<PAGE>
 
             CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES
                  FOR SERIES D 4% CONVERTIBLE PREFERRED STOCK
                                      OF
                               FONIX CORPORATION

     Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, fonix corporation, a Delaware corporation (the "Company"), does hereby
certify:

     FIRST: That pursuant to authority expressly vested in it by the Certificate
of Incorporation of the Company, the Board of Directors of the Company has
adopted the following resolution establishing a new series of Preferred Stock of
the Company, consisting of 1,500,000 shares designated "Series D 4% Convertible
Preferred Stock," with such powers, designations, preferences and relative
participating, optional or other rights, if any, and the qualifications,
limitations or restrictions thereof, as are set forth in the resolutions :

          RESOLVED, that the Company's Board of Directors hereby approves the
     designation and issuance of the Series D 4% Convertible Preferred Stock
     according to the terms and conditions as set forth in Exhibit A and
     authorizes and instructs the Company's Executive Officers to proceed in
     filing the Certificate of Designation with the State of Delaware and to
     take such other action as shall be appropriate in connection with the
     issuance of the Series D Preferred Stock.

     SECOND: That said resolutions of the directors of the Company were duly
adopted in accordance with the provisions of Section 151(g)  of the General
Corporation Law of the State of Delaware.

     IN WITNESS WHEREOF, the undersigned hereby affirms, under penalties of
perjury, that the foregoing instrument is the act and deed of the Company and
that the facts stated therein are true.  Dated this 25th day of August, 1998.

                                    fonix corporation



                                    By:  /s/ Jeffrey N. Clayton
                                        -------------------------
                                         Jeffrey N. Clayton

                                    Title: Vice President and Secretary
<PAGE>
 
                                SERIES D TERMS
                                --------------

          Section 1.     Designation, Amount and Par Value.  The series of
                         ---------------------------------                
preferred stock shall be designated as the 4% Series D Convertible Preferred
Stock (the "Preferred Stock"), and the number of shares so designated and
            ---------------                                              
authorized shall be one million five hundred thousand (1,500,000).  Each share
of Preferred Stock shall have a par value of $.0001 per share and a stated value
of $20 per share (the "Stated Value").
                       ------------   

          Section 2.     Dividends.
                         --------- 

          (a)  Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available therefor,
and the Company shall pay, annually in arrears on December 31 of each year,
commencing on the earlier of December 31, 1998, or any Conversion Date (as
defined below), cumulative dividends on the Preferred Stock at the rate per
share (as a percentage of the Stated Value per share) equal to four percent (4%)
per annum, payable in cash or shares of Common Stock (as defined in Section 7)
at the option of the Company. The number of shares of Common Stock issuable as
payment of dividends hereunder shall equal the aggregate dollar amount of
dividends then being paid, divided by the Conversion Price (as defined in
Section 5(c)(i)) then in effect.  Dividends on the Preferred Stock shall be
calculated on the basis of a 360-day year, shall accrue daily commencing the
Original Issue Date (as defined in Section 7), and shall be deemed to accrue on
such date whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Company legally available for the payment
of dividends.  The party that holds the Preferred Stock on an applicable record
date for any dividend payment will be entitled to receive such dividend payment
and any other accrued and unpaid dividends which accrued prior to such dividend
payment date, without regard to any sale or disposition of such Preferred Stock
subsequent to the applicable record date but prior to the applicable dividend
payment date.  Except as otherwise provided herein, if at any time the Company
pays less than the total amount of dividends then accrued on account of the
Preferred Stock, such payment shall be distributed ratably among the Holders of
the Preferred Stock based upon the number of shares then held by each Holder in
proportion to the total number of shares of Preferred Stock then outstanding.
In order for the Company to exercise its right to pay dividends in cash, the
Company shall, no less than five (5) Trading Days after the last day of a
calendar year for which dividends are payable, provide the Holders of the
Preferred Stock written notice of its intention to pay dividends in cash.  In
order for the Company to exercise its right to pay dividends in cash on any
Conversion Date, the Company must provide written notice to the holders of
Preferred Stock at any time prior to the Company's receipt of a Conversion
Notice, which notice will remain in effect for subsequent Conversion Notices
until rescinded by the Company in a written notice to such effect that is
addressed to the holders of the Preferred Stock.

          (b)  Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends on the
Preferred Stock (and must deliver cash in respect thereof) if:  (i) the number
of shares of Common Stock at the time authorized, 

                                       2
<PAGE>
 
unissued and unreserved for all purposes, or held as treasury stock, is either
insufficient to issue such dividends in shares of Common Stock or the Company
has not duly reserved for issuance in respect of such dividends a sufficient
number of shares of Common Stock, (ii) such shares are not registered for resale
pursuant to an effective Underlying Securities Registration Statement (as
defined in Section 7) and may not be sold without volume restrictions pursuant
to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), as determined by counsel to the Company pursuant to a
 --------------      
written opinion letter, addressed and acceptable to the Company's transfer agent
or other Person performing functions similar thereto, (iii such shares are not
listed for trading on the Nasdaq SmallCap Market, Nasdaq National Market, The
New York Stock Exchange ("NYSE") or the American Stock Exchange (the "AMEX")
                          ----                                        ----
(and any other exchange, market or trading facility in which the Common Stock is
then listed for trading), (iv) the issuance of such shares would result in the
recipient thereof beneficially owning, determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended, more than
4.999% of the then issued and outstanding shares of Common Stock, or (v) the
Company shall have failed to timely satisfy its obligations pursuant to any
Conversion Notice.

     Payment of dividends in shares of Common Stock is further subject to the
provisions of Section 5(a)(ii).

          (c)  So long as any shares of Preferred Stock remain outstanding,
neither the Company nor any subsidiary thereof shall, without the consent of the
holders of one hundred percent (100%) of the shares of Preferred Stock then
outstanding, redeem, repurchase or otherwise acquire directly or indirectly any
Junior Securities (as defined in Section 7), nor shall the Company directly or
indirectly pay or declare any dividend or make any distribution (other than a
dividend or distribution described in Section 5) upon, nor shall any
distribution be made in respect of, any Junior Securities, nor shall any monies
be set aside for or applied to the purchase or redemption (through a sinking
fund or otherwise) of any Junior Securities.

