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, 1997

[ ]  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, UT 84111
                --------------------------------------------
            (Address of principal executive offices and zip code)

                                (801) 328-0161
                           ------------------------
            (Registrant's telephone number, including area code)

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 13, 1997, 43,062,475 shares of the issuer's Common Stock, par
value $.0001 per share, were issued and outstanding.

<PAGE>

                       PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements.

     The interim financial statements required by Rule 10-01 of Regulation
     S-X follow immediately.

                                   2

<PAGE>
                             fonix corporation
                         [A Development Stage Company]
					
                     CONDENSED CONSOLIDATED BALANCE SHEET
                                 (Unaudited)
					
                                    ASSETS
<TABLE>
<CAPTION>
                                                                                September 30,     December 31, 
                                                                                    1997              1996
                                                                               --------------    --------------
<S>                                                                            <C>               <C>
Current assets:					
     Cash and cash equivalents                                                 $  19,967,309     $  22,805,786 
     Note receivable                                                                 250,000         1,000,000 
     Interest receivable                                                                -              157,643 
     Prepaid assets                                                                  156,861             4,172 
     Stock subscription receivable (Note 7)                                        3,794,500              -   
                                                                               --------------    --------------
          Total Current Assets                                                    24,168,670        23,967,601  
						
Equipment, net of accumulated depreciation of $315,727 and $80,232                 1,669,848         1,279,746  
						
Intangible assets, net of accumulated amortization of $6,459 and $3,107              125,755            53,011  
						
Other assets                                                                          49,332            30,912  
                                                                               --------------    --------------
                                                                               $  26,013,605     $  25,331,270  
                                                                               ==============    ==============
</TABLE>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S>                                                                            <C>               <C>
Current liabilities:						
     Accounts payable                                                          $     354,573     $     307,931  
     Accrued expenses                                                                811,081         1,464,049  
     Convertible debenture                                                              -              500,000
     Accrued expenses - related party                                                400,993           411,743  
     Notes payable - related party                                                   760,000
     Notes payable                                                                19,729,995        16,377,358
                                                                               --------------    --------------
						
          Total Current Liabilities                                               22,056,642        19,061,081
                                                                               --------------    --------------
Stockholders' equity:						
     Preferred stock                                                                      46               - 
     Common stock                                                                      4,229             4,163  
     Paid-in capital-common stock                                                 31,423,819        26,107,833  
     Paid-in capital-preferred stock                                               7,886,385             
     Accumulated deficit                                                         (35,357,516)      (19,841,807) 
                                                                               --------------    --------------
          Total stockholders' equity                                               3,956,963         6,270,189  
                                                                               --------------    --------------
                                                                               $  26,013,605     $  25,331,270 
                                                                               ==============    ==============
</TABLE>

    See accompanying notes to condensed consolidated financial statements
                                       3
<PAGE>
                            fonix corporation
                        [A Development Stage Company]

              CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (Unaudited)
<TABLE>
<CAPTION>
                                                                                                       
                                                                                                                  October 1,
                                                  Three months ended                  Nine months ended             1993
                                                      September 30,                     September 30,          (inception) to
                                            -------------------------------   -------------------------------   September 30,
                                                  1997           1996              1997              1996            1997
                                            --------------   --------------   --------------   --------------   --------------
<S>                                         <C>              <C>              <C>              <C>              <C>   
Revenues                                    $        -       $        -       $        -       $        -       $        -   
											
Expenses:											
  General and administrative                    1,997,669          595,717        5,748,338        1,446,369       15,047,896 
  Research and development                      1,650,371        1,226,559        4,715,650        3,134,097       15,586,649 
                                            --------------   --------------   --------------   --------------   --------------
     Total expenses                             3,648,040        1,822,276       10,463,988        4,580,466       30,634,545 
                                            --------------   --------------   --------------   --------------   --------------
Loss from operations                           (3,648,040)      (1,822,276)     (10,463,988)      (4,580,466)     (30,634,545)
                                            --------------   --------------   --------------   --------------   --------------
Other income (Expenses):											
  Interest income                                 279,671          370,637          882,096          858,946        2,274,553 
  Interest (expense)                           (1,697,550)        (243,270)      (3,203,735)        (487,760)      (4,297,990)
                                            --------------   --------------   --------------   --------------   --------------
     Total Other Income (Expenses)             (1,417,879)         127,367       (2,321,639)         371,186       (2,023,437)
                                            --------------   --------------   --------------   --------------   --------------

Loss before extraordinary item                 (5,065,919)      (1,694,909)     (12,785,627)      (4,209,280)     (32,657,982)

Extraordinary item-											
  Loss on extinguishment of debt               (1,069,364)            -          (1,069,364)            -          (1,038,816)
                                            --------------   --------------   --------------   --------------   --------------

Net Loss                                       (6,135,283)      (1,694,909)     (13,854,991)      (4,209,280)     (33,696,798)
											
Dividend on preferred stock                     1,660,718                         1,660,718                         1,660,718 
                                            --------------   --------------   --------------   --------------   --------------
Net loss applicable to common stock         $  (7,796,001)   $  (1,694,909)   $ (15,515,709)   $  (4,209,280)   $ (35,357,516)
                                            ==============   ==============   ==============   ==============   ==============
Loss per common share:											
  Loss before extraordinary item            $       (0.16)   $       (0.04)   $       (0.34)   $       (0.12)   $       (1.29)
  Extraordinary item                                (0.03)             -              (0.03)             -              (0.04)
                                            --------------   --------------   --------------   --------------   --------------
Loss per common share                       $       (0.18)   $       (0.04)   $       (0.37)   $       (0.12)   $       (1.33)
                                            ==============   ==============   ==============   ==============   ==============
Weighted average shares                        42,192,776       38,842,204       42,053,697       35,434,318       26,629,162 
                                            ==============   ==============   ==============   ==============   ==============

</TABLE>

      See accompanying notes to condensed consolidated financial statements
                                     4
<PAGE>

                            fonix corporation
                       [A Development Stage Company]

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (Unaudited)
								
								
<TABLE>
<CAPTION>
                                                                                                         October 1,
                                                                           Nine months ended                1993
                                                                              September 30,           (inception) to
                                                                     -------------------------------   September 30,
                                                                          1997             1996             1997
                                                                     --------------   --------------   --------------
<S>                                                                  <C>              <C>              <C>
Cash flows from development activities:								
   Net loss applicable to common stock                               $ (15,515,709)   $  (4,209,280)   $ (35,357,516)
   Adjustments to reconcile net loss to net cash                                            
      used in operations for development activities:                                                 
         Common stock issued for services                                1,120,004             -           2,444,274 
         Non-cash interest expense related to issuance                                    
           of debentures, warrants and common stock                      1,986,836             -           1,986,836 
         Additional compensation expense related to issuance                                      
           of stock options                                                   -                -           2,282,900 
         Write-off of assets received in acquisition                          -                -               1,281 
         Depreciation and amortization                                     237,784           32,135          322,184 
         Preferred stock dividend                                        1,660,718                         1,660,718 
         Extraordinary item-debt extinguishment                          1,069,364                         1,038,816 
         Changes in assets and liabilities:                                       
             Interest receivable                                           157,643         (116,409)            -   
             Prepaid assets                                               (152,689)         (98,789)        (156,861)
             Other assets                                                  (18,420)            -             (49,332)
             Accounts payable                                               40,870           (2,169)       1,984,070 
             Accrued expenses - related party                               (4,978)         119,596          406,765 
             Accrued expenses                                           (1,006,905)          69,892          549,062 
                                                                     --------------   --------------   --------------          
         Net cash used in operations for development activities        (10,425,482)      (4,205,024)     (22,886,803)
                                                                     --------------   --------------   --------------
Cash flows from investing activities:								
   Purchase of equipment                                                  (625,597)        (516,640)      (1,985,575)
   Investment in intangible assets                                         (75,035)          (9,598)        (132,214)
   Investment in notes receivable                                         (883,600)      (5,400,000)      (1,883,600)
   Payments received on notes receivable                                 1,633,600        4,166,894        1,633,600 
                                                                     --------------   --------------   --------------
          Net cash (used in) provided by investing activities               49,368       (1,759,344)      (2,367,789)
                                                                     --------------   --------------   --------------
Cash flows from financing activities:								
   Net increase in notes payable                                         3,352,637       10,226,031       20,301,856 
   Net increase in notes payable - related party                           760,000                           760,000 
   Proceeds from issuance of convertible debenture                       3,000,000             -           3,500,000 
   Proceeds from issuance of common stock                                  425,000       12,759,962       20,660,045 
                                                                     --------------   --------------   --------------
          Net cash provided by financing activities                      7,537,637       22,985,993       45,221,901 
                                                                     --------------   --------------   --------------
Net increase (decrease) in cash and cash equivalents                    (2,838,477)      17,021,625       19,967,309 
								
Cash and cash equivalents at beginning of period                        22,805,786        7,849,610             -   
                                                                     --------------   --------------   --------------
Cash and cash equivalents at end of period                           $  19,967,309    $  24,871,235    $  19,967,309 
                                                                     ==============   ==============   ==============
</TABLE>

                                  [Continued]
                                      5
<PAGE>
                             fonix corporation
                        [A Development Stage Company]

               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (Unaudited)



<TABLE>
<CAPTION>
                                                                                                         October 1,
                                                                           Nine months ended                1993
                                                                              September 30,           (inception) to
                                                                     -------------------------------   September 30,
                                                                          1997             1996             1997
                                                                     --------------   --------------   --------------
<S>                                                                  <C>              <C>              <C>
Supplemental disclosure of cash flow information:
    Cash paid during the year for:
           Interest paid                                             $    771,037     $    417,868     $   1,659,503 
           Income taxes paid                                         $       -        $       -        $        -   

</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
										
     For the Nine months ended September 30, 1997:

     A subscription receivable in the amount of $44,500 was recorded in
        connection with the exercise of options to purchase 15,000 shares of
        common stock.
											
