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

                                   FORM 10-Q/A
                                 Amendment No. 3


[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 for the quarterly period ended June 30, 2002

[ ]  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.)

                         180 W. Election Road, Suite 200
                                Draper, UT 84020
          (Address of principal executive offices, including zip code)

                                 (801) 553-6600
                                 --------------
              (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 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 September 13, 2002, 484,475,556 shares of Class A voting common
stock, par value $0.0001 per share, were issued and outstanding.



<PAGE>



                                FONIX CORPORATION
                                    FORM 10-Q

                                EXPLANATORY NOTE

The purpose of this amendment to Fonix Corporation's Quarterly Report on Form
10-Q is to reflect the recognition of impairment losses relating to the
Company's speech software technology and its investment in Audium Corporation.
The unaudited Condensed Consolidated Financial Statements as of June 30, 2002,
have been restated as discussed in the notes to the accompanying unaudited
Condensed Consolidated Financial Statements.

This amendment does not reflect events occurring after the filing of the most
recent amendment to this Quarterly Report on September 30, 2002, or modify or
update those disclosures as presented in the original or amended Forms 10-Q,
except to reflect the restatement as described above, to clarify in Note 1 some
of the Company's significant accounting policies, and to describe certain
subsequent events in Note 10 to the unaudited Condensed Consolidated Financial
Statements.


                                TABLE OF CONTENTS

                         PART I - FINANCIAL INFORMATION
                                                                           Page


Item 1.    Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets - As of June 30, 2002
        and December 31, 2001                                                  2

Condensed Consolidated Statements of Operations and Comprehensive
Loss for the three months and six months ended June 30, 2002 and 2001          3

Condensed Consolidated Statements of Cash Flows for the three
months and six months ended June 30, 2002 and 2001                             4

Notes to Condensed Consolidated Financial Statements                           6

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                          15


                           PART II - OTHER INFORMATION

Item 1.    Legal Proceedings                                                  28

Item 2.    Changes in Securities                                              28

Item 3.    Quantitative and Qualitative Disclosures About Market Risk         28

Item 4.    Submission of Matters to a Vote of Security Holders                29

Item 5.    Other Matters - Change in Certifying Public Accountants            29

Item 6.    Exhibits and Reports on Form 8-K                                   30



                                        1

<PAGE>


                                Fonix Corporation
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

<TABLE>
<CAPTION>
ASSETS
                                                                                               June 30,        December 31,
                                                                                                2002               2001
                                                                                           ----------------  -----------------
Current assets:
<S>                                                                                        <C>               <C>
      Cash and cash equivalents                                                            $        38,913   $        201,401
      Subscriptions receivable                                                                           -            852,970
      Accounts receivable, net of allowance for doubtful accounts of $0                             70,632             32,210
      Other receivables                                                                             73,352             25,119
      Inventory                                                                                     28,080             37,154
      Prepaid expenses                                                                             169,764            120,270
                                                                                           ----------------  -----------------

           Total current assets                                                                    380,741          1,269,124

Property and equipment, net of accumulated depreciation of $1,491,553 and
        $1,314,960, respectively                                                                   811,490            903,159

Convertible note receivable                                                                      1,435,000            630,000

Investment in and note receivable from affiliate, net of unamortized discount of $68,655         1,502,774          1,696,869

Intangible assets, net of accumulated amortization of $222,985 and $145,522, respectively        1,268,057          1,345,520

Goodwill, net of accumulated amortization of $2,295,598, in 2002 and 2001                        2,631,304          2,631,304

Other assets                                                                                       359,199            123,052
                                                                                           ----------------  -----------------

           Total assets                                                                    $     8,388,565   $      8,599,028
                                                                                           ================  =================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Advance on equity line of credit                                                     $       182,676   $              -
      Note payable to affiliate, net of unamortized discount of $31,054                            968,946          1,484,753
      Note payable, net of unamortized discount of $12,102                                         397,898          1,239,755
      Notes payable - related parties                                                              435,933             77,625
      Accounts payable                                                                           1,664,292          1,085,711
      Accrued liabilities                                                                        2,622,858            961,299
      Accrued liabilities - related parties                                                      1,443,300          1,451,633
      Deferred revenues                                                                          1,134,792          1,049,849
      Other current liabilities                                                                     21,881             19,767
                                                                                           ----------------  -----------------

           Total current liabilities                                                             8,872,575          7,370,392
                                                                                           ----------------  -----------------

Commitments and contingencies (Notes 1, 3, 5, 6 and 10)

Stockholders' equity:
      Preferred stock, $.0001 par value; 50,000,000 shares authorized; Series A,
           convertible; 166,667 shares outstanding
                (aggregate liquidation preference of $6,055,012)                                   500,000            500,000
      Common stock, $.0001 par value; 800,000,000 shares authorized;
           Class A voting, 484,475,556 and 350,195,641 shares outstanding, respectively             48,448             35,020
           Class B non-voting, none outstanding
      Additional paid-in capital                                                               181,754,780        171,985,508
      Outstanding warrants to purchase Class A common stock                                      2,136,400          2,832,400
      Deferred consulting expenses                                                                  (5,833)           (17,777)
      Cumulative foreign currency translation adjustment                                           (25,396)             2,841
      Accumulated deficit                                                                     (184,892,409)      (174,109,356)
                                                                                           ----------------  -----------------

           Total stockholders' equity                                                             (484,010)         1,228,636
                                                                                           ----------------  -----------------

           Total liabilities and stockholders' equity                                      $     8,388,565   $      8,599,028
                                                                                           ================  =================
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       2

<PAGE>

                                Fonix Corporation
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                             AND COMPREHENSIVE LOSS
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                  Three Months Ended              Six Months Ended
                                                                       June 30,                       June 30,
                                                             ------------------------------  ----------------------------
                                                                 2002            2001            2002           2001
                                                             --------------  --------------  -------------  -------------

<S>                                                          <C>             <C>             <C>            <C>
Revenues                                                     $     679,197   $     107,568   $    977,981   $    240,281
Cost of revenues                                                   166,424         468,632        210,528        931,741
                                                             --------------  --------------  -------------  -------------

     Gross margin                                                  512,773        (361,064)       767,453       (691,460)
                                                             --------------  --------------  -------------  -------------

Expenses:
     Selling, general and administrative                         3,383,999       3,306,802      6,608,167      5,453,702
     Product development and research                            2,590,988       2,483,627      4,714,724      4,139,277
     Amortization of intangible assets                               7,650         151,026         15,300        302,053
                                                             --------------  --------------  -------------  -------------

         Total expenses                                          5,982,637       5,941,455     11,338,191      9,895,032
                                                             --------------  --------------  -------------  -------------

Loss from operations                                            (5,469,864)     (6,302,519)   (10,570,738)   (10,586,492)
                                                             --------------  --------------  -------------  -------------

Other income (expense):
     Interest income                                                68,386          19,276         96,321         57,524
     Interest expense                                              (47,759)        (66,096)      (105,508)       (68,988)
                                                             --------------  --------------  -------------  -------------

         Total other income (expense), net                          20,627         (46,820)        (9,187)       (11,464)
                                                             --------------  --------------  -------------  -------------

Loss before equity in net loss of affiliate                     (5,449,237)     (6,349,339)   (10,579,925)   (10,597,956)

Equity in net loss of affiliate                                    (89,177)       (158,969)      (203,129)      (158,969)
                                                             --------------  --------------  -------------  -------------

Net loss                                                        (5,538,414)     (6,508,308)   (10,783,054)   (10,756,925)

Other comprehensive loss - foreign currency translation            (27,365)         (2,048)       (28,237)        (2,048)
                                                             --------------  --------------  -------------  -------------

Comprehensive loss                                           $  (5,565,779)  $  (6,510,356)  $ (10,811,291) $ (10,758,973)
                                                             ==============  ==============  =============  =============


Basic and diluted net loss per common share                  $       (0.01)  $       (0.03)  $      (0.03)  $      (0.05)
                                                             ==============  ==============  =============  =============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       3

<PAGE>

                                Fonix Corporation
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

                Increase (Decrease) in Cash and Cash Equivalents


<TABLE>
<CAPTION>
                                                                                                         Six Months Ended
                                                                                                               June 30,
                                                                                                   ------------------------------
                                                                                                       2002            2001
                                                                                                   -------------   --------------
Cash flows from operating activities:
<S>                                                                                                <C>             <C>
      Net loss                                                                                     $ (10,783,054)  $ (10,756,925)
      Adjustments to reconcile net loss to net cash
        used in operating activities:
        Non-cash expense related to issuance of debentures, warrants, preferred and common stock              -           62,500
        Additional Compensation expense related to issue of stock options and common stock               11,944                -
        Accretion of discount on note receivable from affiliate                                          (9,036)          (3,628)
        Accretion of discount on note payable from affiliate                                             34,193           40,690
        Accretion of discount on note payable                                                            28,143                -
        Depreciation and amortization                                                                   257,973        1,430,243
        Equity in net loss of affiliate                                                                 203,129          158,969
        Changes in assets and liabilities:
           Accounts receivable                                                                          (38,422)          19,372
           Inventory                                                                                      9,074          (24,467)
           Prepaid expenses and other current assets                                                    (97,727)        (101,265)
           Funds held in escrow                                                                               -          151,006
           Other assets                                                                                (236,147)         (18,695)
           Accounts payable                                                                             578,584          291,897
           Accrued liabilities                                                                        1,661,559          515,054
           Accrued liabilities - related party                                                           (8,333)         (62,500)
           Other Current Liabilities                                                                     21,881                -
           Deferred revenues                                                                             84,943          422,101
           Cumulative foreign currency translation adjustment                                           (26,199)          (2,048)
                                                                                                   -------------   --------------

        Net cash used in operating activities                                                        (8,307,495)      (7,877,696)
                                                                                                   -------------   --------------

Cash flows from investing activities:
      Purchase of property and equipment                                                                (90,880)        (507,242)
      Issuance of notes receivable                                                                     (805,000)        (302,909)
      Investment in Affiliate                                                                                 -         (200,000)
      Proceeds from sale of Healthcare Solutions Group                                                        -        2,000,000
                                                                                                   -------------   --------------

        Net cash used in investing activities                                                          (895,880)         989,849
                                                                                                   -------------   --------------

Cash flows from financing activities:
      Proceeds of note payable to related parties                                                       358,308                -
      Principal payments on capital lease obligation                                                    (19,767)         (21,562)
      Proceeds from sale of Class A common stock, net                                                10,122,346        6,601,950
      Proceeds from exercise of stock options                                                                 -            9,801
      Payments on note payable to affiliate                                                            (550,000)        (200,000)
      Payments on note payable                                                                         (870,000)               -
                                                                                                   -------------   --------------

        Net cash provided by financing activities                                                     9,040,887        6,390,189
                                                                                                   -------------   --------------

Net increase in cash and cash equivalents                                                              (162,488)        (497,658)

Cash and cash equivalents at beginning of period                                                        201,401        1,413,627
                                                                                                   -------------   --------------

Cash and cash equivalents at end of period                                                         $     38,913    $     915,969
                                                                                                   =============   ==============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       4

<PAGE>


                                Fonix Corporation
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)




<TABLE>
<CAPTION>
                                                                                      Six Months Ended June 30,
                                                                                    ------------------------------
                                                                                        2002             2001
                                                                                    --------------   -------------
Supplemental disclosure of cash flow information:

<S>                                                                                 <C>              <C>
     Cash paid during the period for interest                                       $      79,547    $     43,384
</TABLE>

Supplemental Schedule of Non-cash Investing and Financing Activities:

     For the Six Months Ended June 30, 2002:

       Warrants for the purchase of 450,000 shares of Class A common stock,
valued at $696,000, expired.


     For the Six Months Ended June 30, 2001:

       Preferred stock dividends of $9,281 were accrued on Series D and Series F
preferred stock.

       164,500 shares of Series D preferred stock and related dividends of
          $320,949 were converted into 13,978,440 shares of Class A common
          stock.

       6,073 shares of Series F preferred stock and related dividends of $6,853
          were converted into 519,067 shares of Class A common stock.

       Warrants for the purchase of 250,000 shares of Class A common stock
          valued at $62,500 were issued in payment for a perpetual, nonexclusive
          technology license.

       A  non-interest bearing promissory note was issued in the amount of
          $2,600,000 to purchase 1,780,818 shares of Series A preferred stock of
          Audium Corporation.


     See accompanying notes to condensed consolidated financial statements.

                                       5

<PAGE>


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying unaudited condensed consolidated
financial statements of Fonix Corporation and subsidiaries (collectively, the
"Company" or "Fonix") have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the following disclosures
are adequate to make the information presented not misleading.

These condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) that, in the opinion of
management, are necessary to present fairly the financial position and results
of operations of the Company for the periods presented. The Company's business
strategy is not without risk, and readers of these condensed consolidated
financial statements should carefully consider the risks set forth under the
heading "Certain Significant Risk Factors" in the Company's 2001 Annual Report
on Form 10-K.

Operating results for the six months ended June 30, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. The Company suggests that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's 2001 Annual Report on Form 10-K.

Business Conditions - The Company's revenues increased $571,629 for the three
months ended June 30, 2001 to $679,197 for the three months ended June 30, 2002,
and from $240,281 for the six months ended June 30, 2001 to $977,981 for the six
months ended June 30, 2002. However, the Company has incurred significant losses
since inception, including a loss of $10,783,055 for the six months ended June
30, 2002. The Company incurred negative cash flows from operating activities of
$8,307,495 during the six months ended June 30, 2002. Sales of products and
revenue from licenses based on the Company's technologies have not been
sufficient to finance ongoing operations. As of June 30, 2002, the Company had
negative working capital of $8,491,834 and an accumulated deficit of
$184,892,409. The Company has drawn all capital available under its first two
equity lines of credit. The Company will not be able to make draws under its
third equity line of credit until a registration statement covering the shares
of common stock to be issued in connection with that third equity line is
declared effective by the SEC. The Company filed the registration statement for
the third equity line on June 27, 2002. Accordingly, there is substantial doubt
about the Company's ability to continue as a going concern. The Company's
continued existence is dependent upon several factors, including the Company's
success in (1) increasing license, royalty, product, and services revenues, (2)
raising sufficient additional debt or equity funding and (3) minimizing or
decreasing operating costs. The accompanying condensed consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

Net Loss Per Common Share - Basic and diluted net loss per common share are
calculated by dividing net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding during the period.
As of June 30, 2002 and 2001, there were outstanding common stock equivalents to
purchase 32,189,576 and 25,177,817 shares of common stock, respectively, that
were not included in the computation of diluted net loss per common share as
their effect would have been anti-dilutive, thereby decreasing the net loss per
common share.


The following tables are reconciliations of the net loss numerator of basic and
diluted net loss per common share for the three months and six months ended June
30, 2002 and 2001:


                                        6

<PAGE>

<TABLE>
<CAPTION>
                                                            Three months ended June 30,
                                                         2002                          2001
                                               ---------------------------  ----------------------------
                                                                Per Share                    Per Share
                                                  Amount         Amount         Amount         Amount
<S>                                            <C>               <C>        <C>                <C>
Net loss attributable to
common stockholders                            $ (5,538,414)     $ (0.01)   $ (6,508,308)      $ (0.03)
                                               =============     =========  ==============     =========
Weighted average common shares
    outstanding                                   471,938,769                  213,416,041
                                               ==============               ==============
</TABLE>


<TABLE>
<CAPTION>
                                                              Six months ended June 30,
                                                         2002                           2001
                                             ------------------------------   ----------------------------
                                                                Per Share                      Per Share
                                                  Amount         Amount          Amount         Amount
                                             ---------------     ---------    --------------   -----------
<S>                                          <C>                 <C>           <C>             <C>
Net loss                                     $   (10,783,054)                  $(10,756,925)

Preferred stock dividends                               -                            (9,281)
                                             ---------------                  --------------

Net loss attributable to
common stockholders                          $   (10,783,054)    $ (0.03 )    $ (10,766,206)   $   (0.05)
                                             ===============     =========    ==============   ==========
Weighted average common shares
     outstanding                                 431,443,574                    207,611,230
                                             ================                    ===========
</TABLE>


Imputed Interest Expense and Income - Interest is imputed on long-term debt
obligations and notes receivable where management has determined that the
contractual interest rates are below the market rate for instruments with
similar risk characteristics (see Notes 3 and 5).

Other Comprehensive Income (Loss) - Other comprehensive income (loss) presented
in the accompanying condensed consolidated financial statements consists of
cumulative foreign currency translation adjustments. The Company had no items of
comprehensive loss prior to April 1, 2001.

Recently Enacted Accounting Standards - In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 eliminates the "pooling-of-interests" method of
accounting for acquisitions and requires separate accounting for certain
intangibles acquired in such transactions. The application of this standard did
not have an impact on the Company's financial position and results of
operations.

SFAS No. 142 changes the accounting for goodwill and intangible assets with
indefinite lives from an amortization method to an impairment-only approach.
Effective January 1, 2002, the Company adopted the requirements of SFAS No. 142.
Accordingly, effective January 1, 2002, amortization of goodwill and intangible
assets with indefinite lives was discontinued. Other intangible assets will
continue to be amortized over their respective useful lives.

During 2002, the Company engaged Houlihan Valuation Advisors, an independent
valuation firm, to assess the Company's goodwill and intangible assets with
indefinite lives for impairment. The resulting appraisal indicated no impairment
and the application of the test for impairment required by SFAS No. 142 had no
effect on the Company's

                                        7

<PAGE>



financial position or results of operations, except for the change in
amortization of goodwill and intangible assets with indefinite lives described
in the preceding paragraph.

In August 2001, the FASB issued SFAS No. 143 , "Accounting for Asset Retirement
Obligations." This statement establishes financial accounting and reporting
standards for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company's adoption of this
statement on January 1, 2002, did not have a material effect on the Company's
financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement establishes financial accounting
and reporting standards for the impairment or disposal of long-lived assets. The
adoption of this statement on January 1, 2002, did not have a material effect on
the Company's financial position or results of operations. See Note 2.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other provisions, this statement modifies the criteria for classification
of gains or losses on debt extinguishments such that they are not required to be
classified as extraordinary items if they do not meet the criteria for
classification as extraordinary items in APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company will be required to apply the provisions of this
standard to transactions occurring after December 31, 2002. The adoption of this
standard in 2003 is not expected to have a material effect on the Company's
financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The Company will
be required to apply this statement prospectively for any exit or disposal
activities initiated after December 31, 2002. The adoption of this standard is
not expected to have a material effect on the Company's financial position or
results of operations.

Revenue Recognition - The Company recognizes revenues in accordance with the
provisions of Statement of Position No. 97-2, "Software Revenue Recognition" and
related interpretations. The Company generates revenues from licensing the
rights to its software products to end users and from royalties. It also
generates service revenues from the sale of consulting and development services.

Revenues of all types are recognized when contingencies such as conditions of
acceptance of functionality, rights of return and price protection are confirmed
or can be reasonably estimated, as appropriate. Revenues from development and
consulting services are recognized on a completed-contract basis when the
services are completed and accepted by the customer. The completed-contract
method is used because the contracts are either short-term in duration or the
Company is unable to make reasonably dependable estimates of the costs of the
contracts. Revenue for hardware units delivered is recognized when delivery is
verified and collection assured.

Revenue for products distributed through wholesale and retail channels and
resellers is recognized upon verification of final sell-through to end users,
after consideration of rights of return and price protection. Revenue for these
products is recognized when the right of return on such products has expired,
typically when the end user purchases the product from the retail outlet. Once
the end user opens the package, it is not returnable unless the medium is
defective. Price protection is offered to distributors in the event we reduce
the price on any specific product. Such price protection is generally offered
for a specific time period in which the distributor must make a claim. Resulting
revenue recognized reflects the reduced price. Slotting fees paid by the Company
for favorable placement in retail outlets are recorded as a reduction in gross
revenues.

When arrangements to license software products do not require significant
production, modification or customization of software, revenues from licenses
and royalties are recognized when persuasive evidence of a licensing

                                        8

<PAGE>



arrangement exists, delivery of the software has occurred, the fee is fixed or
determinable and collectibility is probable. Post-contract obligations, if any,
generally consist of one year of support including such services as customer
calls, bug fixes, and upgrades. Related revenue is recognized over the period
covered by the agreement. Revenues from maintenance and support contracts are
also recognized over the term of the related contracts.

Revenues applicable to multiple-element fee arrangements are bifurcated among
the elements such as license agreements and support and upgrade obligations
using vendor-specific objective evidence of fair value. Such evidence consists
primarily of pricing of multiple elements as if sold as separate products or
arrangements. These elements vary based upon factors such as the type of
license, volume of units licensed, and other related factors.

Deferred revenue at June 30, 2002, and December 31, 2001, consisted of the
following:


<TABLE>
<CAPTION>
                                                                                         June 30,             December 31,
Description                                   Criteria for Recognition                     2002                   2002
-----------                         ----------------------------------            ----------------------  --------------------
<S>                                 <C>                                           <C>                     <C>
Deferred unit royalties             Delivery of units to end users or
and licence fees                    expiration of contract                        $              978,063  $            945,814
Engineering projects not            Completion of work and acceptance
completed                           of completed work by customer                                125,000                62,500
Deferred customer                   Expiration of period covered by
support                             support agreement                                             31,729                41,535
                                                                                  ----------------------  --------------------
Total deferred revenue                                                            $            1,134,792  $          1,049,849
                                                                                  ======================  ====================
</TABLE>


Cost of revenues from license, royalties and maintenance consists of costs to
distribute the product (including the cost of the media on which it is
delivered), installation and support personnel compensation, amortization of
capitalized speech software costs, licensed technology and other related costs.
Cost of service revenues consists of personnel compensation and other related
costs.

Speech software technology development and production costs - All costs incurred
to establish the technological feasibility of speech software technology to be
sold, leased or otherwise marketed are charged to product development and
research expense. Technological feasibility is established when a product design
and a working model of the software product have been completed and confirmed by
testing. Costs to produce or purchase speech software technology incurred
subsequent to establishing technological feasibility are capitalized.
Capitalization of speech software costs ceases when the product is available for
general release to customers. Costs to perform consulting or development
services applications are charged to cost of revenues in the period in which the
corresponding revenues are recognized. Cost of maintenance and customer support
are charged to expense when related revenue is recognized or when these costs
are incurred, whichever occurs first.

Capitalized speech software technology costs are amortized on a
product-by-product basis. Amortization is recognized from the date the product
is available for general release to customers as the greater of (a) the ratio
that current gross revenue for a product bears to total current and anticipated
future gross revenues for that product or (b) the straight-line method over the
remaining estimated economic life of the products. Amortization is charged to
cost of revenues.

The Company assesses unamortized capitalized speech software costs for possible
write down on a quarterly basis based on net realizable value of each related
product. Net realizable value is determined based on the estimated future gross
revenues from a product reduced by the estimated future cost of completing and
disposing of the product, including the cost of performing maintenance and
customer support. The amount by which the unamortized capitalized costs of a
speech software product exceed the net realizable value of that asset are
written off.

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

                                        9

<PAGE>




2. CONVERTIBLE NOTES RECEIVABLE

On December 1, 2001, the Company, as the lender, established a revolving line of
credit and received a convertible promissory note from Unveil Technologies, Inc.
("Unveil"), that permits Unveil to draw up to $2,000,000 for operations and
other purposes. Unveil is a developer of natural language understanding
solutions for customer resource management ("CRM") applications. Fonix intends
to obtain a license to Unveil's applications when completed and has made the
loan to Unveil to facilitate and expedite the development and commercialization
of Uneveil's speech-enabled CRM software. Draws on the line of credit bear
interest at an annual rate of seven percent, which interest is payable quarterly
beginning September 30, 2002. The balance due under the line of credit is
secured by Unveil's CRM software and related source code and other assets of
Unveil. The Company is a senior creditor to Unveil. The unpaid principal,
together with interest accrued thereon, is due and payable on December 31, 2002,
and is convertible into common shares of Unveil at the Company's option. Based
upon borrowings through June 30, 2002, such conversion at that date would have
represented approximately 12 percent of the ownership of Unveil.

During the six months ended June 30, 2002, Unveil drew $805,000 on the line of
credit, bringing total draws on the line of credit to $1,435,000 as of June 30,
2002. Subsequent to June 30, 2002, Unveil drew an additional $15,000 through
September 13, 2002.

3. INVESTMENT IN AFFILIATE

In February 2001, the Company entered into a collaboration agreement with Audium
Corporation ("Audium") to provide an integrated platform for generating Voice
XML solutions for Internet and telephony systems. Audium is a mobile application
service provider that builds and operates mobile applications that allow access
to Internet information and to complete online transactions using any telephone.
The collaboration includes integration of the Company's technologies with
Audium's mobile applications development capability.

Note Receivable - In connection with the collaboration agreement with Audium, in
February and May 2001 the Company advanced an aggregate of $400,000 to Audium as
a bridge loan (the "Audium Note"). The loan bears interest at a rate of five
percent per year and has a term of four years. The Audium Note is convertible
into shares of Audium Series A Convertible Preferred Stock ("Audium Preferred
Stock") and is secured by Audium's intellectual property.