          Section 3.     Voting Rights; Protective Provisions.  Except as
                         ------------------------------------            
otherwise provided herein and as otherwise required by law, the Preferred Stock
shall have no voting rights.  However, so long as any shares of Preferred Stock
are outstanding, the Company shall not and shall cause its subsidiaries not to,
without the affirmative vote of each of the holders of the Preferred Stock then
outstanding, (ii alter or change adversely the powers, preferences or rights
given to the Preferred Stock, (b) alter or amend this Certificate of
Designation, (c) authorize or create any class of stock ranking as to dividends
or distribution of assets upon a Liquidation (as defined in Section 4) or
otherwise senior to or pari passu with the Preferred Stock, (d) amend its
certificate of incorporation, bylaws or other charter documents so as to affect
adversely any rights of any holders of the Preferred Stock, (e) increase the
authorized or designated number of shares of Preferred Stock, (f) issue any
additional shares of Preferred Stock or (g) enter into any agreement with
respect to the foregoing.

          Section 4.     Liquidation.  Upon any liquidation, dissolution or
                         -----------                                       
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
                                                                -----------   
and subject to the rights of the holders 

                                       3
<PAGE>
 
of the Company's Series A Convertible Preferred Stock then outstanding, the
holders of the Preferred Stock shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid
dividends per share, whether declared or not, and all other amounts in respect
thereof (including liquidated damages, if any) then due and payable before any
distribution or payment shall be made to the holders of any Junior Securities,
and if the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the holders of Preferred
Stock shall be distributed among the holders of Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or disposition
of all or substantially all of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than 50% of the voting power of the Company is disposed of, or a consolidation
or merger of the Company with or into any other company or companies shall not
be treated as a Liquidation, but instead shall be subject to the provisions of
Section 5. The Company shall mail written notice of any such Liquidation, not
less than 45 days prior to the payment date stated therein, to each record
holder of Preferred Stock.

          Section 5.     Conversion.
                         ---------- 

          (a)(i)  Conversions at Option of Holder.  Each share of Preferred
                  -------------------------------                          
Stock shall be convertible into shares of Common Stock (subject to the
limitations set forth in Section 5(a)(iii) hereof) at the Conversion Ratio (as
defined in Section 7) at the option of a Holder, at any time and from time to
time, from and after the earlier of (i) ninety (90) days following the Original
Issue Date and (ii) the date on which the Underlying Securities Registration
Statement (as defined in Section 7) is declared effective by the Securities and
Exchange Commission (the "Commission") (the earlier of such 90 days and such
effective date being hereinafter referred to as the "Initial Conversion Date"),
provided that any conversions of Preferred Stock by a Holder shall be limited in
--------                                                                        
each monthly period to twenty-five percent (25%) of the number of shares of
Preferred Stock originally issued to such Holder on the Original Issue Date, on
a cumulative basis (for example, during the first month following the Initial
Conversion Date, a Holder may convert up to 25% of the number of shares of
Preferred Stock issued to it on the Original Issue Date and during the second
month following the Initial Conversion Date, a Holder may convert, on an
aggregate to date basis, up to 50% of the number of shares of Preferred Stock
issued to it on the Original Issue Date), provided, that notwithstanding the
                                          --------                          
preceding clause, a Holder may convert, during any monthly period after the
Initial Conversion Date, up to fifty percent (50%) of the number of shares of
Preferred Stock originally issued to such Holder on the Original Issue Date, on
a cumulative basis, if (A) the Average Daily Trading Volume (as defined in
Section 7) exceeds 500,000 shares for the ten (10) Trading Day period
immediately preceding any Conversion Date and (B) the average Per Share Market
Value for such 10 Trading Day Period is no more than five percent (5%) lower
than the Per Share Market Value on the Trading Day immediately preceding the
first day of such 10 Trading Day period.  A Holder shall effect conversions by
surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form of
conversion notice 

                                       4
<PAGE>
 
attached hereto as Exhibit A (the "Conversion Notice").  Each Conversion Notice
                   ---------       -----------------         
shall specify the number of shares of Preferred Stock to be converted, the date
on which such conversion is to be effected, which date may not be prior to the
date the holder delivers such Conversion Notice by facsimile (the "Conversion
                                                                   -----------
Date") and the manner by which such holder elects to have the Conversion Price
----                                                         
determined as specified in Section 5(c)(i)(A) and (B) hereof. If no Conversion
Date is specified in a Conversion Notice, the Conversion Date shall be the date
that the Conversion Notice is deemed delivered pursuant to Section 5(i). Subject
to Sections 5(b) and 5(a)(ii) hereof, each Conversion Notice, once given, shall
be irrevocable. If the Holder is converting less than all of the shares of
Preferred Stock represented by the certificate or certificates tendered by the
holder with the Conversion Notice, or if a conversion hereunder cannot be
effected in full for any reason, the Company shall promptly deliver to such
holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares as have not been converted.

          (ii)  Automatic Conversion.  Subject to the provisions in this
                --------------------                                    
paragraph, all outstanding shares of Preferred Stock for which conversion
notices have not previously been received or for which redemption has not been
made or required hereunder shall be automatically converted on the third
anniversary of the Original Issue Date at the Conversion Price on such date. The
conversion contemplated by this paragraph shall not occur at such time as 
(a)(1) an Underlying Securities Registration Statement is not then effective or
(2) the Holder is not permitted to resell Underlying Shares pursuant to Rule
144(k) promulgated under the Securities Act, without volume restrictions, as
evidenced by an opinion letter of counsel acceptable to the Holder and the
transfer agent for the Common Stock; (b) there are not sufficient shares of
Common Stock authorized and reserved for issuance upon such conversion; or (c)
the Company shall have defaulted on its covenants and obligations hereunder or
under the Purchase Agreement or Registration Rights Agreement. Notwithstanding
the foregoing, the three-year period for conversion under this paragraph shall
be extended (on a day-for-day basis) for any Trading Days that the Purchaser is
unable to resell Underlying Shares under an Underlying Securities Registration
Statement due to (i) the Common Stock not being listed for trading on the Nasdaq
SmallCap Market, (ii) the failure of an Underlying Securities Registration
Statement to be declared effective by the Commission by the Filing Date (as
defined in the Registration Rights Agreement), or (iii) if an Underlying
Securities Registration Statement shall have been declared effective by the
Commission, (x) the failure of such Underlying Securities Registration Statement
to remain effective during the Effectiveness Period (as defined in the
Registration Rights Agreement) as to all Underlying Shares, or (y) the
suspension of the Holder's ability to resell Underlying Shares thereunder.

