annual meeting of  shareholders  held on October 29, 1999, the
following  actions were submitted to and approved by vote of the majority of the
issued and outstanding shares of the Company:

           1.        Election of directors;
           2.        Approval  of the  Company's  issuance  of its  Series  D 4%
                     preferred  stock and Series E 4%  preferred  stock to seven
                     institutional  investors,  which  preferred  stock  may  be
                     convertible  into  more  than 20% of the  total  number  of
                     shares  of  the   Company's   Class  A  common  issued  and
                     outstanding  prior to the  commencement  of such  series of
                     transactions.;
           3.        Approval of the Company's  amendments to its certificate of
                     incorporation that; (A) created a new class of common stock
                     designated   as  Class  B  Non-Voting   Common  Stock  with
                     1,985,000 Class B shares  authorized;  and (B) redesignated
                     the Company's  current common stock as Class A Common Stock
                     and  changed  each share of  existing  common  stock into a
                     share of Class A Common Stock; and a further amendment that
                     increased  the  number of common  shares  authorized  to be
                     issued from  100,000,000 to  300,000,000  and increased the
                     number of authorized  preferred  shares from  20,000,000 to
                     50,000,000;
           4.        Approval  of the Board of  Directors'  selection  of Arthur
                     Andersen   LLP,  as  the   Company's   independent   public
                     accountant's for the fiscal year ended Decembing 31, 1999.

           A total of 46,623,763  shares ( approximately  63%) of the issued and
outstanding  shares of the Company were represented by proxy or in person at the
meeting. These shares were voted on the matters described above as follows:

           1.        For the directors as follows:

<TABLE>
<CAPTION>
                                                                             # Shares Abstaining/
    Name                                # Shares For     # Shares Against      Withheld
-------------------------               ------------     ----------------    --------------------
<S>                                      <C>                 <C>                <C>
William A. Maasberg, Jr.                 47,381,620          7,831,673          578,098
John A. Oberteuffer                      47,411,770          7,783,378          523,148
Thomas A. Murdock                        47,356,820          8,562,673          578,098
Roger D. Dudley                          47,045,370          8,579,348          660,148
</TABLE>

           2. For the  approval  of the  Company's  issuance  of its Series D 4%
preferred stock and Series E 4% preferred stock as follows:

# Shares For       # Shares Against    # Shares Abstaining       Not Voted
------------       ----------------    -------------------      -----------
57,192,593            12,397,825           1,139,347            25,180,523

           3. For the approval of the Company's amendments to its certificate of
incorporation  that; (A) created a new class of common stock designated as Class
B Non-Voting  Common Stock with  1,985,000  Class B shares  authorized;  and (B)
redesignated  the  Company's  current  common  stock as Class A Common Stock and
changed  each  share of  existing  common  stock  into a share of Class A Common
Stock.

# Shares For       # Shares Against    # Shares Abstaining
------------       ----------------    -------------------
57,192,593             1,015,071           1,389,754


           4.        For  the  approval  of  an   amendment  to  the   Company's
certificate of incorporation  that would increase the authorized  capital of teh
Company to include  300,000 shares of Common Stock,  par value $.0001 per share,
and 50,000,000 shares of Preferred Stock, par value $.0001 per share.

                                       31

<PAGE>



# Shares For      # Shares Against     # Shares Abstaining       Not Voted
------------       ----------------    -------------------      -----------
20,086,173            12,969,230             1,261,492           25,180,523


           5 For  approval  of the  Board  of  Directors'  selection  of  Arthur
Andersen,  LLP as the independent certified public accountants of the Company as
follows:

# Shares For     # Shares Against      # Shares Abstaining
------------       ----------------    -------------------
59,101,639            298,317                 97,462



Item 6.  Exhibits and Reports on Form 8-K

a.         Exhibits: The following Exhibits are filed with this Form 10-K
           pursuant to Item 601(a) of Regulation S-K:

           Exhibit No.         Description of Exhibit

           (2)(i)              Agreement and Plan of Reorganization among the
                               Company, fonix Acquisition Corporation
                               and AcuVoice dated as of January 13, 1998,
                               incorporated by reference from the Company's
                               Current Report on Form 8-K, filed March 20, 1998