Management determined that a 12 percent annual interest rate better reflects the
risk characteristics of the Audium Note. Accordingly, interest was imputed at 12
percent and the Audium Note was recorded at its original present value of
$302,909. For the three months and six months ended June 30, 2002, the Company
recorded interest income of $9,519 and $19,038, respectively, including
contractual and imputed interest. As of June 30, 2002, the balance of the Audium
Note was $331,345, net of the unaccreted discount of $68,655.

Investment in Affiliate - In April 2001, the Company entered into a stock
purchase agreement with Audium, wherein the Company agreed to purchase up to
$2,800,000 of Audium Preferred Stock at a price of $1.46 per share. At closing,
the Company paid $200,000 in cash and gave Audium a non-interest bearing note
(the "Fonix Note") for the remaining $2,600,000. Each share of Audium Preferred
Stock is convertible into one share of Audium's common stock.

At closing, Audium issued 14 Audium Preferred Share certificates to Fonix, each
certificate for 136,986 shares, and delivered one certificate in exchange for
the initial payment of $200,000. The remaining certificates are held by Audium
as collateral for the Fonix Note under the terms of a security agreement. For
each payment of $200,000 or multiple payments that aggregate $200,000, Audium
will release to Fonix one certificate for 136,986 shares of Audium Preferred
Stock.

The difference between the total purchase price of the Audium Preferred Stock
and the Company's portion of Audium's net stockholders' deficit at the time of
the purchase was $2,700,727, which was allocated to completed core technology.
The excess purchase price allocated to the completed core technology is being
amortized on a straight- line basis over a period of eight years. Interest on
the Fonix Note was imputed at 12 percent resulting in a present

                                       10

<PAGE>



value of $2,370,348.  The resulting purchase price of the Audium Preferred Stock
was $2,570,348.

The investment in Audium does not provide the Company with rights to any
technology developed by Audium, but the Company must obtain a license should it
choose to do so. The Company does not own an interest sufficient to control
Audium, even if it were to convert the Audium Note to Audium Preferred Stock.
Accordingly, Fonix does not benefit directly from the research and development
being done by Audium. As a result, the Company has determined that it is
appropriate to account for its investment, which represents 26.7 percent of
Audium's voting stock, under the equity method and not as a research and
development arrangement. Accordingly, for the three months and six months ended
June 30, 2002, the Company recognized losses consisting of the following:


<TABLE>
<CAPTION>
                                                                           Three Months                  Six Months
                                                                          Ended June 30,               Ended June 30,
                                                                               2002                         2002
                                                                      -----------------------      ----------------------
<S>                                                                   <C>                          <C>
Company share of Audium net loss                                      $                47,352      $              119,479
Amortization of difference between purchase price of Audium Preferred
Stock and Company's share of Audium's net stockholders' deficit       $                41,825      $               83,650
                                                                      -----------------------      ----------------------
Total equity in loss of affiliate                                     $                89,177      $              203,129
                                                                      =======================      ======================
</TABLE>

The fair value of this investment is determined based on Audium's estimated
future net cash flows considering the status of Audium's product development.
The Company evaluates this investment for impairment annually and more
frequently if indications of decline in value exist. An impairment loss that is
other than temporary is recognized during the period it is determined to exist.
An impairment is determined to be other-than-temporary if estimated future net
cash flows are less than the carrying value of the investment. If projections
indicate that the carrying value of the investment will not be recoverable, the
carrying value is reduced by the estimated excess of the carrying value over the
estimated discounted cash flows. At December 31, 2001, the Company evaluated the
estimated future net cash flows, given the status of Audium's product
development. From this evaluation , the Company determined that an impairment
loss of $823,275 should be recorded. No subsequent impairment loss has been
recorded.

Note Payable to Affiliate - The Fonix Note bears no interest unless an event of
default occurs, in which case it will bear interest at 12 percent per year. The
Company owes Audium $987,500 under the Fonix Note. The Company is currently
negotiating a new payment schedule for payment of this amount. If we is are not
able to agree on a new payment schedule, then Audium may declare a default under
the Fonix Note and exercise its rights under the Fonix Note, including the right
to foreclose on approximately 684,930 shares of Audium Preferred Stock held as
collateral for the Fonix Note. No events of default have occurred to date.

Management determined that a 12 percent annual interest rate reflects the risk
characteristics of the Fonix Note. Accordingly, interest has been imputed at 12
percent and the Company recorded a present value of $2,370,348 for the note
payable. For the three months and six months ended June 30, 2002, the Company
recorded interest expense of $19,426 and $55,428, respectively, related to this
note.

4. INTANGIBLE ASSETS

The Company adopted the provisions of SFAS No. 142 in its entirety on January 1,
2002. Under the new standard, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized, but are subject to annual impairment
tests. Other intangible assets will continue to be amortized over their
estimated useful lives. The Company has performed the required impairment tests
of goodwill and indefinite-lived intangible assets. There was no impairment of
goodwill or intangible assets upon adoption of SFAS No. 142. Upon adoption of
SFAS No. 142, the Company also reassessed the estimated useful lives of
intangible assets subject to amortization.

Intangible assets consist of purchased core technology,  customer relationships,
trademarks,  patents and goodwill arising from the purchase of assets from Force
Computers, Inc., and the acquisition of AcuVoice, Inc. Also included

                                       11

<PAGE>



are direct costs incurred by the Company in applying for patents covering its
internally developed technologies. As of June 30, 2002 and December 31, 2001,
amortized intangible assets consisted of the following:


<TABLE>
<CAPTION>
                                                          June 30, 2002                              December 31, 2001
                                            ------------------------------------------  --------------------------------------------
                                                    Gross                                      Gross
                                                  Carrying            Accumulated             Carrying              Accumulated
                                                   Amount             Amortization             Amount              Amortization
                                            --------------------- --------------------  --------------------   ---------------------
<S>                                         <C>                   <C>                   <C>                    <C>
Purchased core technologies                 $             978,582 $           (51,435)  $            978,582   $                  -
Customer relationships                                    306,000              (15,300)              306,000                      -
Patents                                                   164,460            (156,250)               164,460               (145,522)
                                            --------------------- --------------------  --------------------   ---------------------
Total                                       $           1,449,042 $          (222,985)  $          1,449,042   $           (145,523)
                                            ===================== ====================  ====================   =====================
</TABLE>

In addition, the Company has trademarks not subject to amortization, recorded at
a carrying value of $42,000 at June 30, 2002 and December 31, 2001. This asset
is considered to have an indefinite useful life.

Amortization of intangible assets is computed on a straight-line basis over
their estimated useful lives, which range from one to ten years. As of January
1, 2002, the weighted-average amortization periods were as follows: total - 4.6
years, purchased core technologies - 4.0 years, customer relationships - 10.0
years, and patents - 0.8 years. Intangible assets subject to amortization will
not have any significant residual value at the end of their estimated useful
lives. Estimated future amortization expense for intangible assets subject to
amortization is as follows:


For the Year Ended December 31,                            Amount
--------------------------------                           ------
                     2002                               $  78,226
                     2003                                 134,996
                     2004                                 134,996
                     2005                                 134,996
                     2006                                 124,100

Accumulated amortization of goodwill was $2,295,598 at both June 30, 2002 and
December 31, 2001. In accordance with the provisions of SFAS No. 142, the
Company no longer amortizes goodwill.

The amortization expense for capitalized speech software technology is included
in cost of revenues. For the six months ended June 30, 2002 and 2001, th
eamortization expense included in cost of revenue was $52,198 and $912,220,
respectively. During the three months ended December 31, 2001, the Company
recognized an impairment loss on its speech software technology amounting to
$5,832,217, and its handwriting recognition technology amounting to $2,056,295,
both of which were included in cost of revenues for that period.

The carrying values of the Company's long-lived assets is reviewed for
impairment whenever events or changes in circumstances indicate that they may
not be recoverable. If such an event were to occur, the Company would project
undiscounted cash flows to be generated from the use of the asset and its
eventual disposition over the remaining life of the asset. If projections were
to indicate that the carrying value of the long-lived asset would not be
recoverable, the carrying value would be reduced by the estimated excess of the
carrying value over the projected discounted cash flows.

During 2002, the Company engaged Houlihan Valuation Advisors, an independent
valuation firm, to assess its goodwill and intangible assets with indefinite
lives for impairment. The resulting appraisal indicated no impairment, and
therefore management of the Company did not consider goodwill or other
intangible assets to be impaired. However, should the Company's marketing and
sales plans not materialize in the near term, the realization of the Company's
goodwill and other intangible assets could be severely and negatively impacted.
The accompanying condensed consolidated financial statements have been prepared
based on management's estimates of realizability, which estimates may change due
to factors beyond the control of the Company. Upon initial application of SFAS
No. 142, the Company reassessed the useful lives of its intangible assets and
determined that no changes to estimated useful lives were necessary as of June
30, 2002.

Goodwill  amortization expense was $302,053 during the six months ended June 30,
2001 and $1,029,545,

                                       12

<PAGE>



$1,029,545 and $1,189,896 during the years ended December 31, 2001, 2000 and
1999, respectively. The effects on loss before extraordinary item, net loss and
basic and diluted loss per share of excluding such goodwill amortization from
the six months ended June 30, 2002 and 2001 and from the years ended December
31, 2001, 2000 and 1999 is as follows:


<TABLE>
<CAPTION>
                                             For the Six Months Ended                  For the Years Ended December 31,
                                       ------------------------------------  -----------------------------------------------------
                                         June 30, 2002      June 30, 2001          2001               2000              1999
                                       -----------------  -----------------  -----------------  ------------------ ---------------
<S>                                    <C>                <C>                <C>                <C>
Loss before extraordinary item, as
  reported                                 $(10,783,054)      $(10,756,925)      $(31,059,791)      $(22,810,677)    $(22,136,276)
Loss before extraordinary item,
  excluding goodwill amortization          $(10,783,054)      $(10,454,872)      $(30,455,686)      $(22,206,572)    $(21,532,171)
                                       =================  =================  =================  =================  ===============
Net loss, as reported                      $(10,783,054)      $(10,756,925)      $(31,059,791)      $(22,761,229)    $(21,662,419)
Add back goodwill amortization                           -          302,053            604,105            604,105          604,105
                                       -----------------  -----------------  -----------------  -----------------  ---------------
Net loss, excluding goodwill
  amortization                             $(10,783,054)      $(10,454,872)      $(30,455,686)      $(22,157,124)    $(21,058,314)
                                       =================  =================  =================  =================  ===============
Basic and diluted loss per share:

   Loss before extraordinary item,
     as reported                            $     (0.03)        $    (0.05)        $    (0.13)       $     (0.16)    $      (0.32)
   Loss before extraordinary item,
     excluding goodwill amortization        $     (0.03)        $    (0.05)       $     (0.13)       $     (0.16)    $      (0.31)
                                       =================  =================  =================  =================  ===============
   Net loss, as reported                    $     (0.03)        $    (0.05)        $    (0.13)       $     (0.16)    $      (0.31)
   Net loss, excluding goodwill             $     (0.03)        $    (0.05)       $     (0.13)       $     (0.16)    $      (0.30)
     amortization
                                       \=================  =================  =================  =================  ===============
</TABLE>

5.  PROMISSORY NOTE

In December 2001, the Company entered into an Asset Purchase Agreement with
Force Computers, Inc. ("Force"). As part of the purchase price Fonix issued a
non-interest bearing promissory note in the amount of $1,280,000 (the "Force
Note"). Installment payments under the Force Note are due over the 12 month
period following the date of purchase. Management determined that a seven
percent annual interest rate reflects the risk characteristics of the Force
Note. Accordingly, interest has been imputed at seven percent and the Company
recorded a discount of $40,245. For the three months and six months ended June
30, 2002, the Company recorded interest expense of $8,688 and $28,372,
respectively, related to the Force Note.

As collateral for the Force Note, 7,000,000 shares of the Company's Class A
common stock were placed into escrow. To date, all required payments have been
made. As of June 30, 2002, payments amounting to $410,000 remained outstanding
under the Force Note, including a payment of $160,000 that was due June 12,
2002. Subsequent to June 30, 2002, the June 12 installment payment was made.

6. NOTES PAYABLE - RELATED PARTIES

Certain executives officers of the Company (the "Lenders") sold shares of the
Company's Class A common stock owned by them and advanced the resulting proceeds
amounting to $333,308 to the Company under the terms of a revolving line of
credit and related promissory note. The funds were advanced for use in Company
operations. The advances bear interest at 10 percent per annum, and are payable
on a semi-annual basis. The entire principal, along with unpaid accrued interest
and any other unpaid charges or related fees, is due and payable on June 10,
2003. Any time after December 11, 2002, all or part of the outstanding balance
and unpaid interest may be converted at the option of the Lenders into shares of
Class A common stock of the Company. The conversion price is the average closing
bid price of the shares at the time of the advances. If converted, the
conversion amount is divided by the conversion price to determine the number of
shares to be issued to the Lenders. To the extent the market price of the
Company's shares is below the conversion price at the time of conversion, the
Lenders are entitled to receive additional shares equal to the gross dollar
value received from the original sale of the shares. A beneficial conversion
feature of $14,917 was recorded as interest expense in connection with this
transaction. The Lenders

                                       13

<PAGE>



may also receive additional  compensation as determined appropriate by the Board
of Directors.