     Convertible debentures in the amount of $850,000 plus accrued interest
        thereon in the amount of $7,850 were converted into 145,747 shares
        of common stock.
											
     The Company recorded a subscription receivable in the amount of
        $3,750,000 in connection with the issuance of 187,500 shares of
        convertible preferred stock.  The receivable was received in October
        1997.
											
     A dividend and an increase in paid in capital of $1,060,718 and $600,000
        were recorded for the discount associated with the issuance of 187,500
        shares of convertible preferred stock and for the issuance of warrants 
        to purchase 200,000 shares of common stock in connection with the 
        issuance of such preferred stock.
											
     The Company recorded an accrued expense and a debit to paid in capital in
        the amount of $390,000 as a finders fee associated with the issuance of
        $3,750,000 in convertible preferred stock.
											
     The Company recorded the conversion of convertible debentures in the
        amount of $2,150,000 plus accrued interest thereon in the amount of
        $28,213 into 108,911 shares of convertible preferred stock, although
        prior to the actual issuance of such convertible preferred stock, the
        $2,150,000 amount was converted into common stock.
											
     An extra-ordinary loss of $881,864 was recorded in connection with the
        extinguishment of debt and corresponding issuance of convertible
        preferred stock with prepaid financing costs in the amount of $220,014
        and paid-in capital in the amount of $661,850.
											
     A convertible debenture in the amount of $500,000 was converted into
        166,667 shares of Series A Preferred Stock.
											
     Interest expense and an increase in paid in capital of $897,750 was
        recorded for the issuance of 250,000 warrants in connection with the
        sale of $3,000,000 in convertible debentures.
											
     The Company recorded a prepaid financing cost and an increase in
        additional paid-in capital of $427,900 related to the issuance of
        $3,000,000 in convertible debentures.

     Interest expense and an increase in paid in capital of $881,250 was
        recorded in connection with the issuance of 150,000 shares of common
        stock below market value to an unrelated party.
		
     The Company issued 100,000 shares of common stock to an unrelated party
        for consulting fees valued at $778,129.
		
     The Company issued 155,000 shares of common stock to unrelated parties
        for consulting fees valued at $341,875.
		
     For the nine months ended September 30, 1996:

     The Company issued 220,000 shares of common stock to unrelated parties
        for finders fees valued at $597,520.
		
     The Company issued 200,000 shares of common stock to unrelated parties
        for finders fees valued at $304,000.

     See accompanying notes to condensed consolidated financial statements.
                                      6

<PAGE>
                           fonix (TM) corporation
                       [A Development Stage Company]
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              [Unaudited]

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation - The accompanying financial statements have
     been prepared by the Company in accordance with generally accepted
     accounting principles for interim information and pursuant to Rule 10-
     01 of Regulation S-X.  Accordingly, they do not include all of the
     information and footnotes required by generally accepted accounting
     principles for complete financial statements.   In the opinion of
     management, all adjustments (which included only normal recurring
     adjustments) necessary to present fairly the financial position,
     results of operations and cash flows for all periods presented, have
     been made.

     These condensed consolidated financial statements should be read in
     conjunction with the audited financial statements and notes thereto
     included in the Company's Form 10-KSB for the year ended December 31,
     1996, as amended.  The results of operations for the nine months ended
     September 30, 1997 and 1996 are not necessarily indicative of the
     operating results for the full year.
     
     Research and Development - All payments for research and development
     are charged to research and development expense as incurred.

     Recently Enacted Accounting Standards - In February 1997, SFAS Nos.
     128, "Earnings Per Share" and 129, "Disclosures of Information about
     Capital Structure," were issued.  SFAS No. 128 changes the
     computation, presentation, and disclosure requirements of earnings per
     share (EPS) for entities with publicly held common stock.  SFAS No.
     129 addresses standards for disclosing information about an entity's
     capital structure.  Although such statements are not effective until
     December 31, 1997, the effect of the adoption of the above statements
     is not significant.

2.   EMPLOYEE BENEFIT PLAN

     The Company has a 401(k)/ profit sharing plan covering its full time
     employees.  Under the profit sharing portion, the Company may make
     discretionary profit sharing contributions.  Such contributions are
     entirely discretionary as determined by the board of directors.  No
     such profit sharing contributions have been made by the Company. 
     Under the 401(k) feature, employees may reduce their salaries, in
     amounts allowed by law, and contribute the salary reduction amount to
     the plan on a pretax basis.  The 401(k) feature also allows the
     Company to make matching contributions at the sole discretion of the
     Company as determined by the board of directors.  No matching
     contributions have been made by the Company.

3.   NOTE RECEIVABLE
     
     At September 30, 1997, the Company had an unsecured note receivable
     from an unrelated third party in the amount of $250,000 which bears
     interest at 12% per annum and is due and payable thirty days

                                     7
<PAGE>

                           fonix (TM) corporation
                       [A Development Stage Company]
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              [Unaudited]

     after written notice from the Company.  Subsequent to September 30,
     1997, the principal and accrued interest were paid in full.

4.   EQUIPMENT

     Equipment consists of the following at September 30, 1997:

               Furniture and fixtures                 $   639,339  
               Computer equipment                       1,276,865  
               Leasehold improvements                      69,371  
                                                      ------------
                      Total                             1,985,575  
                      Less accumulated depreciation 
                        and amortization                 (315,727) 
                                                      ------------
                      Net equipment                   $ 1,669,848
                                                      ============
5.   CONVERTIBLE DEBENTURES

     In June 1997, the Company entered into a Convertible Debenture
     Purchase Agreement (the "Agreement") whereby an unrelated investment
     entity agreed to purchase up to an aggregate principal amount of
     $10,000,000 of the Company's Series B 5% Convertible Debentures.  The
     debentures were due June 18, 2007, bore interest at 5% and were
     convertible into shares of the Company's common stock at anytime after
     issuance at the holder's option.  Under the terms of the Agreement,
     the debentures were to be purchased in three installments.  The first
     payment of $3,000,000 was made to the Company on June 18, 1997.  The
     second and third payments of $3,000,000 and $4,000,000, respectively,
     were to be paid to the Company upon written notice, provided that the
     Company's market capitalization was then in excess of $200,000,000 and
     other conditions were met.  The debentures were convertible into
     shares of the Company's common stock at the lesser of $6.81 or the
     average of the per share market value for the five trading days
     immediately preceding the conversion date multiplied by 90% for any
     conversion on or prior to the 120th day after the original issue date
     and 87.5% for any conversion thereafter.  Utilizing the conversion
     terms most beneficial to the investor, the Company recorded a prepaid
     financing cost of approximately $427,900.  This amount represents the
     maximum potential discount of 12.5%, which was available to the
     investor after 120 days, applied to the market price on the date of
     issuance of $6.81 per share.  This amount was being amortized as
     additional interest expense over the 120 day period commencing June
     18, 1997.  Upon the conversion of any of the debentures during the 120
     days, an allocable portion of the prepaid financing costs was
     expensed. As part of the same transaction, the Company also issued to
     the investor a warrant to purchase up to 250,000 shares of common
     stock at any time prior to June 18, 2002, at the exercise price of
     $8.28 per share.  In connection with the issuance of these warrants,
     the Company recorded the fair value of the warrants, totaling $897,750
     as a charge to interest expense.  The fair value of such warrants was
     determined as of the date of grant using the Black-Scholes pricing
     model assuming the following: Dividend yield 0.00%; expected
     volatility 65%; risk free interest rate of 5.9% and expected life to
     exercise of 5 years.  Prior to  September 30, 1997 $850,000 face value
     of the Series B 5% Convertible Debenture was converted into 145,747
     shares of common stock. Pursuant to a memorandum of understanding
     between the Company and the investor dated as of 

                                      8
<PAGE>
                           fonix (TM) corporation
                       [A Development Stage Company]
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              [Unaudited]

     September 30, 1997 (the "MOU") the parties agreed to modify the
     Agreement to convert all then outstanding debentures in the amount of
     $2,150,000 into 107,500 shares of Series B Convertible Preferred
     Stock, convertible into common shares under the same terms as the
     debentures.  In connection with the conversion of the convertible
     debentures to convertible preferred stock set forth in the MOU, the
     Company recorded all unamortized prepaid financing costs as an extra-
     ordinary item, loss on extinguishment of debt.  Also in connection
     with this modification, the Company  agreed to issue an additional
     warrant to purchase up to 175,000 shares of common stock at any time
     prior to October 24, 2002, at the exercise price of $7.48 per share. 
     In connection with the issuance of that warrant, the Company recorded
     the fair value of the warrant, totaling $661,850 (representing an
     additional loss on extinguishment of debt) as an extraordinary item
     which was determined as of the date of the grant using the Black-
     Scholes pricing model assuming the following: Dividend yield 0.00%;
     expected volatility 65%; risk free interest rate of 5.8% and expected
     life to exercise of 5 years.  Additionally, the Company entered into
     an amended and restated registration rights agreement with the
     investor under which the Company is obligated to take steps to
     register the common stock issuable upon conversion of the preferred
     stock and exercise of the warrants.  The Company covenanted to reserve
     out of its authorized and unissued shares of common stock no less than
     that number of shares that would be issuable upon the conversion of
     the preferred stock and any dividends then payable in stock on the
     preferred stock and the exercise of the warrant.  Under the MOU, the
     Company agreed that it would convert the remaining $2,150,000 balance
     into 107,500 shares of convertible preferred stock effective as of
     September 30, 1997.  Prior to the actual issuance of such convertible
     preferred stock, however, the investor converted the balance of
     $2,150,000 into 431,619 shares of common stock.  Also, subsequent to
     September 30, 1997, the Company received a second payment in the
     amount of $2,500,000 in exchange for 125,000 shares of preferred
     stock. 92,500 of these preferred shares and dividends earned thereon
     have been converted into 338,486 shares of common stock. 