          (iii)  Certain Conversion Restrictions.
                 ------------------------------- 

                 (A)  In no event (except (i) with respect to an automatic
conversion of the Preferred Stock as provided in Section 5(a)(ii) hereof, 
(ii) if the Company is in default of any of its obligations hereunder or any of
the Transaction Documents, as defined in Section 7, or (iii) except as otherwise
set forth herein) shall any Holder be entitled to convert any Preferred Stock to
the extent that, after such conversion, the sum of (1) number of shares of
Common Stock beneficially owned 

                                       5
<PAGE>
 
by such Holder and its affiliates (other than the shares of Common Stock which
may be deemed beneficially owned through the ownership of the unconverted
portion of the Preferred Stock), and (2) the number of shares of Common Stock
issuable upon the conversion of the Preferred Stock with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock. For purposes of the immediately preceding sentence,
beneficial ownership shall be determined in accordance with section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), except as
otherwise provided in clause (1) of the preceding sentence. To the extent that
the limitation contained in this paragraph applies, the determination of whether
shares of Preferred Stock are convertible (in relation to other securities owned
by a Holder) and of which shares of Preferred Stock are convertible shall be in
the sole discretion of the Holder, and the submission of shares of Preferred
Stock for conversion shall be deemed to be the Holder's determination of whether
such shares of Preferred Stock are convertible (in relation to other securities
owned by the Holder) and of which portion of such shares of Preferred Stock are
convertible, in each case subject to such aggregate percentage limitation, and
the Company shall have no obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to restrict the right of
the Holder to convert shares of Preferred Stock at such time as such conversion
will not violate the provisions of this paragraph. The provisions of this
Section will not apply to any conversion pursuant to Section 5 (a)(ii) hereof,
and may be waived by a Holder (but only as to itself and not to any other
Holder) upon not less than 75 days prior notice to the Company (in which case,
the Holder shall make such filings with the Commission, including under Rule 13D
or 13G, as are required by applicable law), and the provisions of this Section
shall continue to apply until such 75th day (or later, if stated in the notice
of waiver). Other Holders shall be unaffected by any such waiver.

                 (B)  If on any Conversion Date (A) the Common Stock is listed
for trading on the Nasdaq SmallCap Market or the Nasdaq National Market, (B) the
Conversion Price then in effect is such that the aggregate number of shares of
Common Stock that would then be issuable upon conversion in full of all then
outstanding shares of Preferred Stock and as payment of dividends thereon in
shares of Common Stock, together with any shares of the Common Stock previously
issued upon conversion of shares of Preferred Stock and as payment of dividends
thereon, would equal or exceed twenty percent (20%) of the number of shares of
the Common Stock outstanding on the Original Issue Date (such number of shares
as would not equal or exceed such 20% limit, the "Issuable Maximum" and any such
Conversion Date, the "Record Date"), and (C) the Company shall not have
previously obtained the vote of shareholders (the "Shareholder Approval"), if
any, as may be required by the applicable rules and regulations of The Nasdaq
Stock Market (or any success entity) applicable to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum in a private placement
whereby shares of Common Stock are deemed to have been issued at a price that is
less than the greater of book or fair market value of the Common Stock, then the
Company shall issue to the Holder so requesting a conversion a number of shares
of Common Stock equal to the Issuable Maximum and, with respect to the remainder
of the aggregate Stated Value of the shares of Preferred Stock then held by such
Holder for which a conversion in accordance with 

                                       6
<PAGE>
 
the Conversion Price would result in an issuance of Common Stock in excess of
the Issuable Maximum (the "Excess Stated Value"), the Company shall, within
three (3) days of the Record Date, provide the converting Holder with a notice
(the "Notice") as to whether or not it has elected to use its best efforts to
obtain the Shareholder Approval applicable to such issuance. If the Company
shall either (i) fail to provide the converting Holder with the Notice within
three (3) days of the Record Date, or (ii) indicate in the Notice that it does
not intend to obtain the Shareholder Approval applicable to such issuance, or
(iii) fail to obtain the Shareholder Approval applicable to such issuance prior
to the 60th day following the Record Date, the converting Holder shall have the
option to require the Company to either (1) if the Company has not prior thereto
attempted or has attempted to and has failed to obtain the Shareholder Approval
in accordance with this Section, use its best efforts to obtain the Shareholder
Approval applicable to such issuance as soon as is possible, but in any event
not later than the 60th day after such request, or (2)(i) issue and deliver to
such Holder a number of shares of Common Stock as equals (x) the Excess Stated
Value, plus accrued dividends on all shares of Preferred Stock being converted,
divided by (y) the closing sales price of the Common Stock on the Original Issue
Date, and (ii) cash in an amount equal to the product of (x) the Per Share
Market Value on the Conversion Date and (y) the number of shares of Common Stock
in excess of such Holder's pro rata portion of the Issuable Maximum that would
have otherwise been issuable to the Holder in respect of such conversion but for
the provisions of this Section (such amount of cash being hereinafter referred
to as the "Discount Equivalent"), or (3) pay cash to the converting Holder in an
amount equal to the Mandatory Redemption Amount (as defined in Section 7) for
the Excess Stated Value, provided, that the converting Holder may not select
                         --------       
option (3) above unless the Company shall have been requested by the converting
Holder to obtain Shareholder Approval, and shall have failed to (I) prepare and
file with the Commission a proxy statement on Schedule 14A within 15 days after
such request, (II) respond to all comments from the Staff of the Commission
within five (5) business days after receipt thereof, (III) engage a proxy
solicitation service to assist the Company in obtaining a sufficient number of
proxies to facilitate Shareholder Approval, and (IV) promptly enforce any voting
rights agreement pertaining to Shareholder Approval. If the Company fails to pay
the Discount Equivalent or the Mandatory Redemption Amount, as the case may be,
in full pursuant to this Section within seven (7) days after the date payable,
the Company will pay interest thereon at a rate of 18% per annum to the
converting Holder, accruing daily from the Conversion Date until such amount,
plus all such interest thereon, is paid in full.