           (2)(ii)             Agreement and Plan of Merger among the Company,
                               ASI Acquisition Corporation and
                               Articulate Systems, Inc., dated as of July 31,
                               1998, incorporated by reference from the
                               Company's Current Report on Form 8-K, filed
                               September 17, 1998

            (2)(iii)           Amendment  No. 1 to Agreement  and Plan of Merger
                               Agreement  and Plan of Merger  among the Company,
                               ASI   Acquisition   Corporation   and  Articulate
                               Systems,  Inc.,  dated as of  September  2, 1998,
                               incorporated  by  reference  from  the  Company's
                               Current Report on Form 8-K,  filed  September 17,
                               1998

           (3)(i)              Articles of  Incorporation  of the Company  which
                               are  incorporated by reference from the Company's
                               Registration  Statement  on Form S-18 dated as of
                               September 12, 1989

           (3)(ii)             Certificate of Amendment of Certificate of
                               Incorporation dated as of March 21, 1994, which
                               is incorporated by reference from the Company's
                               Annual Report for the Fiscal Year Ended
                               December 31, 1994 on Form 10-KSB

           (3)(iii)            Certificate of Amendment of Certificate of
                               Incorporation dated as of May 13, 1994, which
                               is  incorporated by reference from the Company's
                               Annual Report for the Fiscal Year Ended
                               December 31, 1994  on Form 10-KSB

           (3)(iv)             Certificate of Amendment of Certificate of
                               Incorporation dated as of September 24, 1997,
                               which is incorporated by reference from the
                               Company's Quarterly Report on Form 10-Q for
                               the period ended September 30, 1997

           (3)(v)              The  Company's  Bylaws,  as  amended,  which  are
                               incorporated  by  reference  from  the  Company's
                               Annual Report for the Fiscal Year Ended  December
                               31, 1994 on Form 10-KSB

           (4)(i)              Certificate   of   Designation   of  Rights   and
                               Preferences of Series D 4% Convertible  Preferred
                               Stock,  filed  with  the  Secretary  of  State of
                               Delaware on August 27, 1998, which is
                               incorporated by reference from the Company's
                               Quarterly Report on Form 10-Q for the period
                               ended September 30, 1998


           (4)(ii)             Certificate of Designation of Rights and
                               Preferences of Series E 4% Convertible Preferred
                               Stock, filed with the Secretary of State of
                               Delaware on October 15, 1998, which is
                               incorporated by reference from the Company's
                               Quarterly Report on Form 10-Q for the period
                               ended September 30, 1998


                                       32

<PAGE>



           (10)(i)             Product Development and Assignment Agreement
                               dated as of October 16, 1993 between
                               Phonic Technologies, Inc. and Synergetics, Inc.,
                               which is incorporated by reference from
                               the Company's Current Report on Form  8-K dated
                               as of June 17, 1994

           (10)(ii)            Re-Stated Product Development and Assignment
                               Agreement dated as of March 30, 1995,
                               between fonix Corporation and Synergetics, Inc.,
                               which is incorporated by reference from
                               the Company's Annual Report for the Fiscal Year
                               Ended December 31, 1994 on Form 10-KSB

           (10)(iii)           Memorandum of Understanding dated as of March 13,
                               1997, by and among the Company, Synergetics, Inc.
                               and C. Hal Hansen, which is incorporated by
                               reference from the Company's Annual Report on
                               Form 10-KSB for the fiscal year ended December
                               31, 1996

           (10)(iv)            Employment Agreement by and between the Company
                               and Stephen M. Studdert, which is
                               incorporated by reference from the Company's
                               Annual Report on Form 10-KSB for the
                               fiscal year ended December 31, 1996

           (10)(v)             Employment Agreement by and between the Company
                               and Thomas A. Murdock, which is
                               incorporated by reference from the Company's
                               Annual Report on Form 10-KSB for the
                               fiscal year ended December 31, 1996