     In October 1995, the Company issued a Series A Subordinated
     Convertible Debenture in the amount of $500,000 to a private
     investment entity. That debenture was due October 23, 1997 and had an
     annual interest rate of 5%.  During the three months ended September
     30, 1997, the debenture was converted into 166,667 shares of Series A
     Preferred Stock which are convertible at the option of the holder
     thereof into 166,667 shares of common stock.  A one time dividend in
     the amount of $2.905 for each preferred share is payable in the event
     that any dividend is declared on any stock. 

6.   NOTES PAYABLE

     At September 30, 1997, the Company has a revolving note payable to a
     bank in the amount of $19,729,995 which bears interest at the rate of
     5.84%.  This note was due October 29, 1997, and is secured by a
     certificate of deposit in the amount of $20,000,000.  Subsequently,
     similar terms were negotiated to extend the maturity date of the note
     for six months to April 29, 1998.

     At September 30, 1997, the Company has an unsecured note payable to a
     company owned by three individuals who are each executive officers,
     directors and 10% beneficial owner of the Company in the 


                                       9
<PAGE>
                           fonix (TM) corporation
                       [A Development Stage Company]
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              [Unaudited]

     amount of $760,000.  This note is payable on demand and bears interest
     at 12%.  Subsequent to September 30, 1997, the balance due under the
     note payable was reduced to $189,000.

7.   STOCKHOLDERS' EQUITY

     Issuance of Stock - During the nine months ended September 30, 1997,
     the Company issued 665,747 shares of common stock.  150,000 of such
     shares were issued to an unrelated private investor, 265,000 of such
     shares were issued upon the exercise of previously granted warrants
     and options, 105,000 of such shares were issued to unaffiliated
     individuals for services rendered, and 145,747 were issued upon
     conversion of convertible debentures.
     
     Preferred Stock - In 1995, the Company's board of directors adopted a
     resolution to amend the articles of incorporation to provide for the
     issuance of preferred stock and give the board of directors authority
     to fix the rights, preferences, privileges and restrictions of any
     series of preferred stock.  At the same time the board of directors
     adopted a resolution establishing a class of Series A Preferred Stock. 
     On or about August 29, 1997, a majority of the shareholders of the
     Company authorized an amendment to the Company's certificate of
     incorporation authorizing and approving the issuance of preferred
     stock.  The amendment became effective September 24, 1997.

     Effective September 30, 1997 the Company entered into a Memorandum of
     Understanding ("MOU2") with an unrelated investment entity whereby
     that entity agreed to subscribe for the purchase of 187,500 shares of
     the Company's Series C Convertible Preferred Stock for a purchase
     price of $3,750,000.  Dividends accrue on the stated value of
     preferred stock at a rate of 5% per annum, are payable quarterly in
     cash or common stock at the option of the Company and are convertible
     into shares of the Company's common stock at anytime after issuance at
     the holder's option.  The preferred stock, together with dividends
     accrued thereon, may be converted into shares of the Company's common
     stock at the lesser of $5.98 or  the average of the five lowest
     closing bid prices for the 15 trading days preceding the date of any
     conversion notice multiplied by 91% for any conversion on or prior to
     the 120th day after the original issue date, 90% for any conversion
     between 121 and 180 days and 88% for any conversion thereafter. 
     Utilizing the conversion terms most beneficial to the investor, the
     Company has recorded in the accompanying financial statements a
     dividend of $1,060,718 which represents a discount of 9%, which is
     available to the investor on or before 120 days of closing. A 3%
     discount of $164,002 will be amortized as a dividend over 180 days. 
     In connection with the issuance of the preferred stock described in
     MOU2, the Company also recorded the issuance to the investor of a
     warrant to purchase up to 200,000 shares of common stock at any time
     prior to October 24, 2000, at the exercise price of $7.18 per share. 
     In connection with the issuance of that warrant, the Company recorded
     the fair value of the warrant, totaling $600,000, as a dividend.  The
     fair value of such warrant was determined as of October 24, 1997 using
     the Black-Scholes pricing model assuming the following: Dividend yield
     0.00%; expected volatility 65%; risk free interest rate of 5.8% and
     expected life to exercise of 3 years.  Additionally, the Company has
     entered into a registration rights agreement with the investor under
     which the Company is obligated to take steps to register the common
     stock issuable upon conversion of the preferred stock 


                                       10
<PAGE>
                           fonix (TM) corporation
                       [A Development Stage Company]
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              [Unaudited]

     and exercise of the warrant.  The Company has covenanted to reserve
     out of its authorized and unissued shares of common stock no less than
     that number of shares that would be issuable upon the conversion of
     the preferred stock and any dividends then payable on the preferred
     stock and the exercise of the warrant. Subsequent to September 30,
     1997, the Company received the subscription anticipated by the MOU2
     and $3,750,000 as consideration for the 187,500 shares of Series C
     Preferred Stock. 
     
     Stock Options and Warrants - On March 10, 1997, the Company's board of
     directors approved a stock option plan for directors, employees and
     other persons acting on behalf of the Company, under which the
     aggregate number of shares available for issuance is 7,500,000.  The
     term of options granted under the plan is ten years from the date of
     grant. 

     In April 1996, the directors approved a directors' stock option plan,
     under which the aggregate number of shares available for issuance is
     5,400,000.  The shareholders of the Company approved the plan at their
     annual meeting in July 1996. The plan is administered by a committee
     consisting of two or more directors of the Company.  The plan provides
     that each director shall receive options to purchase 200,000 shares of
     common stock for services rendered as a director during each entire
     calendar year or portion of a calendar year in excess of six months. 
     The exercise price of such options is the closing market price of the
     stock on the date the options are granted.  The option term is ten
     years from the date of grant.
     
     In April 1996, the directors approved an employee stock option plan
     under which the aggregate number of shares available for issuance is
     900,000 shares. The exercise price of such options is the closing
     market price of the stock on the date the options are granted.  The
     term of the plan is 10 years and options are subject to a three year
     vesting schedule, pursuant to which one-third of the total number of
     options granted may be exercised each year.

     A summary of options granted under the Company's various stock option
     plans for the nine months ended September 30, 1997 is presented below:
<TABLE>
<CAPTION>

                                                                                         Wt. Ave.
                                                                         Stock           Exercise
                                                                        Options            Price
                                                                     --------------    --------------
            <S>                                                      <C>               <C>
          
            Total options outstanding at beginning of period           4,626,000        $     4.06   
                Granted                                                3,555,000              6.52   
                Exercised                                                (15,000)             2.97     
                Forfeited                                                   -                  -       
                Canceled                                                ( 35,000)             6.23   
                                                                     --------------    --------------
                   Total options outstanding at end of period          8,131,000        $     5.14   
                                                                     ==============    ==============
                   Total options exercisable at end of period          3,589,337        $     4.32
                                                                     ==============    ==============
</TABLE>

                                       11
<PAGE>
                            fonix (TM) corporation
                       [A Development Stage Company]
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              [Unaudited]

     A summary of options outstanding under the Company's various stock
     option plans at September 30, 1997 is presented below:
<TABLE>
<CAPTION>

                                       Options Outstanding                   Options Exercisable
                           ----------------------------------------      ----------------------------
                                            Weighted                    
                                             Average       Weighted                         Weighted
            Range of                        Remaining       Average                          Average
            Exercise         Number        Contractual      Exercise        Number           Exercise
             Prices        Outstanding        Life           Price       Exercisable          Price
         --------------   -------------   -------------   ------------   --------------    ------------
         <S>              <C>             <C>             <C>            <C>               <C>                    
          $2.97 - 3.66       140,000       8.5 years       $   3.61          60,669         $    3.61  
           4.06            4,400,000       8.6 years           4.06       3,200,000              4.06  
           5.00 - 6.50     3,271,000       9.7 years           6.45          25,334              6.45  
           7.13 - 9.31       320,000       9.4 years           7.17         303,334              7.17  
         --------------   -------------   -------------   ------------   --------------    ------------
          $2.97 - 9.31     8,131,000       9.1 years       $   5.14       3,589,337         $    4.32  
         ==============   =============   =============   ============   ==============    ============
</TABLE>

     A summary of warrants granted by the Company during the nine months
     ended September 30, 1997 is presented below:
<TABLE>
<CAPTION>

                                                                                         Weighted
                                                                                          Average
                                                                                         Exercise
                                                                     Shares                Price
                                                                ----------------      --------------
            <S>                                                 <C>                   <C>
            Total outstanding at beginning of period                 600,000             $    1.63  
                   Granted                                           250,000                  8.28  
                   Exercised                                        (250,000)                 1.40  
                   Forfeited                                            -                      -       
                   Canceled                                             -                      - 
                                                                ----------------      --------------
                      Total outstanding at end of period             600,000             $    4.50
                                                                ================      ==============
</TABLE>

     A summary of warrants outstanding at September 30, 1997 is presented
     below:
<TABLE>
<CAPTION>

                                      Warrants Outstanding                  Warrants Exercisable
                           ----------------------------------------      ----------------------------
                                            Weighted                    
                                             Average       Weighted                         Weighted
            Range of                        Remaining       Average                          Average
            Exercise         Number        Contractual      Exercise        Number           Exercise
             Prices        Outstanding        Life           Price       Exercisable          Price
         --------------   -------------   -------------   ------------   --------------    ------------
         <S>              <C>             <C>             <C>            <C>               <C>
           $ 0.50           130,000        0.8 years         $  0.50          130,000        $   0.50
             2.00           120,000        0.5 years            2.00          120,000            2.00
             3.24           100,000        0.5 years            3.24          100,000            3.24  
             8.28           250,000        4.7 years            8.28          250,000            8.28  
         --------------   -------------   -------------   ------------   --------------    ------------
           $0.50 - 8.28     600,000        2.3 years         $  4.50          600,00 0       $   4.50  
         ==============   =============   =============   ============   ==============    ============
</TABLE>

                                      12
<PAGE>
                           fonix (TM) corporation
                       [A Development Stage Company]
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              [Unaudited]

8.   RELATED PARTY TRANSACTIONS

     Related party transactions with a company owned by the majority
     shareholders not otherwise disclosed for the nine months ended
     September 30, 1997 were as follows:

     
        Expenses:          
            Base rent expense              $ 57,900       
          
        Payables:          
            Accounts payable               $  5,772

     The Company rents office space under a month-to-month lease from a
     company owned by three individuals who are each executive officers,
     directors and 10% beneficial owners of the Company.  The lease to the
     company owned by these individuals is guaranteed by them.