The advances were secured by the Company's intellectual property rights, which
security interest was released when the increase in authorized capital of
300,000,000 shares of Class A common stock was approved by the Company's
shareholders at the Fonix Annual Shareholder Meeting on July 12, 2002.

7. EQUITY LINES OF CREDIT

Equity Line of Credit - On August 8, 2000, the Company entered into a Private
Equity Line Agreement (the "Initial Equity Line") with a private investor (the
"Equity Line Investor"), which gave the Company the right to draw up to
$20,000,000 for Company operations and other purposes through a mechanism of
draws and puts of stock. The Company was entitled to draw funds and to "put" to
the Equity Line Investor shares of Class A common stock in lieu of repayment of
the draw. The number of shares issued was determined by dividing the dollar
amount of the draws by 90 percent of the average of the two lowest closing bid
prices of Class A common stock over the seven trading- day period following the
date the Company tendered the put notice to the Equity Line Investor. The Equity
Line Investor funded the amounts requested by the Company within two trading
days after the seven trading-day period.

On May 8, 2002, the Company and the Equity Line Investor amended the Initial
Equity Line to increase the balance available under the Equity Line from
$20,000,000 to $22,000,000. Accordingly, as of May 8, 2002, $2,000,000 was
available to be drawn under the Equity Line.

During the six months ended June 30, 2002, 40,692,920 shares of Class A common
stock were issued in connection with draws under the Initial Equity Line of
$3,633,817. From inception of the Initial Equity Line through June 30, 2002,
91,083,516 shares of Class A common stock were issued in connection with draws
of $20,617,324. As of September 16, 2002, $1,382,676 remains unutilized under
the Initial Equity Line, as amended; however, no registered shares remain
available to facilitate a draw of this amount. Therefore, this amount is
unavailable to the Company at this time.

Second Equity Line of Credit - On April 6, 2001, the Company entered into a
second equity line agreement (the "Second Equity Line") with the Equity Line
Investor. Under the Second Equity Line, the Company has the right to draw up to
$20,000,000 under terms substantially identical to the Initial Equity Line.

During the six months ended June 30, 2002, 93,586,995 shares of Class A common
stock were issued in connection with draws amounting to $5,728,846. From
inception of the Second Equity Line through June 30, 2002, 211,600,000 shares of
Class A common stock were issued in connection with draws of $19,153,846. As of
September 16, 2002, $846,154 remains unutilized under the Second Equity Line;
however, no registered shares remain available to facilitate a draw of this
amount. Therefore, this amount is unavailable to the Company at this time.

Third Equity Line of Credit - On June 27, 2002, the Company entered into a third
equity line agreement (the "Third Equity Line") with the Equity Line Investor.
Under the Third Equity Line, the Company has the right to draw up to $20,000,000
under terms substantially identical to the Initial Equity Line. On June 27,
2002, the Company filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-2 to register the resale of up
to 200,000,000 shares of the Company's Class A common stock by the Equity Line
Investor. As of September 16, 2002, the registration statement had not been
declared effective by the Commission, and as such, the Company was unable to
draw funds under the Third Equity Line as of that date. Prior to June 30, 2002,
the Equity Line Investor advanced the Company $182,676 against future draws on
the Third Equity Line. As of September 16, 2002, no shares had been issued under
the Third Equity Line.

Subscriptions Receivable - Proceeds from certain draws on the equity lines prior
to December 31, 2001 had not been received by the Company as of those dates. The
cash proceeds in the amount of $852,970 were subsequently received in January
2002.

8.  COMMON STOCK, STOCK OPTIONS AND WARRANTS


                                       14

<PAGE>



Class A Common Stock - During the six months ended June 30, 2002, 134,279,915
shares of Class A common stock were issued in connection with draws on the
equity lines (see Note 7). No shares of Class A common stock were issued as a
result of the exercise of stock options or warrants during the same period.

Stock Options - During the six months ended June 30, 2002, the Company granted
options to employees to purchase 5,229,000 shares of Class A common stock and
granted options to directors to purchase 1,000,000 shares of Class A common
stock. The options have exercise prices ranging from $0.05 to $0.11 per share,
which were the quoted fair market price of the stock on the dates of grant. Of
the options granted during this six-month period, 5,229,000 vest over the three
years following issuance and 1,000,000 vested immediately. These options expire
within ten years from the date of grant if not exercised. Using the
Black-Scholes pricing model, the weighted average fair value of the employee and
director options were $0.08 and $0.04 per share, respectively. As of June 30,
2002, the Company had a total of 29,597,909 options to purchase Class A common
shares outstanding.

The Company's option plans provide for stock appreciation rights that allow the
grantee to receive shares of the Company's Class A common stock equivalent in
value to the difference between the designated exercise price and the fair
market value of the Company's stock at the date of exercise. As of June 30,
2002, there are options to purchase 33,334 shares of Class A common stock
outstanding which provide for stock appreciation rights. These options have an
exercise price of $1.00 per share. If not exercised by September 2002, the
options with these rights will expire.

Warrants - As of September 16, 2002, the Company had warrants to purchase a
total of 2,425,000 shares of Class A common stock outstanding that expire
beginning in 2002 through 2010. Warrants issued for services were recorded at
their fair value determined using the Black-Scholes pricing model. The resulting
values were recorded in operating expenses in the periods covered by the
services rendered. Warrants for the purchase of 300,000 shares of Class A common
stock were issued in January 2000 for consulting services rendered. The warrants
were issued at $47,000 using the Black-Scholes pricing model assuming risk-free
interest rate of 5.7%, expected exercise life of 5 years, and volatility of
102%. The warrants were issued with exercise prices ranging from $0.28 to $1.25,
vested during the year ended December 31, 2000 and expire January 2003.

9.  FONIX UK, LTD.

On May 30, 2002, the Company established Fonix UK, Ltd., a United Kingdom
subsidiary, ("Fonix UK"). Fonix UK will facilitate the Company's development,
marketing and investment opportunities in Europe. To date, Fonix UK has no
operations.

10. SUBSEQUENT EVENTS

On July 12, 2002, the Company held its Annual Meeting of Shareholders in Boston,
Massachusetts. The record date for the meeting was May 24, 2002, on which date
there were 482,805,888 shares of the Company's Class A common stock outstanding.

The first matter voted upon at the meeting was the election of directors. The
following directors were elected:


                                 SHARES                           SHARES
DIRECTOR                     VOTED IN FAVOR                    VOTED AGAINST
--------                     --------------                    -------------
Thomas A. Murdock              399,431,186                      11,146,172
Roger D. Dudley                399,361,304                      11,216,084
John A. Oberteuffer, Ph.D      404,903,223                       5,674,135
William A. Maasberg, Jr.       403,439,549                       7,137,809
Mark S. Tanner                 403,604,229                       6,973,129


                                       15

<PAGE>



The second matter voted upon at the meeting was the approval of a proposed
amendment to the Company's Certificate of Incorporation to increase the
authorized capital stock of the Company to include 800,000,000 shares of Class A
Common Stock. The results of the voting were 397,433,216 shares in favor,
11,766,861 shares against, and 1,377,311 shares withheld or abstaining.

Convertible Notes Receivable - During 2002, the Company has advanced $920,000 to
Unveil under the line of credit. Also during 2002, the Company impaired the full
value of the convertible note receivable and interest accrued thereon.

Note Payable to Affiliate - The Company made payments of $562,500 on the note
payable to Audium Corporation during 2002 through December 10, 2002.

Series D Convertible Debentures - On October 11, 2002, the Company entered into
a Securities Purchase Agreement with Breckenridge Fund, LLC ("Breckenridge"), an
unaffiliated third party, for the sale of the Company's Series D 12% Convertible
Debentures (the "Debentures") in the aggregate principal amount of $1,500,000.
The outstanding principal amount of the Debentures is convertible at any time at
the option of the holder into shares of the Company common stock at a conversion
price equal to the average of the two lowest closing bid prices of the Company's
Class A common stock for the twenty trading days immediately preceding the
conversion date multiplied by 90%. The Debentures are due April 9, 2003. On the
earlier of December 20, 2002, or 45 days after the effective date of this
registration statement and prospectus (the "Initial Payment Date") and each
30-day anniversary of the Initial Payment Date, the Company is required to make
principal payments of $250,000, plus accrued interest.

In connection with the sale of the Debentures, the Company issued, as collateral
to secure its performance under the Debenture, 83,333,333 shares of Class A
common stock (the "Collateral Shares"), which were placed into an escrow
pursuant to an escrow agreement. Under the escrow agreement, the Collateral
Shares will not be released to Breckenridge unless the Company is delinquent
with respect to payments under the Debenture. Additionally, as further
consideration for the sale of the Debentures, the Company issued 7,777,778
shares to Breckenridge (the "Additional Shares") which were were valued at
$0.052 per share, the market value of the stock on the date of the transaction.
In connection with this transaction, in the fourth quarter of 2002, the Company
recorded a discount of $404,444 on the Debentures from the allocation of a
portion of the proceeds to the Additional Shares and recorded an additional
discount of $571,111 from the beneficial conversion option associated with the
Debentures, both of which will be amortized as interest expense over the life of
the Debentures.

In connection with the sale of the Debentures, the Company agreed to register
the resale of shares of our Class A common stock underlying the Debentures, the
Collateral Shares, and the Additional Shares. The Company will file a
registration statement to register those resales.

Common Stock - During 2002, the Company has issued 134,279,915 shares of Class A
common stock in connection with draws on its equity lines of credit.

Stock Options - During the nine months ended September 30, 2002, the Company
granted options to employees to purchase 5,239,000 shares of Class A common
stock and granted options to directors to purchase 1,000,000 shares of Class A
common stock. The options have exercise prices ranging from $0.05 to $0.11 per
share, which were the quoted fair market price of the stock on the dates of
grant. Of the options granted during this nine-month period, 5,239,000 vest over
the three years following issuance and 1,000,000 vested immediately. These
options expire within ten years from the date of grant if not exercised.





                                       16

<PAGE>



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

This quarterly report on Form 10-Q contains, in addition to historical
information, forward-looking statements that involve substantial risks and
uncertainties. Actual results could differ materially from the results the
Company anticipates and which are discussed in the forward-looking statements.
Factors that could cause or contribute to such differences are discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.

To date the Company has earned only limited revenue from operations and intends
to continue to rely primarily on financing through the sale of its equity and
debt securities to satisfy future capital requirements.

Overview

Since inception, Fonix has devoted substantially all of its resources to
research, development and acquisition of software technologies that enable
intuitive human interaction with computers, consumer electronics, and other
intelligent devices. Through June 30, 2002, the Company has incurred significant
cumulative losses, and losses are expected to continue until the effects of
recent marketing and sales efforts begin to take effect, if ever.

The Company incurred negative cash flows from operating activities of $8,307,495
during the six months ended June 30, 2002. Sales and licensing of products based
on the Company's technologies have not been sufficient to finance ongoing
operations. As of June 30, 2002, the Company had negative working capital of
$8,491,835 and an accumulated deficit of $184,892,409. The Company has drawn all
capital available under its initial and second equity lines. While a third
equity line is in place, it is unavailable to the Company until a registration
statement covering the underlying securities is declared effective. The
Company's continued existence is dependent upon several factors, including the
Company's success in (1) increasing license, royalty, product, and services
revenues, (2) raising sufficient additional equity and debt funding and (3)
minimizing and reducting operating costs. Until sufficient revenues are
generated from operating activities, the Company expects to continue to fund its
operations through the sale of its equity and debt securities.

The Company continues to emphasize technologies and product delivery and sales
while achieving technology upgrades to maintain its perceived competitive
advantages. In its current marketing efforts, the Company seeks to form
relationships with third parties who can incorporate speech-enabling
technologies into new or existing products. Such relationships may be structured
in any of a variety of ways including traditional technology licenses,
collaboration or joint marketing agreements, co-development relationships
through joint ventures or otherwise, and strategic alliances. The third parties
with whom Fonix presently has such relationships and with which it may have
similar relationships in the future include developers of application software,
operating systems, computers, microprocessor chips, consumer electronics,
automobiles, telephony and other products.

Significant Accounting Policies

The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of sales and expenses during the reporting period. A complete discussion of
significant accounting policies and areas where substantial judgements by
management are made is included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.