          (b)  Not later than three (3) Trading Days after a Conversion Date,
the Company will deliver to the holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 4.1(b) of the Purchase Agreement) representing the number of
shares of Common Stock being issued upon the conversion of shares of Preferred
Stock (subject to reduction pursuant to Section 5(a)(ii) hereof), (ii) one or
more certificates representing the number of shares of Preferred Stock not
converted, (iii) a bank check in the amount of accrued and unpaid dividends (if
the Company has elected or is required to pay accrued and unpaid dividends in
cash) and (iv) if the Company has elected and is permitted hereunder to pay
accrued dividends in shares of Common Stock, certificates, which shall be free
of restrictive legends and trading 

                                       7
<PAGE>
 
restrictions (other than those required or allowed by Section 4.1(b) of the
Purchase Agreement), representing such number of shares of Common Stock as are
issuable on account of accrued dividends in such number as determined in
accordance with Section 2(a). Notwithstanding the foregoing, the Company shall
not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon conversion of any shares of Preferred Stock until certificates
evidencing such shares of Preferred Stock are either delivered for conversion to
the Company or any transfer agent for the Preferred Stock or Common Stock, or
the holder of such Preferred Stock notifies the Company that su ch certificates
have been lost, stolen or destroyed and provides a bond (or other adequate
security) reasonably satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection therewith. The Company shall, upon request
of the holder, use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If in the case of any Conversion
Notice such certificate or certificates, including for purposes hereof, any
shares of Common Stock to be issued on the Conversion Date on account of accrued
but unpaid dividends hereunder, are not delivered to or as directed by the
applicable holder by the third Trading Day after the Conversion Date, the holder
shall be entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such conversion, in
which event the Company shall immediately return the certificates representing
the shares of Preferred Stock tendered for conversion. If the Company fails to
deliver to the holder such certificate or certificates pursuant to this Section,
including for purposes hereof, any shares of Common Stock to be issued on the
Conversion Date on account of accrued but unpaid dividends hereunder, prior to
the fifth (5th) Trading Day after the Conversion Date, the Company shall pay to
such holder, in cash, as liquidated damages and not as a penalty, $2,500 for
each day after such fifth (5th) Trading Day until such certificates are
delivered. If the Company fails to deliver to the holder such certificate or
certificates pursuant to this Section prior to the twelfth (12th) day after the
Conversion Date, the Company shall, at the Holder's option (i) redeem, from
funds legally available therefor at the time of such redemption, such number of
shares of Preferred Stock then held by such Holder, as requested by such Holder,
and (ii) pay all accrued but unpaid dividends and all other amounts then owing
on account of the Preferred Stock for which the Company shall have failed to
issue Common Stock certificates hereunder, in cash. The redemption price for the
shares of Preferred Stock to be redeemed in accordance with this Section shall
be the Redemption Price (as defined in Section 7). If the holder has requested
redemption pursuant to this Section and the Company fails for any reason to pay
the Redemption Price under this Section within seven (7) days after such notice
is given pursuant to Section 5(i), the Company will pay interest on the unpaid
portion of the Redemption Price at a rate of 18% per annum, accruing from such
seventh day until the Redemption Price and any accrued interest thereon is paid
in full. Nothing herein shall limit a holder's right to pursue actual damages
for the Company's failure to deliver certificates representing shares of Common
upon conversion within the period specified herein (including, without
limitation, damages relating to any purchase of shares of Common Stock by such
holder to make delivery on a sale effected in anticipation of receiving
certificates representing shares of Common Stock upon conversion, such damages
to be in an amount equal to (A) the aggregate amount paid by such holder for the
shares of Common Stock so purchased minus (B) the aggregate 
                                    -----                  

                                       8
<PAGE>
 
amount of net proceeds, if any, received by such holder from the sale of the
shares of Common Stock issued by the Company pursuant to such conversion), and
such holder shall have the right to pursue all remedies available to it at law
or in equity (including, without limitation, a decree of specific performance
and/or injunctive relief).

          (c)(i)  The conversion price for each share of Preferred Stock (the
"Conversion Price") on any Conversion Date shall be, at the option of the holder
-----------------                                                               
of the Preferred Stock to be converted, (x) three and 50/100 U.S. dollars
($3.50), or (y) the lesser of (A) one hundred ten percent (110%) of the average
Per Share Market Value for the fifteen (15) Trading Days immediately preceding
the Original Issue Date, or (B) ninety percent (90%) of the average of the three
(3) lowest Per Share Market Values during the twenty-two (22) Trading Days
immediately preceding the applicable Conversion Date, provided, however, that
                                                      --------               
such twenty-two (22) Trading Day period shall be extended for the number of
Trading Days, if any, during such period in which (A) trading in the Common
Stock was suspended from the Nasdaq SmallCap Market or any other market or
trading facility on which it is listed for trading prior to such suspension, or
(B) after the date declared effective by the Commission, the Underlying
Securities Registration Statement is not effective, or (C) after the date
declared effective by the Commission, the Prospectus included in the Underlying
Securities Registration Statement may not be used by the Holder for the resale
of Underlying Shares, further provided that (a) if an Underlying Securities
                      ----------------                                     
Registration Statement is not filed on or prior to the Filing Date (as such term
is defined in the Registration Rights Agreement), or (b) if the Company fails to
file with the Commission a request for acceleration in accordance with Rule 461
promulgated under the Securities Act within five (5) days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Securities Registration Statement will not be
"reviewed" or is not subject to further review or comment by the Commission, or
(c) if the Underlying Securities Registration Statement is not declared
effective by the Commission on or prior to the Effectiveness Date (as defined in
the Registration Rights Agreement), or (d) if such Underlying Securities
Registration Statement is filed with and declared effective by the Commission
but thereafter ceases to be effective as to all Registrable Securities (as such
term is defined in the Registration Rights Agreement) at any time prior to the
expiration of the Effectiveness Period (as such term as defined in the
Registration Rights Agreement), without being succeeded by a subsequent
Underlying Securities Registration Statement filed with and declared effective
by the Commission within ten (10) days, or (e) if trading in the Common Stock
shall be suspended, or if the Common Stock shall be delisted from trading, on
the Nasdaq SmallCap Market or on any other national securities market, exchange
or trading facility on which the Common Stock is then listed or quoted for
trading for any reason for more than three (3) Trading Days, or (f) if the
conversion rights of any holder of Preferred Stock are suspended for any reason
or if any holder is not permitted to resell Registrable Securities under the
Underlying Securities Registration Statement, or (g) if an amendment to the
Underlying Securities Registration Statement is not filed by the Company with
the Commission within ten (10) days after notification by the Commission that
such amendment is required in order for the Underlying Securities Registration
Statement to remain effective (any such failure being referred to as an "Event,"
                                                                         -----  
and for purposes of clauses (a), (c) and (f) the date on which such Event
occurs, or for purposes of clause (b) the date on which such five 