     At September 30, 1997, the Company has a note payable to a company
     owned by three individuals who are each executive officers, directors
     and 10% beneficial owners of the Company in the amount of $760,000. 
     This note is payable on demand and bears interest at 12%.  Subsequent
     to September 30, 1997, the balance due under the note payable was
     reduced to $189,000.

     During 1996, the disinterested members of the Company's Board of
     Directors authorized the Company to reimburse certain officers for all
     taxes payable by the officers in conjunction with the exercise of
     3,700,000 warrants by a company owned by the officers.  The warrants
     were exercised in 1995.  The total amount to be reimbursed to these
     officers is approximately $2,500,000.  As of September 30, 1997, the
     officers had drawn $2,099,007 of the authorized reimbursements,
     leaving a disbursable balance of $400,993.

9.   RESEARCH AND DEVELOPMENT

     In October 1993, the Company entered into an agreement with
     Synergetics, Inc., a research and development entity, whereby
     Synergetics was to develop certain technologies related to the
     Company's automated speech recognition technology ("ASRT"). The
     president of the Company is one of seven members of the board of
     directors of Synergetics, and three executive officers, directors and
     10% beneficial owners of the Company own less than five percent of the
     common stock of Synergetics.  Under the terms of the Synergetics
     Agreement, as subsequently modified,  the Company acquired
     intellectual property rights, technologies and technology rights that
     were developed by Synergetics. The Company agreed to provide all
     funding necessary for Synergetics to develop commercially viable
     technologies. There is no minimum requirement or maximum limit with
     respect to the amount of the funding to be provided by the Company. 
     However, under the terms of the Synergetics Agreement the Company is
     obligated to use its best efforts in raising the necessary funding for
     the engineering, development and marketing of the ASRT.  As part of
     the Synergetics Agreement, the Company agreed to pay Synergetics a
     royalty of 10% of gross revenues from sales of its ASRT.  The Company
     has not yet licensed or sold 

                                      13
<PAGE>
                           fonix (TM) corporation
                       [A Development Stage Company]
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              [Unaudited]

     its technologies, and consequently, has not made any royalty payments. 
     Under the terms of the Synergetics Agreement, the Company paid to
     Synergetics $498,992 and $2,104,467 for the three and nine months
     ended September 30, 1997, for research and development efforts.   

     Until March 1997, Synergetics had compensated its engineers,
     employees, members of its development team, and other financial
     backers, in part, with the issuance of "Project Shares" granting the
     holders of such shares the right, within limits, to share pro rata in
     future royalty payments.  In addition to issuance of Project Shares,
     Synergetics had made loans and advances to some members of its project
     team on a non-recourse basis.  Repayment of the Advances was secured
     by future disbursements under the Project Shares.

     On March 13, 1997, the Company and Synergetics reached an agreement in
     principle to modify the Synergetics Agreement with regard to the
     development and assignment of the Company's ASRT. 

     The Synergetics Agreement is to be modified as follows:

     *    The rights and obligations of Synergetics under the Agreement,
          including the royalty, will be assigned to a newly created
          wholly-owned subsidiary of the Company, fonix Acquisition
          ("Acquisition");

     *    Acquisition will also assume the obligations of Synergetics to
          all holders of Project Shares;

     *    The Company and Acquisition will release Synergetics from any
          further obligation or duty under the Synergetics Agreements;
          
     *    In consideration for the assignment of the rights to the royalty
          by Synergetics to Acquisition, the Company will issue warrants
          to Synergetics and the holders of Project Shares to acquire, in
          the aggregate, up to 4,800,000 shares of the Company's common
          stock at an exercise price of $10.00 per share (the Warrants). 
          A holder of Project Shares will be entitled to receive Warrants
          to purchase 800 shares of the Company's common stock for each
          Project Share held; provided, however, that the number of
          Warrants to be issued will be reduced by the amount of one
          Warrant for each $37.50 in Advances;

     *    The Warrants will become exercisable subject to progress made in
          further development of the ASRT Technology and the first to
          occur of (i) a minimum daily closing bid price for shares of the
          Company's common stock of $37.50 for a period of at least 15
          consecutive trading days, or (ii) thirty months from the date
          the Warrants are issued.  The exercise date shall be accelerated
          upon certain business combinations or reorganizations, such as a
          merger, involving the Company.  The terms relating to
          development of the ASRT Technology will be subject to a
          confidentiality and non-disclosure agreement and covenants;

                                    14
<PAGE>
                           fonix (TM) corporation
                       [A Development Stage Company]
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              [Unaudited]

     *    In consideration of the assumption by Acquisition of the
          obligations of Synergetics, the release of Synergetics from its
          further duties under the Synergetics Agreements, and the
          issuance of the Warrants to Synergetics and holders of Project
          Shares, the royalty and Project Shares tendered in exchange for
          Warrants will be canceled;

     *    Effective March 1997, the Company employed certain former
          members of the Synergetics project team as employees of the
          Company on terms and conditions approximately equivalent to the
          terms and conditions of their prior employment with Synergetics,
          and including the right to participate in the Company's employee
          stock option plans; and

     *    The Company engaged the founder and principal stockholder of
          Synergetics as a full-time consultant to assist with the further
          development of the ASRT.

     The Company and Synergetics have acknowledged the consummation of the
     transactions described above will require, among other things,
     execution of definitive agreements and compliance with applicable
     federal and state laws, including securities laws.  Those agreements
     will include standard terms and provisions that are typical of such
     transactions, including mutual releases and indemnification covenants. 
     Synergetics has other business interests and activities and will
     continue to conduct its business in the usual course following the
     closing.  The Company presently is in the process of preparing the
     documentation in connection with the modification of the Synergetics
     Agreement.

     The U.S. Patent and Trademark Office issued the initial patent to the
     Company describing 36 claims on June 17, 1997. 

     The Company has incurred total research and development costs of
     $1,650,371 and $4,715,650 for the three and nine months ended
     September 30, 1997.

10.  INCOME TAXES

     At September 30, 1997, net deferred tax assets, before considering the
     valuation allowance, totaled approximately $12,800,000.  The amount of
     and ultimate realization of the benefits from the deferred tax assets
     for income tax purposes is dependent, in part, upon the tax laws then
     in effect, the Company's future earnings, and other future events, the
     effects of which cannot presently be determined. Because of the
     uncertainty surrounding the realization of the loss carryforwards the
     Company has established a valuation allowance for all net deferred tax
     assets.  Accordingly, because of recurring losses and the valuation
     allowance, there is no provision for income taxes in the accompanying
     statements of operations.  The net change in the valuation allowance
     was approximately $2,200,000 and $5,000,000 for the three and nine
     months ended September 30, 1997.  The Company has available at
     September 30, 1997, unused federal operating loss carryforwards of
     approximately $30,600,000 and unused state operating loss
     carryforwards of approximately 

                                    15
<PAGE>
                           fonix (TM) corporation
                       [A Development Stage Company]
            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                              [Unaudited]

     $31,400,000, which may be applied against future taxable income and
     which expire in various years beginning in 2008 through 2011.

11.  COMMITMENTS AND CONTINGENCIES

     Employment Agreements - On November 1, 1996, the Company entered into
     three employment contracts with three executive officers which expire
     on December 31, 2001.  The minimum salary payments required on these
     contracts are as follows:

       Year ending December 31:     
                1997                  $       787,500  
                1998                        1,025,000  
                1999                        1,337,500  
                2000                        1,750,000  
                2001                        1,875,000  
                                      ----------------
                  Total               $     6,775,000  
                                      ================

     Litigation - On February 10, 1997 an action (the "Palomba Action") was
     filed against the Company and six of its directors.  The Palomba
     Action is a derivative action seeking relief on behalf of all
     shareholders for the benefit of the Company.  The Palomba Action
     alleges that certain employee directors caused the Company to engage
     in a series of loan transactions with K.L.S. Enviro Resources, Inc.
     and thereafter appropriated for themselves certain corporate
     opportunities resulting from such loan transactions.  A settlement
     agreement in principle was reached prior to service of the complaint
     and is currently being documented.  The settlement agreement will be
     subject to the approval of the court and will not result in any
     expense to the Company except incidental attorneys fees.  The terms of
     the settlement are confidential until notice is given to shareholders
     under direction of the court.  Because of certain contingencies, it is
     not presently possible to predict the amount of benefit, if any, the
     Company may realize under the settlement.

     Lease Agreement - The Company has a long-term operating lease
     agreement for its Draper, Utah research and office facility with an
     unrelated party.  Future aggregate minimum obligations under this
     operating lease are as follows:

              Years ending December 31:     
                        1997               $       340,672  
                        1998                       340,672  
                        1999                       340,672  
                        2000                       340,672  
                        2001                       340,672  
                        Thereafter                 958,549  
                                            ----------------
                          Total             $    2,661,909 
                                            ================ 

                                    16
<PAGE>
Item 2.  Management's Discussion and Analysis of Financial Condition and
         Results of Operation

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 BELOW IN THE SECTION ENTITLED "FACTORS AFFECTING FUTURE OPERATING
RESULTS."