Recently Enacted Accounting Standards - In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 eliminates the "pooling-of-interests" method of
accounting for acquisitions and requires separate accounting for certain
intangibles acquired in such transactions. The application of this standard did
not have an impact on the Company's financial position and results of
operations.

                                       17

<PAGE>




SFAS No. 142 changes the accounting for goodwill and intangible assets with
indefinite lives from an amortization method to an impairment-only approach.
Accordingly, effective January 1, 2002, amortization of goodwill and intangible
assets with indefinite lives was discontinued. Other intangible assets will
continue to be amortized over their useful lives.

Effective January 1, 2002, the Company adopted the requirements of SFAS No. 142.
During 2002, the Company engaged Houlihan Valuation Advisors, an independent
valuation firm, to assess its goodwill and intangible assets with indefinite
lives for impairment. The resulting appraisal indicated no impairment and the
application of the test for impairment required by SFAS No. 142 had no effect on
the Company's financial position or results of operations, except for the change
in amortization of goodwill and intangible assets with indefinite lives.

In August 2001, the FASB issued SFAS No. 143 , "Accounting for Asset Retirement
Obligations." This statement establishes financial accounting and reporting
standards for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company's adoption of this
statement on January 1, 2002, did not have a material effect on the Company's
financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement establishes financial accounting
and reporting standards for the impairment or disposal of long-lived assets. The
Company's adoption of this statement on January 1, 2002, did not have a material
effect on the Company's financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other provisions, this statement modifies the criteria for classification
of gains or losses on debt extinguishments such that they are not required to
classified as extraordinary items if they do not meet the criteria for
classification as extraordinary items in APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The Company will be required to apply the provisions of this
standard to transactions occurring after December 31, 2002. The Company's
adoption of this standard in 2003 is not expected to have a material effect on
the Company's financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The Company will
be required to apply this statement prospectively for any exit or disposal
activities initiated after December 31, 2002. The Company's adoption of this
standard is not expected to have a material effect on the Company's financial
position or results of operations.

Revenue Recognition - The Company recognizes revenues in accordance with the
provisions of Statement of Position No. 97-2, "Software Revenue Recognition" and
related interpretations. The Company generates revenues from licensing the
rights to its software products to end users and from royalties. It also
generate service revenues from the sale of consulting and development services.

           Revenues of all types are recognized when contingencies such as
           conditions of acceptance of functionality, rights of return, price
           protection, etc. are confirmed or can be reasonably estimated, as
           appropriate. Revenues from development and consulting services are
           recognized on a completed-contract basis when the services are
           completed and accepted by the customer. Revenue for hardware units
           delivered is recognized when delivery is verified and collection
           assured.

           Revenue for products distributed through wholesale and retail
           channels and resellers is recognized upon verification of final
           sell-through to end users, after consideration of rights of return
           and price protection. Revenue is recognized when the right of return
           on such products has expired, typically when the end user

                                       18

<PAGE>



           purchases the product from the retail outlet. Once the end user opens
           the package, it is not returnable unless the medium is defective.
           Price protection is offered to distributors in the event we reduce
           the price on any specific product. Such price protection is generally
           offered for a specific time period in which the distributor must make
           a claim. Resulting revenue recognized reflects the reduced price.
           Slotting fees paid by the Company for favorable placement in retail
           outlets are recorded as a reduction in gross revenues.

           Revenues from licenses and royalties are recognized upon shipment of
           the software by the Company or by the vendor. Post-contract
           obligations, if any, generally consist of one year of support
           including such services as customer calls, bug fixes, upgrades, etc.
           Related revenue is recognized over the period covered by the
           agreement. Revenues from maintenance and support contracts are also
           recognized over the term of the contract.

           Revenues applicable to multiple-element fee arrangements are
           bifurcated among the elements such as license agreements, and support
           and upgrade obligations using vendor-specific objective evidence of
           fair value. Such evidence consists primarily of pricing of multiple
           elements as if sold as separate products or arrangements. These
           elements vary based upon factors such as the type of license, volume
           of units licensed and other related factors.

           Deferred revenue at June 30, 2002, and December 31, 2001, consisted
of the following:

<TABLE>
<CAPTION>
                                                                                         June 30,             December 31,
Description                                   Criteria for Recognition                     2002                   2002
-----------                         ----------------------------------            ----------------------  --------------------
<S>                                 <C>                                           <C>                     <C>
Deferred unit royalties             Delivery of units to end users or
and licence fees                    expiration of contract                        $              978,063  $            945,814
Engineering projects not            Completion of work and acceptance
completed                           of completed work by customer                                125,000                62,500
Deferred customer                   Expiration of period covered by
support                             support agreement                                             31,729                41,535
                                                                                  ----------------------  --------------------
Total deferred revenue                                                            $            1,134,792  $          1,049,849
                                                                                  ======================  ====================
</TABLE>


           Cost of revenues from license, royalties and maintenance consists of
           costs to distribute the product (including the cost of the media on
           which it is delivered), installation and support personnel
           compensation, licensed technology and other related costs. Cost of
           service revenues consists of personnel compensation, licensed
           technology and other related costs.

Software application development costs - The Company has not capitalized the
cost of development of specific software applications due to uncertainty of
recovery of such costs. While the Company believes the carrying value of its
core technology assets is recoverable, it is uncertain regarding the
recoverability of ongoing development costs for specific software applications;
therefore, such costs are charged as operating expenses in the period in which
they are incurred.

Results of Operations

Three months ended June 30, 2002, compared with three months ended June 30, 2001

During the three months ended June 30, 2002, the Company recorded revenues of
$679,197, reflecting an increase of $571,629 over the same period in the
previous year. The increase in revenue is related to the licensing of TTS
applications to customers in assistive markets made possible through the
acquisition of assets and technology rights in December 2001.

Cost of revenues were $166,424 for the three months ended June 30, 2002, a
decrease of $302,208, from the corresponding period in 2001. The writedown of
the Company's capitalized software costs in 2001 resulted in a

                                       19

<PAGE>



$430,001 decrease in amortization in 2002. The decrease was offset by increases
in other costs of revenues including the cost of delivering royalties and
licenses and the cost of hardware sales. Hardware sales represents the the
largest portion of the increase because such sales were new to the Company in
2002, as noted above.

Selling, general and administrative expenses were $3,383,999 and $3,306,800 for
the three months ended June 30, 2002 and 2001, respectively. The increase of
$77,199 includes increases of $142,527 in compensation-related expenses, $87,606
in consultants, outside services and promotional expenses, $33,159 in occupancy
charges and $24,277 in other operating expenses, all of which are related to
increases in sales, marketing and business development personnel, and efforts
related to increased marketing and promotional activities. Administrative
expenses were also increased by $54,779 for costs related to the preparation of
filings and materials for the annual shareholders meeting that were incurred in
the third quarter of 2001. These increases were offset by decreases of $179,220
in legal and accounting fees resulting from fewer regulatory filings completed
during the period and $82,468 in travel and entertainment expenses.

Product development and research expenses were $2,590,988 and $2,483,627 for the
three months ended June 30, 2002 and 2001, respectively, reflecting an increase
of $107,361. Increased internal resources and development expertise resulted in
an increase of $321,788 in conpensation-related expenses. This internal capacity
allowed the Company to reduce its reliance on external service providers in the
second quarter resulting in a decrease of $132,308 in consultant and outside
service expenses and $72,577 in other operating expenses related to the purchase
of software licenses and related services.

Amortization of intangible assets was $7,650 and $151,026, for the three months
ended June 30, 2002 and 2001, respectively. The decrease of $143,376 is a result
of the write down of certain intangible assets in 2001 and the change in
accounting for amortization of goodwill dictated by SFAS No. 142. Based on the
value of current intangible assets, the Company expects amortization expense to
be approximately $68,000, including $53,000 that will be charged to cost of
revenues, for the remainder of 2002 and $136,000 per year thereafter, including
$104,000 that will be charged to cost of revenues until the underlying assets
have been completely amortized.

Six months ended June 30, 2002, compared with six months ended June 30, 2001

During the six months ended June 30, 2002, the Company recorded revenues of
$977,981, reflecting an increase of $737,700 over the same period in the
previous year. The increase in revenue is related to the licensing of TTS
applications to customers in assistive markets made possible through the
acquisition of assets and technology rights in December 2001.

Cost of revenues were $210,528 for the six months ended June 30, 2002, a
decrease of $721,213, from the corresponding period in 2001. The writedown of
the Company's capitalized software costs in 2001 resulted in a $860,000 decrease
in amortization in 2002. The decrease was offset by increases in other costs of
revenues including the cost of delivering royalties and licenses and the cost of
hardware sales. Hardware sales represents the the largest portion of the
increase because such sales were new to the Company in 2002, as noted above.

Selling, general and administrative expenses were $6,608,167 and $5,453,702 for
the six months ended June 30, 2002 and 2001, respectively. The increase of
$1,154,465 includes increases of $447,419 in compensation-related expenses,
$193,903 in consultants, outside services and promotional expenses, $73,083 in
occupancy charges and $481,293 in other operating expenses that are all related
to increases in sales, marketing and business development personnel, and efforts
related to increased marketing and promotional activities as well as expansion
into assistive markets. Administrative expenses were also increased by $120,000
in consulting fees related to strategic planning and financing efforts and
$53,510 for costs related to the preparation of filings and materials for the
annual shareholders meeting that were incurred in the third quarter of 2001.
These increases were offset by decreases of $154,879 in legal and accounting
fees resulting from fewer regulatory filings completed during the period and
$99,771 in travel and entertainment expenses.

Product development and research expenses were $4,714,724 and $4,139,277 for the
six months ended June 30, 2002 and 2001, respectively, reflecting an increase of
$575,447. Increases of $669,567 in compensation-related expenses and $45,697 in
consultants and outside services reflect the Company's efforts to increase its
capacity to

                                       20

<PAGE>



develop speech-enabling solutions as well as the cost of additional employees
added in connection with the acquisition from Force Computers. These increases
were offset by a decrease of $137,138 in occupancy and other operating expenses
resulting from reductions in the purchase of software licenses and related
services.

Amortization of intangible assets was $15,300 and $302,053, for the three months
ended June 30, 2002 and 2001, respectively. The decrease of $286,753 is a result
of the write down of certain intangible assets in 2001 and the change in
accounting for amortization of goodwill dictated by SFAS No. 142. Based on the
value of current intangible assets, the Company expects amortization expense to
be approximately $68,000, including $53,000 that will be charged to cost of
revenues, for the remainder of 2002 and $136,000 per year thereafter, including
$104,000 that will be charged to cost of revenues until the underlying assets
have been completely amortized.

Liquidity and Capital Resources

While the Company anticipates that revenues will increase during the next 12
months, it must raise additional funds to be able to satisfy its cash
requirements. Research and development, corporate operations and marketing
expenses will continue to require additional capital. Because the Company
presently has only limited revenue from operations, the Company intends to
continue to rely primarily on financing through the sale of its equity and debt
securities to satisfy future capital requirements until such time as the Company
is able to enter into additional third- party licensing, collaboration or
co-marketing arrangements which generate revenues such that it will be able to
finance ongoing operations from license, royalty and services revenues. There
can be no assurance that the Company will be able to generate substantial
revenues from such agreements. Furthermore, the issuance of equity or debt
securities which are or may become convertible into equity securities of the
Company in connection with such financing could result in substantial additional
dilution to the stockholders of the Company and declining market value of the
Company's shares may limit the amount available in this manner. The Company
currently has drawn all available funds on existing equity lines, but has
recently entered into a third equity line with the same investor under which the
Company issue up to 200,000,000 shares of Class A common stock when the
registration of such shares is declared effective. The Company currently has no
alternative plans for funding operations other than issuance of debt and equity
securities, but it continues to explore other options for additional funding for
its operations. The Company's shareholders recently approved an increase of
300,000,000 common shares in authorized capital in order to facilitate the
current funding process.

Net cash used in operating activities of $8,307,495 for the six months ended
June 30, 2002, resulted principally from the net loss incurred of $10,783,054
offset by non-cash expenses pertaining to depreciation and amortization of
$257,973 and equity in net loss of affiliate of $203,131. Payments to vendors
and employees have also been delayed since June 2002 resulting in an increase of
$2,240,141 in accounts payable and accrued liabilities outstanding. Net cash
used in investing activities of $895,880 for the six months ended June 30, 2002
consisted primarily of advances under a convertible note payable of $805,000.
Net cash used in operating and investing activities was offset by net cash
provided by financing activities of $9,040,887 consisting primarily of the
receipt of $10,122,346 in cash related draws under the Company's equity lines of
credit offset, in part, by $1,420,000 in payments on notes payable.