                                       9
<PAGE>
 
(5) days period is exceeded, or for purposes of clauses (d) and (g) the date
which such ten (10) day period is exceeded, or for purposes of clause (e) the
date on which such three (3) Trading Day period is exceeded, being referred to
as "Event Date"), the Company shall pay a fee of two percent (2%) of the
    ----------
Purchase Price for each month, which payment shall be in cash as liquidated
damages, and not as a penalty on the first day of each monthly anniversary of
the Event Date until such time as the applicable Event, is cured. If the holder
of the Preferred Stock to be converted elects to calculate the Conversion Price
pursuant to clause (x) above, such holder shall receive, in addition to the
number of shares of Common Stock otherwise issuable upon such conversion, a
Warrant to purchase that number of shares of Common Stock which shall be the
product of the aggregate Stated Value of the Preferred Stock so converted
multiplied by 0.04. The Warrants shall have an exercise price that shall be one
hundred twenty percent (120%) of the Per Share Market Value on the date of
issuance of such Warrants, shall have a three (3) year term, and shall otherwise
be in the form attached as Exhibit "E" to the Purchase Agreement. In the event
conversion of the Preferred Stock results automatically on the third anniversary
of the Original Issue Date, as described in Section 5(a)(i) above, the
Conversion Price shall be the lesser of the Conversion Prices calculated
pursuant to clauses (x) and (y) above.

          (ii)  If the Company, at any time while any shares of Preferred Stock
are outstanding, (a) shall pay a stock dividend or otherwise make a distribution
on account of or to holders of Junior Securities payable in shares of Common
Stock, (b) subdivide outstanding shares of Common Stock into a larger number of
shares, or (c) combine outstanding shares of Common Stock into a smaller number
of shares, then the Conversion Price shall be multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and the denominator of
which shall be the number of shares of Common Stock outstanding after such
event.  Any adjustment made pursuant to this Section 5(c)(ii) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision or
combination.

          (iii)  If the Company, at any time while any shares of Preferred
Stock are outstanding, shall issue rights or warrants to all holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Per Share Market Value of Common Stock at the
record date mentioned below, the Conversion Price shall be multiplied by a
fraction, the denominator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase, and the numerator of which shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered would purchase
at such Per Share Market Value.  Such adjustment shall be made whenever such
rights or warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants.  However, upon the expiration of any right or warrant to

                                       10
<PAGE>
 
purchase Common Stock the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this Section 5(c)(iii), if any such right or
warrant shall expire and shall not have been exercised, the  Conversion Price
shall immediately upon such expiration be recomputed and effective immediately
upon such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Conversion Price made pursuant to the
provisions of this Section 5 after the issuance of such rights or warrants) had
the adjustment of the Conversion Price made upon the issuance of such rights or
warrants been made on the basis of offering for subscription or purchase only
that number of shares of Common Stock actually purchased upon the exercise of
such rights or warrants actually exercised.

          (iv)  If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to holders
of Preferred Stock) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Sections 5(c)(ii) and (iii) above), then in each such case the  Conversion
Price at which each share of Preferred Stock shall thereafter be convertible
shall be determined by multiplying the Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value of Common Stock determined as of the record date
mentioned above, and of which the numerator shall be such Per Share Market Value
of the Common Stock on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Board of Directors in good faith; provided, however, that in the event of a
                                      --------  -------                        
distribution exceeding ten percent (10%) of the net assets of the Company, such
fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
                                                       ---------              
good faith by the holders of a majority in interest of the shares of Preferred
Stock then outstanding; and provided, further, that the Company, after receipt
                            --------  -------                                 
of the determination by such Appraiser shall have the right to select an
additional Appraiser, in good faith, in which case the fair market value shall
be equal to the average of the determinations by each such Appraiser.  In either
case the adjustments shall be described in a statement provided to the holders
of Preferred Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.

          (v)  In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another Person pursuant to
which the Company will not be the surviving entity, the sale or transfer of all
or substantially all of the assets of the Company or any compulsory share
exchange pursuant to which the Common Stock is converted into other securities,
cash or property (collectively, a "Business Combination"), the holders of the
Preferred Stock then outstanding shall have the right thereafter to, at their
option, (A) convert such shares of Preferred Stock, together with all accrued
and unpaid dividends thereon, into the shares of stock and other 