Overview

     fonix is a development-stage company engaged in scientific research
and development of proprietary automatic speech recognition and related
technologies ("ASRT") comprised of components which may be licensed in whole
or in part to third parties.  The Company has completed the core
technologies related to the ASRT such that they are available for
third-party licensing and co-development.  The Company is presently engaged
in discussions with potential licensees and co-developers.  However, the
Company has to date received no revenues from operations, including
licenses, and there can be no assurance that revenues from operations will
be received in the future.  

     The Company's primary development objective is to further develop,
refine and enhance the main components of its ASRT and certain supplemental
technologies.  The Company's initial marketing direction is to focus on
licensing its ASRT to third parties and co-developers.  These licenses will
be made broadly available to many segments of the computer industry,
including  application software, operating systems, computers and
microprocessor chips, and research and development entities worldwide,
including academia, government, industry and commercial speech product
developers who may want to take advantage of the Company's ASRT or related
technologies in their existing products.  The Company anticipates that it
will sell or license its ASRT or related technologies on terms advantageous
to the Company, and that run-time product license royalty rates will vary
according to applications, sales volumes, and end-user pricing of products
using the ASRT.  The Company may reserve exclusive rights in some fields of
use for the internal development of high value end-user products and
applications. 

Results of Operations

Research and Development 

     The Company's scientific research and development activities
historically have been conducted by an unaffiliated third party,
Synergetics, Inc.  pursuant to product development and assignment contracts
between the Company and Synergetics.  Under that arrangement, Synergetics
provided personnel and facilities, and the Company financed such scientific
research and development activities on an as-required basis.  There was no
minimum requirement or maximum limit with respect to the amount of funding
the Company was obligated to provide to Synergetics under the Agreement, and
the Company was obligated to use its best efforts in raising all of the
necessary funding for the development of the ASRT.  The amounts of payments
to Synergetics pursuant to the Agreement were determined as Synergetics
submitted weekly pre-authorized work orders and budgets, which were then
reviewed and approved by the Company.  All funds paid to Synergetics have
been accounted for by the Company as research and development expense. 
Moreover, under the Agreement, the Company, if and when the Company began
receiving revenue from sales of the ASRT or products 


                                    17
<PAGE>
incorporating the ASRT, was obligated to pay a royalty of 10% of such
revenues to Synergetics.  On March 13, 1997, the Company and Synergetics
reached an agreement in principle to modify the Synergetics Agreement ( the
"Modification Terms") with regard to the development and assignment of the
Company's ASRT.  Under the Modification Terms, and further assuming that the
definitive agreements relating thereto are executed and certain other
preconditions are satisfied, of which there can be no assurance, the Company
will no longer have any obligation to pay to Synergetics the Royalty or any
percentage of the revenues received from entering into licensing and/or co-
development agreements or otherwise from the manufacture of products
incorporating the ASRT, if and when the Company generates revenue.  The
Company does not expect there to be a material change to the overall amount
of research and development spending as a result of the modification of the
Synergetics Agreement.

     Because the Company has not yet licensed its ASRT, the Company has not
received any revenues from operations.  During the three months ended
September 30, 1997 the Company incurred research and development expenses of
$1,650,371, an increase of $423,812 or approximately 35 percent over the
three months ended September 30, 1996.  This increase is due in part to
increases in research and development personnel.  The Company anticipates
similar or increased research and development costs as it expands and
continues to develop and market its technologies.   

Development Losses

     General and administrative expenses were $1,997,669 and $595,717,
respectively, for the three months ended September 30, 1997 and September
30, 1996.  This is an increase of approximately 235% over the three months
ended September 30, 1996.  This increase over the comparable period was due
primarily to increases in salaries, rents, legal and accounting fees,
outside services and an accrued fee of $586,464 payable to certain officers
for taxes payable by the officers in conjunction with the exercise of
3,700,000 warrants in 1995 by a company owned by the officers (see note 8). 
Due to the lack of revenues and these general and administrative and
research and development expenses, the Company has incurred losses from
operations of $3,648,040 and $1,822,276 for the three months ended September
30, 1997 and 1996, respectively.  Net expense from other income and expenses
was $1,417,879 for the three months ended September 30, 1997, an increase in
net expense of $1,545,246 over the three months ended September 30, 1996. 
This increase was due primarily to financing costs associated with the
issuance of convertible debentures, convertible preferred stock, warrants
and common stock and the Company drawing on its line of credit for internal
operations, investing smaller amounts of cash reserves, decreasing interest
income and increasing interest expense.  At September 30, 1997, the Company
had an accumulated deficit of $35,357,516 and stockholders' equity of
$3,956,963.  The Company anticipates that its investment in ongoing
scientific research and development of the ASRT and related artificial
intelligence and compression/decompression technologies will continue at
present or increased levels for at least the remainder of fiscal 1997. 

Liquidity and Capital Resources

     The Company's current assets exceeded its current liabilities by
$2,112,028 at September 30, 1997 and current assets exceeded current
liabilities by $4,906,520 at December 31, 1996.  The current ratio of assets
to liabilities was 1.10 at September 30, 1997 as compared with 1.26 at
December 31, 1996.  Current assets increased by $201,069 to $24,168,670 from
December 31, 1996 to September 30, 1997.  Current liabilities increased by
$2,995,561 to $22,056,642 during the same period.  The decrease in working
capital over this period is primarily attributable to the Company's use of
its cash reserves to support increased operational 

                                  18
<PAGE>
expenses during the nine months ended September 30, 1997.  Total assets were
$26,013,605 at September 30, 1997 as compared to $25,331,270 at December 31,
1996. 

     From its inception, the Company's principal source of operating
capital has been private and other exempt sales of the Company's equity
securities.   Private and other exempt sales of the Company's equity
securities resulted in net cash proceeds of $425,000 for the nine months
ended September 30, 1997.  During the three months ended September 30, 1997
the Company recorded a subscription receivable for $44,500 for common stock
and $3,750,000 for the issuance of convertible preferred stock pursuant to a
Memorandum of Understanding ( the "MOU2") under which an unrelated
investment entity agreed to subscribe for 187,500 shares of convertible
preferred stock for the purchase price of $3,750,000.  The cash proceeds
were received subsequent to September 30, 1997.  

     In June 1997, the Company entered into a Convertible Debenture
Purchase Agreement (the "Agreement") whereby an unrelated investment entity
agreed to purchase up to an aggregate principal amount of $10,000,000 of the
Company's Series B 5% Convertible Debentures.  The debentures were due June
18, 2007, bore interest at 5% and were convertible into shares of the
Company's common stock at anytime after issuance at the holder's option. 
Under the terms of the Agreement, the debentures were to be purchased in
three installments.  The first payment of $3,000,000 was made to the Company
on June 18, 1997.  The second and third payments of $3,000,000 and
$4,000,000, respectively, were to be paid to the Company upon written
notice, provided that the Company's market capitalization was then in excess
of $200,000,000 and other conditions were met.  The debentures were
convertible into shares of the Company's common stock at the lesser of $6.81
or the average of the per share market value for the five trading days
immediately preceding the conversion date multiplied by 90% for any
conversion on or prior to the 120th day after the original issue date and
87.5% for any conversion thereafter.  Utilizing the conversion terms most
beneficial to the investor, the Company recorded a prepaid financing cost of
approximately $427,900.  This amount represents the maximum potential
discount of 12.5%, which was available to the investor after 120 days,
applied to the market price on the date of issuance of $6.81 per share. 
This amount was being amortized as additional interest expense over the 120
day period commencing June 18, 1997.  Upon the conversion of any of the
debentures during the 120 days, an allocable portion of the prepaid
financing costs was expensed. As part of the same transaction, the Company
also issued to the investor a warrant to purchase up to 250,000 shares of
common stock at any time prior to June 18, 2002, at the exercise price of
$8.28 per share.  In connection with the issuance of these warrants, the
Company recorded the fair value of the warrants, totaling $897,750 as a
charge to interest expense.  The fair value of such warrants was determined
as of the date of grant using the Black-Scholes pricing model assuming the
following: Dividend yield 0.00%; expected volatility 65%; risk free interest
rate of 5.9% and expected life to exercise of 5 years.  Prior to  September
30, 1997 $850,000 face value of the Series B 5% Convertible Debenture was
converted into 145,747 shares of common stock. Pursuant to a memorandum of
understanding between the Company and the investor dated as of September 30,
1997 (the "MOU") the parties agreed to modify the Agreement to convert all
then outstanding debentures in the amount of $2,150,000 into 107,500 shares
of Series B Convertible Preferred Stock, convertible into common shares
under the same terms as the debentures.  In connection with the conversion
of the convertible debentures to convertible preferred stock set forth in
the MOU, the Company recorded all unamortized prepaid financing costs as an
extra-ordinary item, loss on extinguishment of debt.  Also in connection
with this modification, the Company  agreed to issue an additional warrant
to purchase up to 175,000 shares of common stock at any time prior to
October 24, 2002, at the exercise price of $7.48 per share.  In connection
with the issuance of that warrant, the Company recorded the fair value of
the warrant, totaling $661,850 (representing an additional loss on
extinguishment of debt) as an extraordinary item which was determined as of
the date of the grant using the Black-Scholes pricing model assuming the
following: Dividend yield 0.00%; expected volatility 65%; risk free interest
rate of 5.8% and 


                                    19
<PAGE>
expected life to exercise of 5 years.  Additionally, the Company entered
into an amended and restated registration rights agreement with the investor
under which the Company is obligated to take steps to register the common
stock issuable upon conversion of the preferred stock and exercise of the
warrants.  The Company covenanted to reserve out of its authorized and
unissued shares of common stock no less than that number of shares that
would be issuable upon the conversion of the preferred stock and any
dividends then payable in stock on the preferred stock and the exercise of
the warrant.  Prior to  September 30, 1997 $850,000 face value of the Series
B 5% Convertible Debenture was converted into 145,747 shares of common
stock.  Under the MOU, the Company agreed that it would convert the
remaining $2,150,000 balance into 107,500 shares of convertible preferred
stock effective as of September 30, 1997.  Prior to the actual issuance of
such convertible preferred stock, however, the investor converted the
balance of $2,150,000 into 431,619 shares of common stock.  Also, subsequent
to September 30, 1997, the Company received a second payment in the amount
of $2,500,000 in exchange for 125,000 shares of preferred stock. 92,500 of
these preferred shares and dividends earned thereon have been converted into
338,486 shares of common stock.  