The Company had negative working capital of $8,491,834 at June 30, 2002,
compared to negative working capital of $6,101,268 at December 31, 2001. Current
assets decreased by $888,383 to $380,741 from December 31, 2001, to June 30,
2002. Current liabilities increased by $1,502,183 to $8,872,575 during the same
period. The change in working capital from December 31, 2001 to June 30, 2002,
was primarily attributable to the timing of payments on operating obligations
such as accounts payable and accrued liabilities, and receipts of funding under
the Company's equity lines of credit. Total assets were $8,388,565 at June 30,
2002, compared to $8,599,028 at December 31, 2001.

Convertible Note Receivable and Line of Credit

On December 1, 2001, the Company, as the lender, established a revolving line of
credit and received a convertible promissory note from Unveil Technologies, Inc.
("Unveil"), that permits Unveil to draw up to $2,000,000 for operations and
other purposes. Unveil is a developer of natural language understanding
solutions for customer resource management ("CRM") applications. Fonix intends
to obtain a license to Unveil's applications when completed and has made the
loan to Unveil to facilitate and expedite the development and commercialization
of Uneveil's speech-enabled CRM software. Draws on the line of credit bear
interest at an annual rate of seven

                                       21

<PAGE>



percent, which interest is payable quarterly beginning September 30, 2002. The
balance due under the line of credit is secured by Unveil's CRM software and
source code therefor and other assets of Unveil. The Company is a senior
creditor to Unveil. The unpaid principal, together with interest accrued
thereon, is due and payable on December 31, 2002, and is convertible into common
shares of Unveil at the Company's option. Based upon borrowings through June 30,
2002, such conversion at that date would have represented approximately 12
percent of the ownership of Unveil.

During the six months ended June 30, 2002, Unveil drew $805,000 on the line of
credit, bringing total draws on the line of credit to $1,435,000 as of June 30,
2002. Subsequent to June 30, 2002, Unveil drew an additional $15,000.

Investment In Audium Corporation

In February 2001, the Company entered into a collaboration agreement with Audium
Corporation ("Audium") to provide an integrated platform for generating Voice
XML solutions for Internet and telephony systems. Audium is a mobile application
service provider that builds and operates mobile applications that allow access
to Internet information and to complete online transactions using any telephone.
The collaboration includes integration of the Company's technologies with
Audium's mobile applications development capability.

Note Receivable - In connection with the collaboration agreement with Audium, in
February and May 2001 the Company advanced an aggregate of $400,000 to Audium as
a bridge loan (the "Audium Note"). The loan bears interest at a rate of five
percent per year and has a term of four years. The Audium Note is convertible
into shares of Audium Series A Convertible Preferred Stock ("Audium Preferred
Stock") and is secured by Audium's intellectual property.

Management determined that a 12 percent annual interest rate better reflects the
risk characteristics of the Audium Note. Accordingly, interest was imputed at 12
percent and the Audium Note was recorded at its original present value of
$302,909. For the three months and six months ended June 30, 2002, the Company
recorded interest income of $9,519 and $19,038, respectively, including
contractual and imputed interest. As of June 30, 2002, the balance of the Audium
Note was $331,345, net of the unaccreted discount of $68,655.

Investment in Affiliate - In April 2001, the Company entered into a stock
purchase agreement with Audium, wherein the Company agreed to purchase up to
$2,800,000 of Audium Preferred Stock at a price of $1.46 per share. At closing,
the Company paid $200,000 in cash and gave Audium a non-interest bearing note
(the "Fonix Note") for the remaining $2,600,000. Each share of Audium Preferred
Stock is convertible into one share of Audium's common stock. Interest on the
Fonix Note was imputed at 12 percent resulting in a present value of $2,370,348.
The resulting purchase price of the Audium Preferred Stock was $2,570,348.

At closing, Audium issued 14 Audium Preferred Share certificates to Fonix, each
certificate for 136,986 shares, and delivered one certificate in exchange for
the initial payment of $200,000. The remaining certificates are held by Audium
as collateral for the Fonix Note under the terms of a security agreement. For
each payment of $200,000 or multiple payments that aggregate $200,000, Audium
will release to Fonix one certificate for 136,986 shares of Audium Preferred
Stock.

The difference between the total purchase price of the Audium Preferred Stock
and the Company's portion of Audium's net stockholders' deficit at the time of
the purchase was $2,700,727, which was allocated to completed core technology.
The excess purchase price allocated to the completed core technology is being
amortized on a straight- line basis over a period of eight years.

The investment in Audium does not provide the Company with rights to any
technology developed by Audium, but the Company must obtain a license should it
choose to do so. The Company does not own an interest sufficient to control
Audium, even if it were to convert the Audium Note to Audium Preferred Stock.
Accordingly, Fonix does not benefit directly from the research and development
being done by Audium. As a result, the Company has determined that it is
appropriate to account for its investment, which represents 26.7 percent of
Audium's voting stock, under the equity method and not as a research and
development arrangement. Accordingly, for the three months and six months ended
June 30, 2002, the Company recognized losses consisting of the following:

                                                                  22

<PAGE>



<TABLE>
<CAPTION>
                                                                           Three Months                  Six Months
                                                                          Ended June 30,               Ended June 30,
                                                                               2002                         2002
                                                                      -----------------------      ----------------------
<S>                                                                   <C>                          <C>
Company share of Audium net loss                                      $                47,352      $              119,479
Amortization of difference between purchase price of Audium Preferred
Stock and Company's share of Audium's net stockholders' deficit       $                41,825      $               83,650
                                                                      -----------------------      ----------------------
Total equity in loss of affiliate                                     $                89,177      $              203,129
                                                                      =======================      ======================
</TABLE>


The fair value of this investment is determined based on Audium's estimated
future net cash flows considering the status of Audium's product development.
The Company evaluates this investment for impairment annually and more
frequently if indications of decline in value exist. An impairment loss that is
other than temporary is recognized during the period it is determined to exist.
An impairment is determined to be other-than-temporary if estimated future net
cash flows are less than the carrying value of the investment. If projections
indicate that the carrying value of the investment will not be recoverable, the
carrying value is reduced by the estimated excess of the carrying value over the
estimated discounted cash flows. At December 31, 2001, the Company evaluated the
estimated future net cash flows, given the status of Audium's product
development. From this evaluation , the Company determined that an impairment
loss of $823,275 should be recorded. No subsequent impairment loss has been
recorded.

Note Payable to Affiliate - The Fonix Note bears no interest unless an event of
default occurs, in which case it will bear interest at 12 percent per year. The
Company owes Audium $987,500 under the Fonix Note. The Company is currently
negotiating a new payment schedule for payment of this amount. If we is are not
able to agree on a new payment schedule, then Audium may declare a default under
the Fonix Note and exercise its rights under the Fonix Note, including the right
to foreclose on approximately 684,930 shares of Audium Preferred Stock held as
collateral for the Fonix Note. No events of default have occurred to date.

Management determined that a 12 percent annual interest rate reflects the risk
characteristics of the Fonix Note. Accordingly, interest has been imputed at 12
percent and the Company recorded a present value of $2,370,348 for the note
payable. For the three months and six months ended June 30, 2002, the Company
recorded interest expense of $19,426 and $55,428, respectively, related to this
note.

Promissory Note

In December 2001, the Company entered into an Asset Purchase Agreement with
Force Computers, Inc. ("Force"). As part of the purchase price Fonix issued a
non-interest bearing promissory note in the amount of $1,280,000 (the "Force
Note"). Installment payments under the Force Note are due over the 12 month
period following the date of purchase. Management determined that a seven
percent annual interest rate reflects the risk characteristics of the Force
Note. Accordingly, interest has been imputed at seven percent and the Company
recorded a discount of $40,245. For the three months and six months ended June
30, 2002, the Company recorded interest expense of $8,688 and $28,372,
respectively, related to the Force Note.

As collateral for the Force Note, 7,000,000 shares of the Company's Class A
common stock were placed into escrow. To date, all required payments have been
made. As of June 30, 2002, payments amounting to $410,000 remained outstanding
under the Force Note, including a payment of $160,000 that was due June 12,
2002. Subsequent to June 30, 2002, the June 12 installment payment was made.

Notes Payable - Related Parties

Certain  executives  officers of the Company (the  "Lenders") sold shares of the
Company's Class A common stock owned by them and advanced the resulting proceeds
amounting  to  $333,308 to the  Company  under the terms of a revolving  line of
credit and related  promissory  note. The funds were advanced for use in Company
operations. The

                                       23

<PAGE>



advances bear interest at 10 percent per annum, payable on a semi-annual basis.
The entire principal, along with unpaid accrued interest and any other unpaid
charges or related fees, is due and payable on June 10, 2003. Any time after
December 11, 2002, all or part of the outstanding balance and unpaid interest
may be converted at the option of the Lenders into shares of Class A common
stock of the Company. The conversion price is the average closing bid price of
the shares at the time of the advances. If converted, the conversion amount is
divided by the conversion price to determine the number of shares to be issued
to the Lenders. To the extent the market price of the Company's shares is below
the conversion price at the time of conversion, the Lenders are entitled to
receive additional shares equal to the gross dollar value received from the
original sale of the shares. A beneficial conversion feature of $14,917 was
recorded as interest expense in connection with this transaction. The Lenders
may also receive additional compensation as determined appropropriate by the
Board of Directors.

The advances were secured by the Company's intellectual property rights, which
security interest was released when the increase in authorized capital of
300,000,000 shares of Class A common stock was approved by the Company's
shareholders at the Fonix Annual Shareholders Meeting on July 12, 2002.

The Company also had unsecured demand notes payable to former stockholders of an
acquired entity in the aggregate amount of $77,625 outstanding as of June 30,
2002. During 2000, certain holders of these notes made demand for payment. The
Company is attempting to negotiate a reduced payoff of these notes. The notes
remain unpaid and no additional demands for payment have been received by the
Company.

Equity Lines of Credit

During the six months ended June 30, 2002, 40,692,920 shares of Class A common
stock were issued in connection with draws of $3,633,817 against the Initial
Equity Line (see Note 7 of the Condensed Consolidated Financial Statements) On
May 8, 2002, the Company and the Equity Line Investor amended the Initial Equity
Line agreement to increase the balance available under the Initial Equity Line
from $20,000,000 to $22,000,000. Accordingly, as of May 8, 2002, an additional
$2,000,000 was available to be drawn under the Initial Equity Line. From
inception of the Initial Equity Line through June 30, 2002, 91,083,516 shares of
Class A common stock have been issued in connection with draws of $20,617,324.
As of September 16, 2002, $1,382,676 remains unutilized under the Initial Equity
Line, as amended; however, no registered shares remain available to facilitate a
draw of this amount. Therefore, this amount is unavailable to the Company at
this time.

During the six months ended June 30, 2002, 93,586,995 shares of Class A common
stock were issued in connection with draws of $5,728,846 against the Second
Equity Line (see Note 7 of the Condensed Consolidated Financial Statements).
From inception of the Second Equity Line through June 30, 2002, 211,600,000
shares of Class A common stock were issued in connection with draws of
$19,153,846. As of September 16, 2002, $846,154 remains unutilized under the
Second Equity Line; however, no registered shares remain available to facilitate
a draw of this amount. Therefore, this amount is unavailable to the Company at
this time.

The following table summarizes the transactions completed under the equity lines
to date:

<TABLE>
<CAPTION>
                                      Weighted Average                Average Number of               Total Shares Issued
Equity Line                           Conversion Price              Shares Issued Per Draw             Under Equity Line
-----------                           ----------------              ----------------------             -----------------
<S>                                   <C>                           <C>                                <C>
Initial Equity Line                        $0.228                         4,554,176                       91,083,516
Second Equity Line                         $0.091                        11,775,556                      211,600,000
</TABLE>

On June 27, 2002, the Company entered into a the Third Equity Line Agreement
with the Equity Line Investor. Under the Third Equity Line, the Company has the
right to draw up to $20,000,000 under terms substantially identical to the
previous equity lines. On June 27, 2002, the Company filed with the Commission a
registration statement on Form S-2 to register the resale of up to 200,000,000
shares of the Company's Class A common stock by the Equity Line Investor. As of
September 16, 2002, the registration statement had not been declared effective
by the Commission, and as such, the Company was unable to draw funds under the
Third Equity Line as of that date. Prior to June 30, 2002, the Equity Line
Investor advanced the Company $182,676 against future draws on the Third Equity
Line. As of September 16, 2002, no shares had been issued under the Third Equity
Line.