                                       11
<PAGE>
 
securities, cash and property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation, merger, sale,
transfer or share exchange, and the holders of the Preferred Stock shall be
entitled upon such event to receive such amount of securities, cash or property
as the shares of the Common Stock of the Company into which such shares of
Preferred Stock, together with all accrued and unpaid dividends thereon could
have been converted immediately prior to such reclassification, consolidation,
merger, sale, transfer or share exchange would have been entitled, (B) require
the Company to redeem its shares of Preferred Stock then outstanding at the
Redemption Price, but only if the Business Combination was the voluntary act of
the Company (i.e. not a tender offer) or (C) to require that the Person with
whom such consolidation, merger, sale or transfer or share exchange takes place
issue and deliver to the holders of the Preferred Stock shares of convertible
preferred stock or convertible debentures of such Person which newly issued
shares or debentures (as the case may be) shall have terms substantially similar
in all material respects to the terms of the Preferred Stock (including with
respect to conversion) and shall be entitled to all of the rights and privileges
of a holder of Preferred Stock set forth herein, in the Registration Rights
Agreement and in the Purchase Agreement (including without limitation, such
rights as relates to the acquisition, transferability, registration and listing
of the stock or other securities issuable upon conversion of such convertible
preferred stock or convertible debentures). In such case, the conversion price
for such newly issued convertible securities shall be based upon the amount of
securities, cash or property that each share of Common Stock would receive in
the transaction giving rise to the obligation to issue such securities, the
Conversion Ratio immediately prior to the effective or closing date for such
transaction and the Conversion Price stated herein. The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such terms
so as to continue to give to the holders of Preferred Stock the right to receive
the securities, cash or property set forth in this Section upon any conversion
following such consolidation, merger, sale, transfer or share exchange. This
provision shall similarly apply to successive reclassifications, consolidations,
mergers, sales, transfers or share exchanges. If the holder has requested
redemption pursuant to this Section and the Company fails for any reason to pay
the Redemption Price under this Section within seven (7) days after such notice
is given pursuant to Section 5(i), the Company will pay interest on the unpaid
portion of the Redemption Price at a rate of 18% per annum, accruing from such
seventh day until the Redemption Price and any accrued interest thereon is paid
in full.

           (vi)  All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.

          (vii)  Whenever the Conversion Price is adjusted pursuant to 
Section 5(c)(ii), (iii), (iv) or (v) the Company shall promptly mail to each
holder of Preferred Stock, a notice setting forth the Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment.

         (viii)  If:

                  A.  the Company shall declare a dividend (or any other
                      distribution) on its Common Stock; or

                                       12
<PAGE>
 
                  B.  the Company shall declare a special nonrecurring cash
                      dividend on or a redemption of its Common Stock; or

                  C.  the Company shall authorize the granting to all holders of
                      the Common Stock rights or warrants to subscribe for or
                      purchase any shares of capital stock of any class or of
                      any rights; or

                  D.  the approval of any stockholders of the Company shall be
                      required in connection with any reclassification of the
                      Common Stock of the Company, any consolidation or merger
                      to which the Company is a party, any sale or transfer of
                      all or substantially all of the assets of the Company, or
                      any compulsory share or exchange whereby the Common Stock
                      is converted into other securities, cash or property; or

                  E.  the Company shall authorize the voluntary or involuntary
                      dissolution, liquidation or winding up of the affairs of
                      the Company;

then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Preferred Stock, and shall cause to be mailed to
the holders of Preferred Stock at their last addresses as they shall appear upon
the stock books of the Company, at least 45 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating 
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however, that
                                                         --------  -------      
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice.  Holders are entitled to convert shares of Preferred Stock
during the 30-day period commencing the date of such notice to the effective
date of the event triggering such notice.

          (ix)  If the Company (i) makes a public announcement that it intends
to enter into a Change of Control Transaction (as defined below) or (ii) any
Person or group of Persons (including the Company, but excluding a holder or any
affiliate of a holder) publicly announces a bona fide tender offer, exchange
offer or other transaction to purchase 50% or more of the Common Stock (such
announcement being referred to herein as a "Major Announcement" and the date on
                                            ------------------                 
which a Major Announcement is made, the "Announcement Date"), then, in the event
                                         -----------------                      
that a holder of Preferred Stock seeks to convert shares of Preferred Stock on
or following the Announcement Date, 

                                       13
<PAGE>
 
the Conversion Price shall, effective upon the Announcement Date and continuing
through the earlier to occur of the consummation of the proposed transaction or
tender offer, exchange offer or other transaction and the Abandonment Date (as
defined below), be equal to the lower of (x) the Conversion Price measured on
the Announcement Date and (y) the Conversion Price in effect on the Conversion
Date for such Preferred Stock. "Abandonment Date" means with respect to any
                                ----------------- 
proposed transaction or tender offer, exchange offer or other transaction for
which a public announcement as contemplated by this paragraph has been made, the
date upon which the Company (in the case of clause (i) above) or the person,
group or entity (in the case of clause (ii) above) publicly announces the
termination or abandonment of the proposed transaction or tender offer, exchange
offer or another transaction which caused this paragraph to become operative.

     (d)  If at any time conditions shall arise by reason of action taken
by the Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially and adversely
affect the rights of the holders of Preferred Stock (different than or
distinguished from the effect generally on rights of holders of any class of the
Company's capital stock) or if at any time any such conditions are expected to
arise by reason of any action contemplated by the Company, the Company shall
mail a written notice briefly describing the action contemplated and the
material adverse effects of such action on the rights of the holders of
Preferred Stock at least 30 calendar days prior to the effective date of such
action, and an Appraiser selected by the holders of majority in interest of the
Preferred Stock shall give its opinion as to the adjustment, if any (not
inconsistent with the standards established in this Section 5), of the
Conversion Price (including, if necessary, any adjustment as to the securities
into which shares of Preferred Stock may thereafter be convertible) and any
distribution which is or would be required to preserve without diluting the
rights of the holders of shares of Preferred Stock; provided, however, that the
                                                    --------  -------          
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in good faith, in which case the
adjustment shall be equal to the average of the adjustments recommended by each
such Appraiser.  The Board of Directors shall make the adjustment recommended
forthwith upon the receipt of such opinion or opinions or the taking of any such
action contemplated, as the case may be; provided, however, that no such
                                         --------  -------              
adjustment of the Conversion Price shall be made which in the opinion of the
Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Conversion Price to more than the Conversion Price then in
effect.

     (e)  The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Preferred Stock and payment of dividends on
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the holders of
Preferred Stock, not less than such number of shares of Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(c)) upon the conversion of all
outstanding shares of Preferred Stock and payment of dividends hereunder. The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid and
nonassessable.