           (10)(vi)            Employment Agreement by and between the Company
                               and Roger D. Dudley, which is
                               incorporated by reference from the Company's
                               Annual Report on Form 10-KSB for the
                               fiscal year ended December 31, 1996

           (10)(vii)           Restated  Master  Agreement  for Joint
                               Collaboration  between the Company and
                               Siemens,  dated  November 14, 1997, as
                               revised,   which  is  incorporated  by
                               reference  from the  Company's  Annual
                               Report on Form 10-K for the year ended
                               December 31, 1997

           (10)(viii)          Restated  First  Statement  of Work  and  License
                               Agreement between the Company and Siemens,  dated
                               February  11,  1998,  which  is  incorporated  by
                               reference from the Company's  Quarterly Report on
                               Form 10-Q for the period ended June 30, 1999

           (10)(ix)            Master Technology Collaboration Agreement between
                               the Company and OGI, dated October
                               14, 1997, which is incorporated by reference from
                               the Company's Annual Report on Form
                               10-K for the year ended December 31, 1997

           (10)(x)             Common Stock Purchase Agreement among the Company
                               and JNC Opportunity Fund Ltd.
                               and Diversified Strategies Fund, LP, dated as of
                               March 9, 1998, which is incorporated by
                               reference from the Company's Annual Report on
                               Form 10-K for the year ended December 31, 1997

           (10)(xi)            Common Stock Purchase Agreement between the
                               Company and Thomson Kernaghan & Co.,
                               dated as of March 9, 1998, which is incorporated
                               by reference from the Company's Annual
                               Report on Form 10-K for the year ended December
                               31, 1997

           (10)(xii)           Royalty Modification Agreement among the Company
                               and Synergetics, dated as of April
                               6, 1998, which is incorporated by reference from
                               the Company's Annual Report on Form
                               10-K for the year ended December 31, 1997

           (10)(xiii)          Purchase Agreement with John Oberteuffer and the
                               Company dated April 9, 1998, which
                               is incorporated by reference from the Company's
                               Annual Report on Form 10-K for the year
                               ended December 31, 1997

           (10)(xiv)           Employment Agreement by and between the Company
                               and John A. Oberteuffer, which is

                                       33

<PAGE>



                               incorporated by reference from the Company's
                               Annual Report on Form 10-K for the year
                               ended December 31, 1997

           (10)(xv)            First Amendment to Master Agreement for Joint
                               Collaboration between the Company and
                               Siemens, dated February 13, 1998, which is
                               incorporated by reference from the Company's
                               Annual Report on Form 10-K for the year ended
                               December 31, 1997

           (10)(xvi)           Second  Amendment to Master  Agreement  for Joint
                               Collaboration  between the  Company and  Siemens,
                               dated March 13, 1998,  which is  incorporated  by
                               reference  from the  Company's  Annual  Report on
                               Form 10-K for the year ended December 31, 1997

           (10)(xvii)          Series D  Convertible  Preferred  Stock  Purchase
                               Agreement    Among   fonix    corporation,    JNC
                               Opportunity  Fund, Ltd.,  Diversified  Strategies
                               Fund,   L.P.,   Dominion   Capital  Fund,   Ltd.,
                               Sovereign   Partners,   LP,  Canadian   Advantage
                               Limited  Partnership and Thomson  Kernaghan & Co.
                               (as agent) dated as of August 31, 1998,  which is
                               incorporated  by  reference  from  the  Company's
                               Quarterly  Report  on Form  10-Q  for the  period
                               ended June 30, 1999

           (10)(xviii)         Series E Convertible Preferred Stock Exchange and
                               Purchase   Agreement  among  fonix   corporation,
                               Sovereign Partners, LP and Dominion Capital Fund,
                               Ltd.,  dated as of September  30, 1998,  which is
                               incorporated  by  reference  from  the  Company's
                               Quarterly  Report  on Form  10-Q  for the  period
                               ended June 30, 1999

