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



     Pursuant to Section 103(f) of the General Corporation Law of the State of
Delaware, fonix corporation, a Delaware corporation (the "Company"), does hereby
certify:

     FIRST: That pursuant to Section 151 of the General Corporation Law of
Delaware, and pursuant to authority expressly vested in it by the Certificate of
Incorporation of the Company, the Board of Directors of the Company adopted a
resolution establishing a new series of Preferred Stock of the Company,
consisting of 250,000 shares designated "Series E 4% Convertible Preferred
Stock" ("Series E Preferred Stock"), and pursuant to such resolution, the
Company caused to be filed with the Delaware Secretary of State's Office a
Certificate of Designation (the "Original Certificate of Designation") of the
powers, designations, preferences and relative participating, optional or other
rights, and the qualifications, limitations or restrictions of such Series E
Preferred Stock.  The Original Certificate of Designation was filed on 
October 13, 1998.

     SECOND: That Exhibit "A" to the Original Certificate of Designation, which
set forth the terms and conditions of the Series E Preferred Stock, did not
accurately reflect the corporate action taken in approving the Series E
Preferred Stock, necessitating the filing of this Corrected Certificate of
Designation.

     THIRD: That the attached Exhibit "A" sets forth the corrected terms and
conditions of the Series E Preferred Stock, in their entirety, which corrected
terms reflect the deletion from Section 5(a)(i) of the following language:

     "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."
<PAGE>
 
     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 as of the 15th day of October,
1998.


                              fonix corporation



                              By: /s/ Roger D. Dudley
                                 --------------------------------------------
                                  Roger D. Dudley, Executive Vice President








        







    
<PAGE>
 
                                SERIES E TERMS
                                --------------


          Section 1.     Designation, Amount and Par Value.  The series of
                         ---------------------------------                
preferred stock shall be designated as the 4% Series E Convertible Preferred
Stock (the "Preferred Stock"), and the number of shares so designated and
            ---------------                                              
authorized shall be two hundred fifty thousand (250,000).  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, 

                                       3
<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
 --------------      
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, (a) 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 (including the reissuance of any shares of
Preferred Stock converted for Common Stock) or (g) enter into any agreement with
respect to the foregoing.

                                       4
<PAGE>
 
          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 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 Original Issue Date (the "Initial Conversion Date").  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 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 

                                       5
<PAGE>
 
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
Securities and Exchange Commission (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 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

                                       6
<PAGE>
 
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 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 

                                       7
<PAGE>
 
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 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 such 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

                                       8
<PAGE>
 
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 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 

                                       9
<PAGE>
 
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 (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.

                                       10
<PAGE>
 
          (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
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 

                                       11
<PAGE>
 
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 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 

                                       12
<PAGE>
 
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

                  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

                                       13
<PAGE>
 
                  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, 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 

                                       14
<PAGE>
 
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.

     (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 

                                       15
<PAGE>
 
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 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 

                                       16
<PAGE>
 
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.

     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

                                       17
<PAGE>
 
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 and the Company's Series D 4% 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.

          "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 

                                       18
<PAGE>
 
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 E Convertible Preferred Stock
           ------------------                                                
Exchange And 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, 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.

                                       19
<PAGE>
 
          "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 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 E
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:

                    _______________________________________________________
                    Date to effect conversion

                    _______________________________________________________
                    Number of shares of Preferred Stock to be converted

                    _______________________________________________________
                    Number of shares of Common Stock to be issued

                    _______________________________________________________
                    Applicable conversion price

                    _______________________________________________________
                    Name of Holder


                    _______________________________________________________


                    _______________________________________________________
                    Address of Holder


                    __________________________________
                    Authorized Signature