                                       24

<PAGE>




Stock Options and Warrants

During the six months ended June 30, 2002, the Company granted options to
employees to purchase 5,229,000 shares of Class A common stock and granted
options to directors to purchase 1,000,000 shares of Class A common stock. The
options have exercise prices ranging from $0.05 to $0.11 per share, which were
the quoted fair market price of the stock on the dates of grant. Of the options
granted during this six-month period, 5,229,000 vest over the three years
following issuance and 1,000,000 vested immediately. These options expire within
ten years from the date of grant if not exercised. Using the Black-Scholes
pricing model, the weighted average fair value of the employee and director
options were $0.08 and $0.04 per share, respectively. As of June 30, 2002, the
Company had a total of 29,597,909 options to purchase Class A common shares
outstanding.

The Company's option plans provide for stock appreciation rights that allow the
grantee to receive shares of the Company's Class A common stock equivalent in
value to the difference between the designated exercise price and the fair
market value of the Company's stock at the date of exercise. As of June 30,
2002, there are options to purchase 33,334 shares of Class A common stock
outstanding which provide for stock appreciation rights. These options have an
exercise price of $1.00 per share. If not exercised by September 2002, the
options with these rights will expire.

As of September 16, 2002, the Company had warrants to purchase a total of
2,425,000 shares of Class A common stock outstanding that expire beginning in
2002 through 2010. Warrants issued for services were recorded at their fair
value determined using the Black-Scholes pricing model. The resulting values
were recorded in operating expenses in the periods covered by the services
rendered. Warrants for the purchase of 300,000 shares of Class A common stock
were issued in January 2000 for consulting services rendered. The warrants were
issued at $47,000 using the Black-Scholes pricing model assuming risk-free
interest rate of 5.7%, expected exercise life of 5 years, and volatility of
102%. The warrants were issued with exercise prices ranging from $0.28 to $1.25,
vested during the year ended December 31, 2000 and expire January 2003.

Related-Party Transaction

In February 2000, the Company entered into an agreement to purchase from John A.
Oberteuffer, an executive officer and director of the Company, all of Dr.
Oberteuffer's rights and interests in certain methods and apparatus for
integrated voice and pen input for use in computer systems. In payment for Dr.
Oberteuffer's technology, the Company granted Dr. Oberteuffer 600,000 warrants
to purchase our Class A common stock at an exercise price of $1.00 per share.
The warrants were valued using the Black-Scholes method of valuation and
resulted in a value of $0.79 per warrant for the 600,000 warrants, or an
aggregate value of $474,000. The warrants expire February 10, 2010. Also, the
Company granted Dr. Oberteuffer the right to repurchase the technology from the
Company at fair market value if the Company subsequently determined not to
commercialize the pen/voice technologies or products.

In February 2000, the Company was actively pursuing development and licensing
opportunities in handwriting recognition ("HWR") and desired to procure the
rights to Dr. Oberteuffer's in-process development. However, there was no
assurance at the time that the development of the project would result in
revenue opportunities when completed, so the cost was charged to in-process
research and development at that time.

The Company has since determined that there is no substantial benefit to
pursuing the market for HWR technology, including the technology acquired from
Dr. Oberteuffer and as such, the balance of goodwill from all HWR acquisitions
was written off in 2001. The Company's decision to cease efforts to
commercialize HWR technologies may trigger Dr. Oberteuffer's right to repurchase
the pen/voice technologies acquired from the Company.

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

                                     Outlook

Corporate Objectives and Technology Vision

                                       25

<PAGE>




The Company delivers speech solutions that empower people to interact
conversationally with information systems and computing devices using natural
language. The Company's speech-enabling technologies, which include text-to-
speech ("TTS") and neural network-based automated speech recognition ("ASR"),
are integrated into products for commercial, industrial and consumer
applications.

The Company is now delivering standard speech-enabled solutions and applications
for specific market segments, namely: mobile and wireless handheld computing
devices, automotive solutions, TTS applications for computer telephony, and
speech software applications. These solutions and applications are built on the
Company's Core Technologies. Management expects to deliver efficient, reusable
and scaleable standard solutions to increase revenue margins and leverage the
Company's Core Technologies across multiple platforms and operating systems for
wireless and mobile computing devices and computer telephony systems. The Fonix
Core Technologies are based on proprietary technology that is protected by
various patents and trade secrets. Management believes that the Company's
speech-enabling technologies and solutions provide superior competitive
advantages compared to other speech technologies and products available in the
marketplace. Specifically, the Fonix Core Technologies provide the following
competitive advantages:

          o    Fonix neural net-based  technologies require less memory storage.
               For example,  the combined Fonix ASR & TTS  technologies  require
               approximately  one megabyte  (MB),  while the nearest  competitor
               requires approximately three MB for comparable applications. This
               benefit lowers the cost of the Fonix solution compared to that of
               our competitors.

          o    Fonix neural net-based technologies require less processing power
               as measured in MIPS  (million  instructions  per  second).  Fonix
               technologies require a less expensive  micro-processor  (CPU) and
               allow for more  applications to run  concurrently on a comparable
               CPU.

          o    Fonix neural net-based  technologies provide a higher recognition
               accuracy in noisy  environments,  such as inside of an  operating
               vehicle.

          o    Fonix neural  net-based  technologies  do not require the user to
               train the system to their individual voice.

          o    Fonix  neural  net-based  architecture  provides  higher and more
               robust system reliability.

          o    Fonix neural net-based  technologies allow customers (OEMs, VARs,
               and end users) to modify vocabularies in real-time.

          o    Fonix neural net-based  technologies provide a lower porting-cost
               and require less time to integrate speech- enabling  solutions to
               operating systems ("OS") and CPUs.

          o    To date,  Fonix has ported to nine different  multiple  operating
               systems and twelve different CPUs, while many competitors support
               only a limited number of OS and CPU platforms.

          o    Fonix TTS human-like "voices" have very high understandability in
               noisy environments.

 In order to accomplish the objective of delivering efficient, resuable and
scalable standard solutions to increase revenue margins and leverage our Core
Technologies, the Company intends to proceed as follows:

           Substantially Increase Marketing and Sales Activities. The Company
           intends to hire additional sales and marketing personnel, both
           domestically and internationally, who will focus on the automotive
           embedded and wireless mobile markets, computer telephony and server
           solution markets and personal software for consumer applications. To
           address global opportunities, the Company will continue to develop or
           acquire additional speech-enabling products and technologies for
           foreign languages and dialects. Fonix will also make significant
           investments in reseller, co-operative, and market development funded
           programs in order to build sales and marketing opportunities with
           software developers, resellers, wholesale distribution channels and
           corporate partners.

           Expand Strategic Relationships. The Company has a number of strategic
           collaboration and marketing arrangements with developers and VARs.
           The Company intends to expand such relationships and add additional
           similar relationships, specifically in the mobile communications,
           PDA, IVR and computer telephony markets. Fonix partners, OEMs, and
           VARs can accelerate time to market by incorporating Fonix s.Manager,
           a proprietary dynamic development platform. Further, when the Company
           is able to identify "first mover" speech-enabling applications in
           which it can integrate its Core Technologies, the Company intends to
           investigate investment opportunities in order that the Company can
           obtain preferred or priority

                                       26

<PAGE>



           collaboration rights.

           Continue to Develop and Enhance the Core Technologies. The Company
           plans to continue to invest significant resources in development of
           standard solution and products, acquisition of speech-enabling
           technologies and properties, developer tools and development
           frameworks to maintain the competitive advantages found in its Core
           Technologies.

The Company has entered into and is seeking to enter into collaboration or joint
marketing agreements, co- development relationships, and strategic alliances
with well-known technology and consumer product manufacturers, integrators, and
value-added resellers ("VARs"). Management believes that the best way to
generate material recurring revenues is for the Company to enter into contracts
with integrators and VARs who will introduce it to potential end users of
products that incorporate our Core Technologies. Typically, these types of
agreements require joint marketing and development efforts by both Fonix and the
integrators or VARs. The Company spends significant time educating and providing
information to both third party integrators and VARs and their prospective
customers regarding the use and benefits of Fonix Core Technologies. During this
evaluation period, the Company may expend substantial sales, marketing and
management resources, all of which is not recoverable unless the prospective
customer of the third party integrator or VAR enters into an agreement with the
Company or the third party which has integrated Fonix Core Technologies into its
products, which agreement ultimately results in the receipt of revenue by the
Company.

As the Company proceeds to implement its strategy and to reach its objectives,
it anticipates further development of complementary technologies, added product
and applications development expertise, access to market channels and additional
opportunities for strategic alliances in other industry segments. The strategy
adopted by the Company has significant risks and shareholders and others
interested in the Company and its Class A common stock should carefully consider
the risks set forth under the heading "Certain Significant Risk Factors" in the
Company's 2001 Annual Report on Form 10-K, Item 1, Part I.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

To date, all of the Company's revenues have been denominated in United States
dollars and received primarily from customers in the United States. The
Company's exposure to foreign currency exchange rate changes has been
insignificant. The Company expects, however, that future product license and
services revenue may also be derived from international markets and may be
denominated in the currency of the applicable market. As a result, operating
results may become subject to significant fluctuations based upon changes in the
exchange rate of certain currencies in relation to the U.S. dollar. Furthermore,
to the extent that the Company engages in international sales denominated in
U.S. dollars, an increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products less competitive in international
markets. Although the Company will continue to monitor its exposure to currency
fluctuations, it cannot assure that exchange rate fluctuations will not
adversely affect financial results in the future.

Item 4.  Evaluation of Disclosure Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934, Rules 13a-14(c) and 15-d-14(c)) as of a
date (the "Evaluation Date") within 90 days before the filing date of this
quarterly report, have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures were adequate and designed to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them by others within those entities.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls, or, to the Company's knowledge, in other factors
that could significantly affect these controls subsequent to the Evaluation
Date.

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

                                       27

<PAGE>




           In November 1998, Fonix filed a suit against John R. Clarke and
Perpetual Growth Fund, a company affiliated with Clarke, in Federal District
Court for the Central District of Utah seeking a declaratory judgment that it
did not owe any money to Clarke and Perpetual Growth relating to certain
financing received by the Company during 1998 and thereafter. The case was tried
in March 2001, after which the trial court ruled in favor of Fonix and
determined that Clarke and Perpetual Growth had no claims for "trailing fees"
with regard to the financings which were the subject of the suit. Clarke and
Perpetual Growth appealed the decision of the trial court to the United States
Court of Appeals for the Tenth Circuit, but the appellate court has not yet
rendered a decision. The Company believes that the claims of Clarke and
Perpetual Growth are without merit and will continue to vigorously oppose those
claims. If the appellate court reverses the decision of the trial court and
finds that we owe additional funds to Clarke and/or Perpetual Growth, that
ruling could have a material adverse effect on our financial position.

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

Item 2.  Changes in Securities

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

Recent Sales of Unregistered Securities. During the three months ended June 30,
2002, the Company issued equity securities that were not registered under the
Securities Act of 1933, as amended (the "1933 Act"), other than unregistered
sales in reliance on Regulation S under the Act, as follows:

           For the three months ended June 30, 2002, the Company received
           $876,981 in funds drawn under the Initial Equity Line (see Note 7 of
           the Condensed Consolidated Financial Statements), less commissions
           and fees of $26,309, and issued 11,505,784 shares of Class A common
           stock to the Equity Line Investor. The shares were issued without
           registration under the 1933 Act in reliance on Section 4(2) of the
           Securities Act of 1933, as amended (the "1933 Act"), and the rules
           and regulations promulgated thereunder. The resales of the shares
           were subsequently registered under a registration statement on Form
           S-2.

           For the three months ended June 30, 2002, the Company received
           $1,085,682 in funds drawn under the Second Equity Line (see Note 7 of
           the Condensed Consolidated Financial Statements), less commissions
           and fees of $32,570, and issued 9,689,260 shares of Class A common
           stock to the Equity Line Investor. The shares were issued without
           registration under the 1933 Act in reliance on Section 4(2) of the
           1933 Act and the rules and regulations promulgated thereunder. The
           resales of the shares were subsequently registered under a
           registration statement on Form S-2.

Item 3. Defaults Upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security Holders

On July 12, 2002, the Company held its Annual Meeting of Shareholders in Boston,
Massachusetts. The record date for the meeting was May 24, 2002, on which date
there were 482,805,888 shares of the Company's Class A common stock outstanding.

The first matter voted upon at the meeting was the election of directors. The
following directors were elected:




                                       28

<PAGE>



                                  SHARES                           SHARES
DIRECTOR                      VOTED IN FAVOR                    VOTED AGAINST
--------                      --------------                    -------------
Thomas A. Murdock               399,431,186                      11,146,172
Roger D. Dudley                 399,361,304                      11,216,084
John A. Oberteuffer, Ph.D       404,903,223                       5,674,135
William A. Maasberg, Jr.        403,439,549                       7,137,809
Mark S. Tanner                  403,604,229                       6,973,129

The second matter voted upon at the meeting was the approval of a proposed
amendment to the Company's Certificate of Incorporation to increase the
authorized capital stock of the Company to include 800,000,000 shares of Class A
Common Stock. The results of the voting were 397,433,216 shares in favor,
11,766,861 shares against, and 1,377,311 shares withheld or abstaining.