                                       14
<PAGE>
 
     (f)  Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted and unless waived by the holder of the Preferred
Stock, make a cash payment in respect of any final fraction of a share based on
the Per Share Market Value at such time. If the Company elects not, or is
unable, to make such a cash payment, the holder of a share of Preferred Stock
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock .

     (g)  The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
                                                      --------  
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.

     (h)  Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
undesignated stock.

     (i)  Any and all notices or other communications or deliveries to be
provided by the holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the attention of
the Vice President, Legal, of the Company at the facsimile telephone number or
address of the principal place of business of the Company as set forth in the
Purchase Agreement.  Any and all notices or other communications or deliveries
to be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
each holder of Preferred Stock at the facsimile telephone number or address of
such holder appearing on the books of the Company, or if no such facsimile
telephone number or address appears, at the principal place of business of the
holder.  Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:00 p.m. (Salt Lake City
time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:00 p.m. (Salt Lake City time) on any date
and earlier than 11:59 p.m. (Salt Lake City time) on such date, (iii) four days
after deposit in the United States mails, (iv) the Business Day following the
date of mailing, if send by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.  For purposes of Section 5(c)(i), if a Conversion Notice 

                                       15
<PAGE>
 
is delivered by facsimile prior to 5:00 p.m. (Salt Lake City time) on any date,
then the day prior to such date shall be the last Trading Day calculated to
determine the Conversion Price applicable to such Conversion Notice, and the
date of such delivery shall commence the counting of days for purposes of
Section 5(b).

     Section 6.  Optional Redemption.
                 ------------------- 

     (a)  The Company shall have the right, exercisable at any time, to redeem
from funds legally available therefor all or any portion of the then outstanding
and unconverted shares of Preferred Stock at a price equal to the Redemption
Price.  Any redemptions pursuant to this Section 6 shall be effected by the
delivery of a notice to each holder of Preferred Stock to be redeemed, which
notice shall indicate the number of shares of Preferred Stock of each holder to
be redeemed and the date that such redemption is to be effected, which shall be
the fifth (5/th/) Trading Day after the date such notice is deemed delivered
pursuant to Section 5(i) (the "Optional Redemption Date"). All redeemed shares
                               ------------------------                       
of Preferred Stock shall cease to be outstanding and shall have the status of
authorized but undesignated stock, but may not be reissued as Preferred Stock.
The entire Redemption Price under this Section shall be paid in cash by the
Optional Redemption Date.  The holders of the Preferred Stock shall have the
right to tender, and the Company shall honor, Conversion Notices for shares of
Preferred Stock, including shares subject to the notice of redemption described
in this Section, at any time through the fourth (4/th/) Trading Day after
receipt of such notice of redemption.

     (b)  If any portion of the Redemption Price under this section is not paid
by the Company on or prior to the Optional Redemption Date, interest shall
accrue thereon at the rate of 18% per annum thereafter until such Redemption
Price plus all such interest is paid in full (which amount shall be paid as
liquidated damages and not as a penalty).  In addition, if any portion of such
Redemption Price remains unpaid for more than five (5) calendar days after the
date due, each holder of the Preferred Stock subject to such redemption may
elect, by written notice to the Company, to either (i) demand conversion in
accordance with the formula and the time frame therefor set forth in Section 5
of all of the shares of Preferred Stock for which such Redemption Price has not
been paid in full (the "Unpaid Redemption Shares"), in which event the Per Share
                        ------------------------                                
Market Price for such shares shall be the lower of the Per Share Market Price
calculated on the date such Redemption Price was originally due and the Per
Share Market Price as of the holder's written demand for conversion, or (ii)
invalidate ab initio such redemption, notwithstanding anything herein contained
           ---------                                                           
to the contrary.  If a holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to such holder
the shares of Common Stock issuable upon conversion of the Unpaid Redemption
Shares subject to such holder conversion demand and otherwise perform its
obligations hereunder with respect thereto; or, if such holder elects option
(ii) above, the Company shall promptly, and in any event not later than three
(3) Trading Days from receipt of the holder's notice of such election, return to
the holder all of the Unpaid Redemption Shares.

                                       16
<PAGE>
 
     Section 7.  Definitions.  For the purposes hereof, the following terms
                 -----------                                               
shall have the following meanings:

          "Applicable Percentage" means (i) one hundred twelve percent (112%)
           ---------------------                                             
for any payment in full of the Redemption Price occurring within sixty (60) days
after the Original Issue Date; (ii) one hundred fifteen percent (115%) for any
payment in full of the Redemption Price occurring after the 61/st/ day but
before the one hundred twentieth (120/th/) day after the Original Issue Date;
(iii) one hundred twenty percent (120%) for any payment in full of the
Redemption Price occurring after the 121/st/ day but before the one hundred
eightieth (180/th/) day after the Original Issue Date; and (iv) one hundred
twenty-five percent (125%) for any payment in full of the Redemption Price
occurring after the 181/st/ day after the Original Issue Date.

          "Average Daily Trading Volume" means for any period specified the
           ----------------------------                                    
average of the daily sales volume of the Common Stock as reported by the Nasdaq
SmallCap Market or other principal stock exchange or quotation system on which
the Common Stock is then listed or quoted, or if the Common Stock is not listed
then on the Nasdaq SmallCap Market or any stock exchange or quotation system,
the daily trading volume as in the over-the-counter market, as reported by the
Nasdaq Stock Market or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices at the
close of business on such date.

          "Business Day" means any day except Saturday, Sunday and any day which
           ------------                                                         
shall be a legal holiday or a day on which banking institutions in the State of
Delaware are authorized or required by law or other government action to close.

          "Common Stock" means the common stock, $.0001 par value per share, of
           ------------                                                        
the Company, and stock of any other class into which such shares may hereafter
have been reclassified or changed.

          "Conversion Ratio" means, at any time, a fraction, the numerator of
           ----------------                                                  
which is Stated Value plus accrued but unpaid dividends to the extent to be paid
in shares of Common Stock and the denominator of which is the Conversion Price
at such time.