     Effective September 30, 1997 the Company entered into a Memorandum of
Understanding ("MOU2") with an unrelated investment entity whereby that
entity agreed to subscribe for the purchase of 187,500 shares of the
Company's Series C Convertible Preferred Stock for a purchase price of
$3,750,000.  Dividends accrue on the stated value of preferred stock at a
rate of 5% per annum, are payable quarterly in cash or common stock at the
option of the Company and are convertible into shares of the Company's
common stock at anytime after issuance at the holder's option.  The
preferred stock, together with dividends accrued thereon, may be converted
into shares of the Company's common stock at the lesser of $5.98 or  the
average of the five lowest closing bid prices for the 15 trading days
preceding the date of any conversion notice multiplied by 91% for any
conversion on or prior to the 120th day after the original issue date, 90%
for any conversion between 121 and 180 days and 88% for any conversion
thereafter.  Utilizing the conversion terms most beneficial to the investor,
the Company has recorded in the accompanying financial statements a dividend
of $1,060,718 which represents a discount of 9%, which is available to the
investor on or before 120 days of closing. A 3% discount of $164,002 will be
amortized as a dividend over 180 days.  In connection with the issuance of
the preferred stock described in MOU2, the Company also recorded the
issuance to the investor of a warrant to purchase up to 200,000 shares of
common stock at any time prior to October 24, 2000, at the exercise price of
$7.18 per share.  In connection with the issuance of that warrant, the
Company recorded the fair value of the warrant, totaling $600,000, as a
dividend.  The fair value of such warrant was determined as of October 24,
1997 using the Black-Scholes pricing model assuming the following: Dividend
yield 0.00%; expected volatility 65%; risk free interest rate of 5.8% and
expected life to exercise of 3 years.  Additionally, the Company has entered
into a registration rights agreement with the investor under which the
Company is obligated to take steps to register the common stock issuable
upon conversion of the preferred stock and exercise of the warrant.  The
Company has covenanted to reserve out of its authorized and unissued shares
of common stock no less than that number of shares that would be issuable
upon the conversion of the preferred stock and any dividends then payable on
the preferred stock and the exercise of the warrant. Subsequent to September
30, 1997, the Company received the subscription anticipated by the MOU2 and
$3,700,000 as consideration for the 187,500 shares of Series C Preferred
Stock. 

     Although the Company presently anticipates that it will enter into a
third party license or licenses or co-development agreement or agreements
for its ASRT by the end of fiscal 1997, there can be no assurance that the
Company will be able to license the ASRT within that time frame.  Even
assuming that the Company is able to begin licensing the ASRT during 1997,
the Company may not receive revenues from operations until 1998, if at all. 
Accordingly, the Company expects to incur significant losses at least
through the end of fiscal 1997 and until such time as it is able to enter
into substantial licensing and co-development agreements and actually
receive substantial revenues from such arrangements, of which there can be
no assurance. 


                                       20
<PAGE>
     The Company has an established relationship with a major regional
federally insured financial institution pursuant to which the Company has
entered into an agreement allowing it to borrow against its own funds on
deposit with the institution.  As of December 31, 1996, the Company had
funds on deposit of $20,000,000, and the Company owed $16,377,358 to the
institution.  As of September 30, 1997, the Company had funds on deposit of
$20,000,000, and the Company owed the institution $19,729,995, which
obligation matured on October 29, 1997.  The relationship with the
institution is re-negotiated quarterly to enhance the earning potential to
the Company of that deposit.  Subsequently, the Company and the institution
agreed to extend the term of the borrowing relationship for an additional
six-month term on comparable competitive terms.  The rate of interest paid
by the institution for the Company's funds on deposit at the institution and
the interest rate paid to the Company by the institution is a net difference
of 1%.  Interest income and expense is payable monthly and the principal
amount is payable in full at maturity. 

     Presently, the Company anticipates that unless it receives substantial
licensing or other revenues prior to the end of fiscal 1997 it will need to
raise additional funds to be able to satisfy its cash requirements during
the next twelve months. The scientific research and development, corporate
operations and marketing expenses will continue to require additional
capital.  Because the Company presently has no revenue from operations, the
Company intends to continue to rely primarily on financing through the sale
of its equity and debt securities to satisfy future capital requirements
until such time as the Company is able to enter into acceptable 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
acceptable third party licensing or co-development agreements.  Furthermore,
the issuance of equity securities or other securities which are or may
become convertible to the equity securities of the Company in connection
with such financing would result in dilution to the shareholders of the
Company which could be substantial.

     In connection with the Modification Terms, 55 employees of Synergetics
became full-time or part-time employees of the Company in March 1997. 
Taking account of these employees, the Company presently employs 82 persons
and has a need for approximately 15 additional scientific professionals and
10 additional technology asset managers.

     The Company has no plans to purchase any new plants or expand beyond
any existing facility.

Factors Affecting Future Operating Results

     Notwithstanding the Company's efforts and planning, any one or more of
several factors could delay, obstruct or otherwise hinder the Company's
ability to achieve its objectives or cause actual results of  operations to
materially differ from expected or anticipated results including, without
limitation, those which are expressed in forward-looking statements
contained in this Report.  Included among such factors could be those Risk
Factors described in the Company's reports on Form 10-KSB for the period
ending December 31, 1996, Form 10-Q for the period ending March 31, 1997,
and Form 10-Q for the period ending June 30, 1997 as well as the following:

Substantial and Continuing Losses; Accumulated Deficit.  

     Since commencing its business of developing its automatic speech
recognition technologies ("ASRT") and certain other proprietary
technologies, including data compression and neural network design
technologies (collectively the ASRT and such other related technologies are
referred to in this Report as the "Core Technologies"), the Company has had
no revenues from operations.  During each of the preceding three fiscal

                                     21
<PAGE>
years, the Company has sustained ongoing losses associated with its research
and development costs.  The Company incurred a net loss of $7,829,508 for
the year ended December 31, 1996 and a net loss applicable to common stock
of $15,515,709 for the nine months ended September 30, 1997.  The auditor's
report in the fiscal 1996 financial statements includes an explanatory
paragraph relating to the Company's ability to continue as a going concern. 
Losses of this magnitude are expected to continue for the near term and
until such time as the Company is able to complete licensing or
co-development arrangements with third parties which produce revenues
sufficient to offset losses associated with the Company's ongoing operating
expenses, and there can be no assurance that the Company will achieve
profitable operations or that profitable operations will be sustained if
achieved.   At December 31, 1996, the Company's accumulated deficit was
$19,841,807 and at September 30, 1997, the Company's accumulated deficit was
$35,357,516.  The Company anticipates incurring substantial research and
development expenses for the foreseeable future, which will require
substantial amounts of additional cash on an ongoing basis.  The Company
must continue to secure additional financing to complete its research and
development activities, and to seek and engage in negotiations with
potential strategic alliance partners and otherwise market its technology to
industry segments that can incorporate the Company's technologies into their
products.  The Company believes that the cash generated to date from its
financing activities and the Company's ability to raise cash in future
financing activities will be sufficient to satisfy its working capital
requirements through the next twelve-month period.  However, there can be no
assurance that this assumption will prove to be accurate or that events in
the future will not require the Company to obtain additional financing
sooner than presently anticipated or that financing will be available if and
when needed.  To the extent that the Company's future financing activities
involve the issuance of equity securities or securities convertible into
equity securities, additional and possibly substantial dilution to the
interests of the Company's stockholders will result.  Although the Company 
continues to  investigate  several  financing alternatives, including
strategic partnerships, private, debt and equity financing and other sources
in relation to its ongoing and research and development activities, there
can be no assurance that the current levels of funding or additional funding
will be available when needed, or if available will be on terms satisfactory
to the Company.  Failure to obtain additional financing could have a
material adverse effect on the Company, including possibly requiring it to
significantly curtail its operations.

Development Stage of Core Technologies.  

     While the Company generally is pleased with the progress made to date
with respect to the research and development of its Core Technologies,
currently there are no products incorporating the Core Technologies.  As a
development stage company, fonix intends to enter into licensing and
co-development arrangements or strategic alliances with third parties,
although no such relationships presently exist.  The Company presently
anticipates that any products incorporating the Company's Core Technologies
would be manufactured and marketed by such third party licensees and
co-development and strategic alliance partners.  There can be no assurance
that the Company will ever be able to license its Core Technologies or enter
into co-development or strategic alliance agreements such that the Core
Technologies or products based thereon will be commercially viable.  

Implementation of Business Strategy. 