Item 5.    Other Matters

           Change in Certifying Public Accountants

           On July 16, 2002, the Company engaged the accounting firm of Hansen
Barnett & Maxwell ("HBM") as the Company's independent public accountants to
review the Company's interim financial statements and to audit its financial
statements beginning with the fiscal year ending December 31, 2002. The Company
terminated its relationship with and dismissed its former independent public
accountant, Arthur Andersen LLP ("Andersen"), effective with the appointment of
HBM. The dismissal of Andersen and the appointment of HBM as the Company's new
independent public accountant were approved by the Company's Audit Committee and
Board of Directors on July 12, 2002.

           During the period from the date of Andersen's engagement as the
Company's independent public accountants to July 16, 2002, the Company did not
consult with HBM on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.

           During the most recent fiscal years ended December 31, 2001 and 2000,
and the interim period subsequent to December 31, 2001, through the date of
dismissal of Andersen, there were no disagreements with Andersen on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure that would have caused Andersen to make references
in their report to such disagreements.

           Andersen's report on the financial statements of the Company for the
year ended December 31, 2001, contained no adverse opinion or disclaimer of
opinion and was not modified as to audit scope or accounting principles, except
that Andersen's report dated February 26, 2002, contained an explanatory
paragraph regarding the Company's ability to continue as a going concern.
Similarly, Andersen's report on the financial statements of the Company for the
year ended December 31, 2000, contained no adverse opinion or disclaimer of
opinion and was not modified as to audit scope or accounting principles, except
that Andersen's report dated March 29, 2001, contained an explanatory paragraph
regarding the Company's ability to continue as a going concern.

           The Company filed with the Commission a current report on Form 8-K on
July 17, 2002, disclosing the termination of its engagement with Andersen, its
engagement of HBM, and other information required to be disclosed. The Company
provided Andersen with a copy of the current report and requested that Andersen
furnish a letter addressed to the Commission stating whether Andersen agrees
with the above statements. In response, a representative of Andersen advised the
Company that Andersen would no longer provide letters relating to its
termination as a audit client's independent public accountant, and that
Andersen's inability to provide such letters had been discussed with the Staff
at the Commission.

Resignation of Mark S. Tanner

           Effective July 27, 2002, Mark S. Tanner resigned as a member of our
Board of Directors.

Item 6.  Exhibits and Reports on Form 8-K

                                       29

<PAGE>



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

<TABLE>
<CAPTION>
           Exhibit No.         Description of Exhibit

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

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

           (2)(iii)            Agreement and Plan of Merger among Fonix, Papyrus Acquisition Corporation, and
                               Papyrus Associates, Inc., dated as of September 10, 1998, incorporated by reference from
                               the Company's Current Report on Form 8-K, filed November 13, 1998

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

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

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

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

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

           (4)(i)              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, which is incorporated by
                               reference from the Company's Quarterly Report on Form 10-Q for the period ended
                               September 30, 1997

           (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, which is
                               incorporated by reference from the Company's
                               Quarterly Report on Form 10-Q for the period
                               ended September 30, 1997

           (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, which is
                               incorporated by reference from the Company's
                               Quarterly Report on Form 10-Q for the period
                               ended September 30, 1997


                                       30

<PAGE>



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

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

           (9)(i)              Voting Trust Agreement dated as of December 10, 1993 by and among Phonic
                               Technologies, Inc., Stephen M. Studdert, Thomas A. Murdock and Roger D. Dudley,
                               which is incorporated by reference from the Company's Current Report on Form 8-K
                               dated as of June 17, 1994

           (9)(ii)             Amendment of Voting Trust Agreement by and among the Company, Stephen M.
                               Studdert, Thomas A. Murdock, Roger D. Dudley, Beesmark Investments, L.C., Studdert
                               Companies Corporation, and Thomas A. Murdock as Trustee, dated as of October 23,
                               1995, incorporated by reference from the Company's Current Report on Form 8-K dated
                               as of October 23, 1995

           (9)(iii)            Second Amendment of Voting Trust Agreement by and among the Company, Stephen M.
                               Studdert, Thomas A. Murdock, Roger D. Dudley, Beesmark Investments, L.C., Studdert
                               Companies Corporation, and Thomas A. Murdock as Trustee, dated as of July 2, 1996,
                               incorporated by reference from the Annual Report on Form 10-KSB for the fiscal year
                               ended December 31, 1996

           (9)(iv)             Third Amendment of Voting Trust Agreement by and among the Company, Stephen M.
                               Studdert, Thomas A. Murdock, Roger D. Dudley, Beesmark Investments, L.C., Studdert
                               Companies Corporation, and Thomas A. Murdock as Trustee, dated as of September 20,
                               1996, incorporated by reference from the Annual Report on Form 10-KSB for the fiscal
                               year ended December 31, 1996

           (9)(v)              Fourth Amendment of Voting Trust Agreement by and among the Company, Stephen M.
                               Studdert, Thomas A. Murdock, Roger D. Dudley, Beesmark Investments, L.C., Studdert
                               Companies Corporation, and Thomas A. Murdock as Trustee, dated as of September 20,
                               1996, incorporated by reference from the Annual Report on Form 10-KSB for the fiscal
                               year ended December 31, 1996

           (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

                                       31

<PAGE>




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

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

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

           (10)(viii)          Restated First Statement of Work and License Agreement between the Company and
                               Siemens, dated February 11, 1998, as revised, which is incorporated by reference from
                               the Company's Annual Report on Form 10-K for the year ended December 31, 1997

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

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

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

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

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

           (10)(xiv)           Employment Agreement by and between the Company and John A. Oberteuffer, which is
                               incorporated by reference from the Company's Annual Report on Form 10-K for the year
                               ended December 31, 1997

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

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

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

                                       32

<PAGE>



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

           (10)(xix)           Securities Purchase Agreement among Fonix
                               Corporation and JNC Strategic Fund, dated
                               December 21, 1998 for 1,801,802 shares of common
                               stock and Repricing Rights, incorporated by
                               reference from Amendment No. 1 to Registration
                               Statement on Form S-3 (File No. 333-67573)

           (10)(xx)                       Securities Purchase Agreement among Fonix Corporation and the investors identified
                                          therein dated January 29, 1999, as supplemented on March 3, 1999, concerning sales of
                                          $6,500,000 principal amount of Series C 5% Convertible Debentures, incorporated by
                                          reference from Amendment No. 1 to Registration Statement on Form S-3 (File No. 333-
                                          67573)

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

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

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

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

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

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

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

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

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


                                       33

<PAGE>



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

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

           (10)(xxxii)         Series F Convertible Preferred Stock Purchase Agreement, Among Fonix Corporation,
                               Sovereign Partners, LP, Dominion Capital Fund, LTD., Dominion Investment Fund, LLC,
                               Canadian Advantage, L.P., and Queen LLC, dated as of February 1, 2000

           (10)                (xxxiii) Amended and Restated Series F
                               Convertible Preferred Stock Purchase Agreement
                               among Fonix Corporation and the investors
                               identified therein dated May 22, 2000, which is
                               incorporated by reference from the Company's Rule
                               424(b) Registration Statement on Form S-2, filed
                               with the Commission on June 16, 2000 (therein
                               designated as Exhibit 99.3)

           (10)                (xxxiv) Equity Line Agreement between Fonix
                               Corporation and Queen LLC, dated August 8, 2000,
                               which is incorporated by reference from the
                               Company's Registration Statement on Form S-2,
                               filed with the Commission on August 10, 2000
                               (therein designated as Exhibit 99.4)

           10(xxxv)            Audium Stock Purchase Agreement between Fonix
                               Corporation and Audium Corporation, dated as of
                               April 5, 2001, filed with the Commission on April
                               17, 2001

           10(xxxvi)           Certificate of Designation of Audium Series A Preferred Stock, filed with the
                               Commission on April 17, 2001.

           10(xxxvii)          Form of Promissory Note from Fonix Corporation to
                               Audium Corporation for $2,600,000, dated as of
                               April 5, 2001, filed with the Commission on April
                               17, 2001.

           10(xxxviii)         Security Agreement between Fonix Corporation as
                               the Debtor and Audium Corporation as the Secured
                               Party, dated as of April 5, 2001, filed with the
                               Commission on April 17, 2001.

           10(xxxix)           Registration Rights Agreement between Fonix
                               Corporation and Audium Corporation, dated as of
                               April 5, 2001, filed with the Commission on April
                               17, 2001.

           10(xl)              Security Agreement between Audium Corporation as the Debtor and Fonix Corporation
                               as the Secured Party, dated as of April 5, 2001, filed with the Commission on April 17,
                               2001.

           10(xli)             Form of Promissory Note from Audium Corporation to Fonix Corporation for $400,000,
                               filed with the Commission on April 17, 2001.

           10(xlii)            License Agreement between Fonix Corporation and Audium Corporation, dated as of
                               April 5, 2001, filed with the Commission on April 17, 2001.

           10(xliii)           Second Private Equity Line Agreement between
                               Fonix Corporation and Queen LLC, dated April 6,
                               2001, filed with the Commission on April 17,
                               2001.

           10(xliv)            Registration Rights Agreement between Fonix Corporation and Queen LLC, dated April
                               6, 2001, filed with the Commission on April 17, 2001.


                                       34

<PAGE>



           10(xlv)             Amendment to Equity Line Agreement between Fonix Corporation and Queen LLC,
                               dated May 8, 2002, filed with the Commission May 9, 2002.
           10(xlvi)            Third Private Equity Line Agreement between Fonix Corporation and Queen LLC, dated
                               June 27, 2002, filed with the Commission June 27, 2002.

           99.1                Certification of President and Chief Financial Officer
           99.2                Certification of President and Chief Financial Officer Pursuant to Section 906 of the
                               Sarbanes-Oxley Act of 2002.
</TABLE>

(B) Reports filed on Form 8-K during the three-month period ended June 30, 2002:

On June 10, 2002, the Company filed a Current Report on Form 8-K to announce a
loan and repayment agreement between the Company and Thomas A. Murdock and Roger
D. Dudley, two if its executive officers and directors.

On July 17, 2002, the Company filed a current report on Form 8-K with the
Commission relating to its engagement of Hansen Barnett & Maxwell as its
independent public accountants to review the Company's interim financial
statements and to audit the Company's financial statements beginning with its
fiscal year ending December 31, 2002. The current report also disclosed the
termination of the Company's engagement of Arthur Andersen LLP as its
independent public accountant, effective upon the engagement of Hansen Barnett &
Maxwell.




                                       35

<PAGE>



                                   SIGNATURES

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


                                   Fonix Corporation



Date: December 13, 2002            /s/ Roger D. Dudley
                                   --------------------------------------------
                                   Roger D. Dudley, Executive Vice President,
                                   Chief Financial Officer
                                   (Principal financial officer)



                                       36

<PAGE>



                                  CERTIFICATION
I, Thomas A. Murdock certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Fonix Corporation;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material  fact  necessary to make the  statements  made,  in
     light of the  circumstances  under  which such  statements  were made,  not
     misleading with respect to the period covered by this quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's  other certifying  officers and I have disclosed,  base on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of registrant's board of directors:

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date: December 13, 2002


/s/ Thomas A. Murdock
-------------------------------------
Thomas A. Murdock
Chairman and Chief Executive Officer



                                       37

<PAGE>



                                  CERTIFICATION

I, Roger D. Dudley, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Fonix Corporation;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material  fact  necessary to make the  statements  made,  in
     light of the  circumstances  under  which such  statements  were made,  not
     misleading with respect to the period covered by this quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's  other certifying  officers and I have disclosed,  base on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of registrant's board of directors:

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date: December 13, 2002


/s/ Roger D. Dudley
-------------------------------------
Roger D. Dudley
Executive Vice President and Chief Financial Officer




                                       38

<PAGE>



                                  EXHIBIT 99.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report of Fonix Corporation on Form
10-Q for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), Thomas A. Murdock, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the  requirements  of section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information  contained in the Report fairly  presents,  in all material
     respects, the financial condition and result of operations of the Company.



                                    /s/ Thomas A. Murdock
                                  ------------------------------------------
                                  Thomas A. Murdock
                                  Chief Executive Officer



                                       39

<PAGE>


                                  EXHIBIT 99.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report of Fonix Corporation on Form
10-Q for the period ending June 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), Roger D. Dudley, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the  requirements  of section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information  contained in the Report fairly  presents,  in all material
     respects, the financial condition and result of operations of the Company.


                                    /s/ Roger D. Dudley
                                   ------------------------------------------
                                   Roger D. Dudley
                                   Chief Financial Officer



                                       40