           (10)(xix)           Asset Purchase Agreement - Acquisition of Certain
                               Assets   of  Fonix   Corporaion   and   Fonix/ASI
                               Corporation by Lernout & Hauspie Speech  Products
                               N.V.,   dated  as  of  May  19,   1999,which   is
                               incorporated  by  reference  from  the  Company's
                               Current  Report  on  Form  8-K,  filed  with  the
                               Commission   on  September   16,  1999   (therein
                               designated as Exhibit 10(a))

           (10)(xx)            Escrow Agreement, dated as of September 1, 1999,
                               which is incorporated by reference from
                               the Company's Current Report on Form 8-K, filed
                               with the Commission on September 16,
                               1999 (therein designated as Exhibit 10(b))

           (10)(xxi)           Technology Option Agreement, dated as of May 19,
                               1999, which is incorporated by
                               reference from the Company's Current Report on
                               Form 8-K, filed with the Commission on
                               September 16, 1999 (therein designated as Exhibit
                               10(c))

           (10)(xxii)          Assignment and Assumption Agreement, dated as of
                               September 1, 1999, which is
                               incorporated by reference from the Company's
                               Current Report on Form 8-K, filed with the
                               Commission on September 16, 1999 (therein
                               designated as Exhibit 10(d))

           (10)(xxiii)         License   Agreement  by  and  between   Fonix/ASI
                               Corporation and Lernout & Hauspie Speech Products
                               N.V.,   dated  as  of  May  19,  1999, which   is
                               incorporated  by  reference  from  the  Company's
                               Current  Report  on  Form  8-K,  filed  with  the
                               Commission   on  September   16,  1999   (therein
                               designated as Exhibit 10(e))

           (10)(xxiv)          Loan Agreement, dated as of April 22, 1999, which
                               is incorporated by reference from the
                               Company's Current Report on Form 8-K, filed with
                               the Commission on September 16, 1999
                               (therein designated as Exhibit 10(f))

           (10)(xxv)           Amendment to Loan Agreement, dated as of May 12,
                               1999, which is incorporated by
                               reference from the Company's Current Report on
                               Form 8-K, filed with the Commission on
                               September 16, 1999 (therein designated as Exhibit
                               10(g))

           (10)(xxvi)          Second  Amendment to Loan Agreement,  dated as of
                               May 19,  1999,which is  incorporated by reference
                               from the  Company's  Current  Report on Form 8-K,
                               filed with the  Commission  on September 16, 1999
                               (therein designated as Exhibit 10(h))

                                       34

<PAGE>



           (10)(xxvii)         Loan Agreement, dated as of May 19, 1999,which is
                               incorporated  by  reference  from  the  Company's
                               Current  Report  on  Form  8-K,  filed  with  the
                               Commission   on  September   16,  1999   (therein
                               designated as Exhibit 10(i))

           (10)(xxviii)        First  Amendment to Loan  Agreement,  dated as of
                               August  12,   1999,which   is   incorporated   by
                               reference  from the Company's  Current  Report on
                               Form 8-K,  filed with the Commission on September
                               16, 1999 (therein designated as Exhibit 10(j))

           (10)(xxix)          Agreement, dated as of July 31, 1999, which is
                               incorporated by reference from the
                               Company's Current Report on Form 8-K, filed with
                               the Commission on September 16, 1999
                               (therein designated as Exhibit 10(k))

           (27)                Financial Data Schedule



(b) Reports filed on Form 8-K during the three-month  period ended September 30,
1998:

           (i)       On September 16, 1999,  the Company filed a Current  Report
                     on Form 8-K,  dated  September 1, 1999,  containing  Item 2
                     disclosure   pertaining  to  the  Company's   sale  of  the
                     operations  and a significant  portion of the assets of its
                     HealthCare   Solutions   Group,   headquartered  in  Woburn
                     Massachusetts, to Lernout and Hauspie Speech Products N.V.,
                     a Belgian  corporation with its principal place of business
                     in Ieper, Belgium.




                                       35

<PAGE>


                                   SIGNATURES

           In  accordance  with  the  requirements  of  the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                       Fonix Corporation



Date:November 22, 1999                 By: /s/ Douglas L. Rex
     ---------------------                --------------------------------------
                                       Douglas L. Rex, Chief Financial Officer

                                       36