     The Company's business strategy is to achieve revenues through
appropriate strategic alliances, co-development arrangements and license
agreements.  To date, the Company has not yet entered into any
revenue-generating license, co-development or strategic relationships.  The
Company's ability to implement its strategy fully over the long term, and
the ultimate success of this strategy, are subject to a broad range of
uncertainties and contingencies, many of which are beyond the Company's
control.  The Company may not be 


                                    22
<PAGE>
able to achieve the revenue it is seeking as a result of incompatibilities
between its Core Technologies and the needs of third-party developers and
manufacturers or an unwillingness of companies with existing voice
recognition products to integrate the Company's technologies.   In addition,
there can be no assurance that the Company will be able to enter into
revenue-generating licensing or co-development arrangements or to implement
strategic relationships, or, if entered into, that such strategic
relationships will in fact further the implementation of the Company's
business strategy.

Unproven Market; Risks of New Technology.  

     The market for speech recognition technologies is relatively new.  The
Company's Core Technologies are new and represent a significant departure
from technologies which have already found a degree of acceptance in the
nascent voice recognition marketplace. The financial performance of the
Company will depend, in part, on the future development, growth and ultimate
size of the market for voice recognition products generally, and products
incorporating the Company's Core Technologies specifically.  Products, if
any, incorporating the Company's Core Technologies will compete with more
conventional means of information processing (e.g., data entry or access by
keyboard or touch-tone phone).  The Company believes that there is a
substantial potential market for products incorporating speaker-
independent, natural language, continuous speech recognition technology with
vocabulary contextually sufficient to be useful for general purpose
consumer, commercial and industrial use, and capable of operating in real
time with acceptable levels of accuracy.  Nevertheless, there can be no
assurance that any market for the Company's Core Technologies or for
products incorporating the Company's Core Technologies will develop, or that
the Company's technology will find general acceptance in the marketplace, or
that sales of products incorporating the Core Technologies will be
profitable.  Accordingly, the Company is subject to all of the risks
inherent in developing and marketing new products based on new technology,
together with the risks associated with market acceptance of such
technology, technological obsolescence, inappropriate and/or illegal
intellectual property appropriation and inadequate funding to commence
and/or sustain operations.  Even if the Core Technologies are licensed and
products incorporating such technologies are manufactured and marketed, the
occurrence of warranty or product liability, or retraction of market
acceptance due to product failure, excess product returns or failure of the
products to meet market expectations could prevent the Company from
achieving or sustaining profitable operations.

Reliance on Strategic Partners.  

     The Company's strategy for commercialization of its Core Technologies
depends, in part, upon the formation of strategic alliances and licensing
arrangements, although the Company has not entered into any such
arrangements to date.  There can be no assurance that the Company will be
able to establish such strategic alliance or licensing arrangements, that
any such arrangements or licenses will be on terms favorable to the Company,
or that any such strategic alliances or licensing arrangements ultimately
will be successful.  Even if the Company were to enter into third party
licensing agreements, the extent of revenues to the Company resulting from
such agreements would depend on factors beyond the Company's control such as
the timing and extent of such licensee's manufacture of products
incorporating the Company's Core Technologies, the scope of the marketing
effort related to such products, the price of any product incorporating the
Company's Core Technologies, and competition from new or existing products.
Moreover, disputes may arise with respect to the ownership of rights to any
technology developed with strategic partners. These and other possible
disagreements between strategic partners and the Company could lead to
delays in the collaborative research, development or commercialization of
certain product candidates, or could require or result in litigation or


                                     23
<PAGE>
arbitration, which could be time consuming and expensive, and which could
have a material adverse effect on the Company's business, financial
condition and results of operations.

Nasdaq Stock Market Listing Requirements.

     The Company's Common Stock presently is listed on the Nasdaq SmallCap
Market under the symbol "FONX".  In order to maintain the continued listing
on such market, the Company, like all companies listed on the Nasdaq
SmallCap Market, is subject to certain minimum asset and capital and surplus
requirements; specifically, the Company's capital and surplus as indicated
on its financial statements prepared in accordance with generally accepted
accounting principles must be at least $1,000,000, and the Company's total
assets must be at least $2,000,000.  Effective February 1998, companies with
securities listed on the Nasdaq SmallCap market will be able to satisfy
continued listing requirements by reference, among other factors, to such
companies' total market capitalization.  Nevertheless, until such rule
changes take effect, the Company will continue to be subject to the asset
and capital and surplus maintenance requirements referenced above.  If the
Company fails to meet such requirements, there can be no assurance that the
Company's Common Stock will not be delisted from the Nasdaq SmallCap Market. 
If delisted, the Company's management believes that the Common Stock would
continue to be traded in the over-the-counter market.  Nevertheless, in such
event, there can be no assurance that such delisting would not adversely
affect the prevailing market price of the Common Stock or the general
liquidity of an investment in the Company's Common Stock.

Competition and Technological Change.  

     The computer hardware and software industries into which the Core
Technologies would be incorporated are highly and intensely competitive.  In
particular, the speech recognition field and the computer voice and
communications industries in which products employing the Company's Core
Technologies would be incorporated are characterized by rapid technological
change.  Competition in the field of speech recognition is based largely on
technological superiority. The development of new technology or material
improvements to existing technologies by the Company's competitors may
render the Company's technology obsolete.  Accordingly, the success of the
Company will depend upon its ability to continually enhance its Core
Technologies to keep pace with or ahead of technological developments and to
address the changing needs of the marketplace. Although the Company expects
to continue to devote significant resources to research and development
activities, there can be no assurance that these activities will allow the
Company's Core Technologies to successfully be incorporated into marketable
products or to keep pace with changing demands and needs of the marketplace. 
In addition, there can be no assurance that the introduction of products or
technological developments by others will not have a material adverse effect
on the Company's operations.  Although the Company believes that its Core
Technologies could beneficially be incorporated into most existing computer
speech recognition applications based on traditional Hidden Markov Models
("HMMs") technology, several companies already manufacture and market
computer speech recognition products against which products incorporating
the Core Technologies would compete.  Some, if not all, of those companies
have greater experience in manufacturing and marketing speech recognition
products, and many have far greater financial and other resources than the
Company and/or its potential licensees and co-developers, as well as broader
name-recognition, more-established technology reputations, and mature
distribution channels for their products.  One computer speech company,
Dragon Systems, Inc., has recently introduced a continuous speech dictation
product that could have the effect of desensitizing the market to new
dictation products and increasing the installed base of products
incorporating traditional voice recognition technologies.  Additionally, as
the market for automatic speech recognition expands and matures, the Company
expects many more entrants into this already competitive arena.  There can
be no assurance that the distinguishing characteristics of the Core


                                     24
<PAGE>
Technologies as presently completed and/or as may be enhanced in the future
and any products employing such technology will be sufficient to allow the
Company to successfully compete in the marketplace. 

Need for Additional Financing.  

     The development of the Company's Core Technologies has required that
fonix establish a substantial research and scientific infrastructure
consisting of teams of experts in, among others, the fields of computer
programming and design, electrical engineering and linguistics, as well as
the assembly of certain specialized equipment and developmental and
diagnostic software and hardware, some of which has been designed and built
exclusively by the Company.  The Company has consumed substantial amounts of
cash to date in developing this infrastructure and in developing and
refining its Core Technologies.  During the year ended December 31, 1996,
the Company incurred total research and development expenses in the amount
of $4,758,012.  During the nine months ended September 30, 1997, the Company
incurred total research and development expenses of $4,715,650.  The Company
anticipates that its research and development expenditures will continue at
present rates or increased rates for the foreseeable future.  Absent
revenues from co-development or licensing agreements, the Company believes
that existing cash and cash from anticipated financings will be required to
support the Company's operations for at least the next 12 months.  The
Company's future capital requirements will depend on many factors, including
further development of its Core Technologies, the Company's ability to enter
into strategic alliance, co-development and licensing arrangements, the
progress of the development, manufacturing and marketing efforts of the
Company's strategic partners, if any, the level of the Company's activities
relating to commercialization rights it may retain in its strategic alliance
arrangements, competing technological and market developments, and the costs
involved in enforcing patent claims and other intellectual property rights.  
When and as  substantial amounts of additional financing are required, the
Company does not believe it will be able to obtain such financing from
traditional commercial lenders.  Rather, the Company likely will have to
conduct additional sales of its equity and/or debt securities.  There can be
no assurance that such additional financing will be available if and when,
and in the amounts required, by the Company.  Moreover, even if such
financing is available if and when required, there can be no assurance that
such financing will be obtained on terms that are favorable to the Company,
and substantial and immediate dilution to existing stockholders likely would
result from any sales of equity securities or other securities convertible
into equity securities.  To the extent that the Company raises additional
funds through strategic alliance and licensing arrangements, the Company may
be required to relinquish rights to certain of its technologies, or to grant
licenses on terms that are not favorable to the Company, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.  In the event that adequate funds are
not available when and as needed, the Company's business would be adversely
affected.

Intellectual Property Protection.  

     On June 17, 1997, the United States Patent and Trademark Office issued
U.S. Patent No. 5,640,490 entitled "A User Independent, Real-time Speech
Recognition System and Method."   The patent has a 20-year life running from
the November 4, 1994 filing date, and has been assigned to the Company. 
However, there can be no assurance that such patent will be incontestable to
a user with prior rights.  The Company is unaware of any facts or
circumstances suggesting that the Core Technologies or the Company's
anticipated use thereof infringes or will infringe any third party
intellectual property rights.  Regardless of the foregoing, there can be no
assurance that the Core Technologies will not infringe upon third party
intellectual property rights, nor can there be any assurance that a third
party will not assert that the Company has infringed its intellectual
property rights, in which case the Company could be involved in protracted
and costly litigation which could seriously impede the Company's development
or otherwise adversely affect its operations.  Additionally, attempts may 


                                    25
<PAGE>
be made to copy or reverse engineer aspects of the Core Technologies, or to
obtain, use or exploit information or methods which the Company deems
proprietary.  Policing the use of the Core Technologies and perhaps
infringing technology is difficult and expensive. Litigation or other action
may be necessary in the future to protect the Company's proprietary rights
and to determine the validity and scope of the proprietary rights of others. 
Such litigation or proceedings could result in substantial costs and
diversions of resources and management's attention, and could have a
material adverse impact upon the Company's business, operating results and
financial condition.  In addition to patents, the Company relies on
proprietary technology that it closely guards as trade secrets. The Company
has required non-disclosure and confidentiality agreements to be executed by
its employees, potential licensees, and potential strategic alliance and
co-development partners, and the Company expects to continue this
requirement. However, there can be no assurance that such non-disclosure and
confidentiality agreements will be legally enforceable or sufficient to
maintain the secrecy of the Company's proprietary technology.  Moreover,
although the Company presently is seeking patent protection for certain
additional technologies, there can be no assurance that such patents will
issue or that the Company will be able to sufficiently protect any
technologies developed by it in the future.