          "Junior Securities" means the Common Stock and all other equity
           -----------------                                             
securities of the Company except for the Company's Series A Convertible
Preferred Stock.

          "Mandatory Redemption Amount" for each share of Preferred Stock means
           ---------------------------                                         
the sum of (i) the greater of (A) 125% of the Stated Value and all accrued and
unpaid dividends with respect to such share, and (B) the product of (a) the Per
Share Market Value on the Trading Day immediately preceding (x) the date of the
Triggering Event or the Conversion Date, as the case may be, or (y) the date of
payment in full by the Company of the applicable Redemption Price, whichever is
greater, and (b) the Conversion  Ratio calculated on the date of the Triggering
Event, or the Conversion Date, as the case may be, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock.

                                       17
<PAGE>
 
          "Original Issue Date" means the date of the first issuance of any
           -------------------                                             
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.

          "Per Share Market Value" means on any particular date (a) the closing
           ----------------------                                              
bid price per share of the Common Stock on such date on the Nasdaq SmallCap
Market or other principal stock exchange or quotation system on which the Common
Stock is then listed or quoted or if there is no such price on such date, then
the closing bid price on such exchange or quotation system on the date nearest
preceding such date, or (b) if the Common Stock is not listed then on the Nasdaq
SmallCap Market or any stock exchange or quotation system, the closing bid price
for a share of Common Stock in the over-the-counter market, as reported by the
Nasdaq Stock Market or in the National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices at the
close of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices, then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser selected
in good faith by the holders of a majority in interest of the shares of the
Preferred Stock; provided, however, that the Company, after receipt of the
                 --------  -------                                        
determination by such Appraiser, shall have the right to select an additional
Appraiser, in which case, the fair market value shall be equal to the average of
the determinations by each such Appraiser.

          "Person" means an individual or a corporation, partnership, trust,
           ------                                                           
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

          "Purchase Agreement" means the Series D Convertible Preferred Stock
           ------------------                                                
Purchase Agreement, dated as of the Original Issue Date, between the Company and
the original holders of the Preferred Stock.

          "Redemption Price" shall be equal to the sum of (i) the greater of (A)
           ----------------                                                     
one hundred twenty-five percent (125%) of the aggregate Stated Value of the
shares of Preferred Stock being redeemed and all accrued and unpaid dividends
with respect to such shares, and (B) the product of (a) the number of shares of
Preferred Stock to be redeemed multiplied by the Stated Value of such shares of
Preferred Stock and (b) the Applicable Percentage and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock to be redeemed.

          "Registration Rights Agreement" means the Registration Rights
           -----------------------------                               
Agreement, dated the Original Issue Date, between the Company and the original
holder of Preferred Stock.

          "Trading Day" means (a) a day on which the Common Stock is traded on
           -----------                                                        
the Nasdaq SmallCap Market or other stock exchange or market on which the Common
Stock has been listed, 

                                       18
<PAGE>
 
or (b) if the Common Stock is not listed on the Nasdaq SmallCap Market or any
stock exchange or market, a day on which the Common Stock is traded in the over-
the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common
Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock
is quoted in the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding its
functions of reporting prices).

          "Transaction Documents" means collectively, the Purchase Agreement and
           ---------------------                                                
the exhibits and schedules thereto, including, the Warrants and the Registration
Rights Agreement.

          "Underlying Shares" means the number of shares of Common Stock into
           -----------------                                                 
which the Shares are convertible in accordance with the terms hereof and the
Purchase Agreement and shares of Common Stock issuable on account of dividends
on or with respect to the Preferred Stock.

          "Underlying Securities Registration Statement" shall mean a
           --------------------------------------------              
registration statement under the Securities Act prepared by the Company and
filed with the Commission in accordance with the Registration Rights Agreement,
covering the resale of the Underlying Shares and naming the holders of the
Preferred Stock as "selling stockholders" thereunder.

     Section 8.     Redemption Upon Triggering Events.
                    --------------------------------- 

          (a)  Upon the occurrence of a Triggering Event, each Holder shall (in
addition to all other rights it may have hereunder or under applicable law),
have the right, exercisable at the sole option of such Holder, to require the
Company to redeem all or a portion of the Preferred Stock then held by such
Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory
Redemption Amount plus (ii) the product of (A) the number of Underlying Shares
issued in respect of conversions or as payment of dividends hereunder and then
held by the Holder and (B) the Per Share Market Value on the date such
redemption is demanded or the date the redemption price hereunder is paid in
full, whichever is greater (the "Mandatory Redemption Price").  The Mandatory
Redemption Price shall be due and payable within ten (10) days of the date of
the notice for the payment therefor is provided by a Holder.

          (b)  If the Company fails to pay the Mandatory Redemption Price
hereunder  in full pursuant to this Section within seven (7) days after the date
when due in accordance with the terms of Section 7(a), the Company will pay
interest thereon at a rate of 18% per annum, accruing daily from such seventh
day until the Mandatory Redemption Price, plus all such interest thereon, is
paid in full.  For purposes of this Section, a share of Preferred Stock is
outstanding until such date as the Holder shall have received Underlying Shares
upon a conversion (or attempted conversion) thereof.

          (c)  A "Triggering Event" means (whatever the reason and whether it
shall be voluntary or involuntary or effected by operation of law or pursuant to
any judgement, decree or 

                                       19
<PAGE>
 
order of any court, or any order, rule or regulation of any administrative or
governmental body) the failure of an Underlying Securities Registration
Statement to be filed with the Commission on or prior to the 45th day after the
Original Issue Date.







    







    







    

                                       20
<PAGE>
 
                                   EXHIBIT A

                              NOTICE OF CONVERSION

(To be executed by the registered holder
in order to convert shares of Preferred Stock)

The undersigned hereby elects to convert the number of shares of Series D
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.0001 per share (the "Common Stock"), of fonix corporation (the
"Company") according to the conditions hereof, as of the date written below.  If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith.  No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.

Conversion calculations:

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                    Date to effect conversion

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                    Number of shares of Preferred Stock to be converted

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                    Number of shares of Common Stock to be issued

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                    Applicable conversion price

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                    Name of Holder


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                    Address of Holder


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                    Authorized Signature