Controlling Interest of Related Parties.  

     Thomas A. Murdock, a director, executive officer and founding
shareholder of the Company is the trustee of a voting trust into which is
deposited a majority of the Company's issued and outstanding common stock,
which effectively gives Mr. Murdock control of the Company.  The Company
believes that it will be controlled by Mr. Murdock, as the trustee of the
voting trust and one of its founding shareholders, for the foreseeable
future.

Lack of Diversification of the Company's Business.  

     The Company is not engaged in and does not intend to engage in any
business other than the further development and marketing of its Core
Technologies and related technologies.

Dependence on Key Personnel.  

     The Company is dependent on the knowledge, skill and expertise of
several key scientific employees and consultants, including but not limited
to C. Hal Hansen, Dale Lynn Shepherd, R. Brian Moncur, and Tony R. Martinez,
and its executive officers, Messrs. Studdert, Murdock and Dudley.  The loss
of any of such personnel could materially and adversely affect the Company's
future business efforts.  Moreover, although the Company has taken
reasonable steps to protect its intellectual property rights, if one or more
of the Company's key scientific employees or consultants resigns from the
Company to join a competitor, the loss of such personnel and the employment
of such personnel by a competitor could have a material adverse effect on
the Company.  In the event of loss of any of the Company's key employees or
consultants, there can be no assurance that the Company would be able to
prevent the unauthorized disclosure or use of its proprietary technology by
such former employees or consultants, although the Company's employees and
consultants have entered into confidentiality agreements with the Company.
The Company does not presently have any key man life insurance on any of its
employees.

Assets Consisting Primarily of Intangible Intellectual Property Rights.  

     The Company's assets consist primarily of intangible assets,
principally intellectual rights such as patents, trademarks and trade
secrets, the value of which will depend significantly upon the success of
the 


                                     26
<PAGE>
Company's development of the Core Technologies and its ability to enter into
licensing and co-development arrangements with third parties.  In the event
of default on indebtedness or liquidation of the Company, there can be no
assurance that the value of these assets will be sufficient to satisfy its
obligations. 

Risks Associated With Pending Litigation.  

     The Company has been named as a defendant in a shareholder derivative
action brought by a shareholder of the Company against certain directors of
the Company and a third party affiliated with certain of the
director-defendants.  Although the parties have reached, in principal, a
settlement agreement, as is discussed in more detail below, the complaint in
that action alleges that certain of the individual employee director
defendants wrongfully caused the Company to engage in a series of loan
transactions with K.L.S. Enviro Resources, Inc., a Nevada corporation
("KLSE"), and thereafter appropriated to themselves certain corporate
opportunities resulting from such loan transactions.  The Complaint further
alleges that the non-employee director defendants wrongfully acquiesced in
or ratified the conduct of the employee-directors, and that all of the
individual defendants breached their fiduciary duties to the Company.  The
Complaint seeks to compel an accounting for any alleged profits earned by
the employee director defendants, equitable relief in the form of an order
requiring certain of the employee director defendants to forfeit certain
securities of KLSE they allegedly acquired in breach of their fiduciary
duties to the Company, monetary damages in an unspecified amount, and costs
and legal fees.  After that action was filed but before process was served,
the Company commenced settlement negotiations with the plaintiff. A
settlement agreement in principal was reached by the parties.  Limited
discovery has been undertaken and documentation is being drafted to submit
to the court for approval.  Regardless of the outcome of the settlement or
the commencement of litigation proceedings if the settlement is not
consummated, the Company believes that the claims asserted against the
Company in this action are entirely without merit, and that the material
facts and circumstances surrounding the relationship between the Company and
KLSE have been fully disclosed in accordance with applicable laws and
regulations.  After consideration of the nature of the claims and the facts
relating to this action, the Company believes that the resolution of this
action will not have a material effect on the Company's business, financial
condition and results of operations; however, the results of this action,
including any potential settlement, are uncertain and there can be no
assurance to that effect.  At a minimum this action will result in some
diversion of management time and effort from the operations of the business.

                                PART II

Item 2.  Changes in Securities

     c.   Unregistered sales of equity securities during quarter (other
          than in reliance on Regulation S).

     Recent Sales of Unregistered Securities.  During the quarter ended
September 30, 1997, the Company issued equity securities that were not
registered under the Securities Act of 1933, as amended (the "Act"), other
than unregistered sales in reliance on Regulation S under the Act, as
follows:

     On July 31, 1997, the Company issued 87,496 shares of common stock to
a private unaffiliated investment entity upon that entity's conversion of
the principal amount of $500,000 of the Company's Series B 5% Convertible
Debentures.  The Company issued such shares without registration under the
Act in reliance on Section 4(2) of the Act and/or Regulation D.  Such shares
of common stock were issued as restricted securities and the certificates
representing such shares were stamped with a restrictive legend to prevent
any resale without registration under the Act or in compliance with an
exemption.


                                   27
<PAGE>
     On September 25, 1997, the Company issued 166,667 shares of its Series
A Preferred Stock to an affiliated investment entity upon that entity's
conversion of the principal amount of $500,000 of the Company's Series A
Convertible Subordinated Debentures.  The Series A Preferred stock is
convertible at any time at the option of the holder thereof, into 166,667
shares of the Company's common stock.  The Company issued such shares
without registration under the Act in reliance on Section 4(2) of the Act
and/or Regulation D.  Such shares of common stock were issued as restricted
securities and the certificates representing such shares were stamped with a
restrictive legend to prevent any resale without registration under the Act
or in compliance with an exemption.

     On September 26, 1997, the Company issued 58,249 shares of common
stock to a private unaffiliated investment entity upon that entity's
conversion of the principal amount of $350,000 of the Company's Series B 5%
Convertible Debentures.  The Company issued such shares without registration
under the Act in reliance on Section 4(2) of the Act and/or Regulation D,
although such shares were registered for resale as of the time of issuance
of such securities pursuant to a Registration Statement on Form S-3. 

Item 4.  Submission of Vote of Security Holders

     During the quarter ended September 30, 1997, no matter was submitted
for vote of the Company's shareholders.  However, pursuant to written
consent resolutions adopted by the owners of approximately 61 percent of the
issued and outstanding shares of the Company's common stock, and effective
on or about September 24, 1997, the Company's certificate of incorporation
was amended to:  (i) authorize the issuance of a new class of preferred
stock of the Company, par value $.0001 per share, and (ii) ratify the
actions of the board of directors of the Company in designating 166,667
shares of a new Series A Preferred Stock of the Company, for issuance to an
affiliated investment entity, in connection with the conversion of the
principal amount of $500,000 of the Company's Series A Subordinated
Convertible Debentures.  A report in the form of an Information Statement on
Schedule 14C was prepared and submitted to the record owners of the
Company's shareholders and was filed with the Securities and Exchange
Commission on September 3, 1997, which report is referenced pursuant to
Instruction 6 of Item 4 of Form 10-Q.

Item 6.  Exhibits and Reports on Form 8-K

a.   Regulation S-K Exhibits.      
 
     Exhibit
       No.     Description
    --------   ------------------------------------------------------------
  
     (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


                                   28
<PAGE>
     (3)(iv)   Certificate of Amendment of Certificate of Incorporation
               dated as of September 24, 1997, filed herewith.
  
     (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)    Description of the Company's common stock and other
               securities and specimen certificates representing such
               securities which are incorporated by reference from the
               Company's Registration Statement on Form S-18 dated as of
               September 12, 1989, as amended

     (4)(ii)   Certificate of Designation of Rights and Preferences of
               Series A Preferred Stock, filed with the Secretary of
               State of Delaware on September 24, 1997, filed herewith

     (4)(iii)  Certificate of Designation of Rights and Preferences of
               Series B Convertible Preferred Stock, filed with the
               Secretary of State of Delaware on October 27, 1997, filed
               herewith

     (4)(iv)   Certificate of Designation of Rights and Preferences of 5%
               Series C Convertible Preferred Stock, filed with the
               Secretary of State of Delaware on October 24, 1997, filed
               herewith
  
     (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


                                     29
<PAGE>
     (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) Convertible Debenture Purchase Agreement dated as of June
               18, 1997 between the Company and Southbrook International
               Investments, Ltd., incorporated by reference from
               Amendment No. 1 to the Quarterly Report on Form 10-Q for
               the period ended June 30, 1997

     (10)(viii)Amended and Restated Purchase Agreement effective as of
               September 30, 1997 and dated as of October 24, 1997 by and
               between the Company and Southbrook International
               Investments, Ltd., filed herewith.

     (10)(ix)  Convertible Preferred Stock Purchase Agreement effective
               as of September 30, 1997 and dated as of October 24, 1997
               by and among the Company and JNC Opportunity Fund Ltd. 
               and Diversified Strategies Fund, L.P., filed herewith.
  
     (27)      Financial Data Schedule, filed herewith.


                                   30
<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 14, 1997             /s/ Douglas L. Rex
      ------------------           ---------------------------------
                                   Douglas L. Rex, Chief Financial Officer