SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark one)

[X]       Annual  Report  pursuant  to  Section  13 or 15(d)  of the  Securities
          Exchange Act of 1934 for the fiscal year ended December 31, 2001, or

[ ]       Transition  Report  pursuant to Section 13 or 15(d) of the  Securities
          Exchange Act of 1934 for the transition period from      to          .
                                                             ------  ----------

Commission File No. 0-23862

                                Fonix Corporation
             (Exact name of registrant as specified in its charter)


Delaware                                                 87-0380088
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

                         180 W. Election Road, Suite 210
                               Draper, Utah 84020
             (Address of principal executive offices with zip code)

                                 (801) 553-6600
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock
                                                            ($0.0001 par value
                                                            per share)

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $42,534,564. calculated using a closing price of
$0.093 per share on March 26, 2002. For purposes of this calculation, the
registrant has included only the number of shares directly held by its officers
and directors as of March 26, 2002 (and not counting shares beneficially owned
on that date), in determining the shares held by non-affiliates. As of March 26,
2002, there were issued and outstanding 463,280,512 shares of the Company's
Class A common stock.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]



<PAGE>



                                Fonix Corporation

                          2001 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     Part I

                                                                            Page

Item  1.    Business...........................................................3
Item  2.    Properties........................................................17
Item  3.    Legal Proceedings.................................................18
Item  4.    Submission of Matters to a Vote of Security Holders...............18

                                     Part II

Item  5.    Market for Registrant's Common Equity and Related
            Stockholder Matters...............................................20
Item  6.    Selected Financial Data...........................................21
Item  7.    Management's Discussion and Analysis of Financial Condition and
            Results of Operations.............................................22
Item  8.    Financial Statements and Supplementary Data.......................31
Item  9.    Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure..............................................31

                                    Part III

Item 10.    Directors and Executive Officers of the Company...................32
Item 11.    Executive Compensation............................................35
Item 12.    Security Ownership of Certain Beneficial
            Owners and Management.............................................42
Item 13.    Certain Relationships and Related Transactions....................43

                                     Part IV

Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K...44





<PAGE>



                                     PART I

ITEM 1.                  BUSINESS

THIS ANNUAL REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED BY
THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED BELOW IN THE SECTION
ENTITLED "FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS ANNUAL REPORT. THE
FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE COMPANY'S FINANCIAL
STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS DOCUMENT.

General

            Fonix Corporation, a Delaware corporation ("Fonix" or the
"Company"), delivers speech solutions that empower people to interact
conversationally with information systems and computing devices using natural
language. The Company's speech-enabling technologies, which include
text-to-speech ("TTS") and neural network-based automated speech recognition
("ASR"), are integrated into products for commercial, industrial and consumer
applications. ASR and TTS technologies are sometimes collectively referred to in
this report as "Core Technologies". The Company believes its efficient and
intuitive speech-enabling technologies enhance user productivity and efficiency
in a broad range of markets including embedded applications for automotive and
wireless devices, computer telephony and server applications, and personal
software for consumer applications.

             The Company currently markets solutions and applications that
utilize its Core Technologies to software developers, consumer electronics
manufacturers, micro-processor manufacturers, third-party product developers,
operating system developers, network developers and Internet-related companies
as well as directly to consumers. The Company currently focuses its marketing
efforts toward embedded systems for automotive applications and wireless and
mobile electronic devices, server-based solutions for Internet and telephony
voice-activated applications, and personal software for consumer applications
through retail distribution channels. The Company pursues revenue opportunities
through generation of royalty fees, product and technology licenses, product
sales, non-recurring engineering fees, and support agreements.

            Speech-enabling technologies are a value-added interface solution
for computing and communications devices. The Company believes that
manufacturers of consumer electronics products, software developers and Internet
content developers use the Company's Core Technologies and solutions to simplify
the use and increase the functionality of their products and services resulting
in broader market opportunities and significant competitive advantage. Fonix
solutions support multiple hardware and software platforms, are environment and
speaker independent, optimize cost and power efficiencies and provide easy
integration within a relatively small memory requirement for embedded
applications and enhances scalability for high channel capacity for computer
telephony and server-based systems.

            The Company believes that it is well positioned to serve markets
that are rapidly adopting speech-enabled applications. As memory requirements,
noise robustness, recognition accuracy and efficiency of speech solutions become
increasingly critical, Fonix expects to provide compelling solutions to meet
highly competitive customer demands.

Market Focus



                                     Page 3

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            Fonix products and solutions are sold into three broad markets: 1)
embedded automotive applications and wireless and mobile devices, 2) computer
telephony and server solutions, and 3) personal software for consumer
applications. Solutions and applications are distinguished between each market
based on processor size and speed, memory and power capacity and utility to
consumers. For example, wireless and mobile applications utilize embedded
solutions featuring very small processors with limited memory and power
capacity. Computer telephony and server solutions are server-based and scale
from desktop/laptop applications to connected server applications to full
distributed solutions. Personal software for consumer applications adapt
solutions developed in embedded and server-based environments to provide utility
to users of personal computers and handheld computing devices.

            EMBEDDED AUTOMOTIVE APPLICATIONS AND WIRELESS AND MOBILE DEVICES.
Devices in this category include personal digital assistants ("PDAs"), cellular
phones, web pads, wireless communication devices, automotive command and control
functions and telematics, and other consumer electronics. The Company believes
that in many cases, a significant deterrent to full functionality of these
powerful and small computing devices is the current need for a keyboard, touch
screen and/or mouse to interface with the device. The Company also believes that
speech-enabling applications provide a user-intuitive interface that will
increase the utility of these devices and improve access to information. Other
product development initiatives that may drive additional interest in
speech-enabling technologies include electronic books, wearable computers, smart
toys and appliances such as VCRs, answering machines, wireless climate control
systems, and command-and-control applications.

            Fonix ASR and TTS technologies have memory and power requirements
that fall within tolerances needed to speech-enable these devices which use
existing 32-bit or greater processors. To capitalize on this distinct
competitive advantage, Fonix has ported its speech-enabling technologies to
several processors including ARM, Epson EOC 33A104 and 208, Infineon TriCore,
Texas Instruments 55xx and OMP, Intel StrongArm(R), Hitachi SH3 and SH4, and NEC
MIPS core. Fonix has also ported on various operating systems including
Microsoft Windows CE, QSSL QNX, Linux and WindRiver VxWorks.

            Fonix has identified certain channel and direct sales opportunities
for ASR and TTS technologies in wireless and mobile device markets.

            Chip Manufacturers - Digital signal processor, microprocessor, and
            controller manufacturers are highly focused on technology
            innovations that will support and drive sales of chips via
            third-party vendors. Fonix has ported ASR and TTS to multiple
            platforms and is leveraging sales through the third-party software
            networks. Partners in this area include Motorola, Intel, Epson and
            Infineon.

            Design and Operating System Developers - Reference platform and
            product designers provide opportunity for design-in speech
            technology sales. These companies are channels to major consumer
            electronics marketers. Current design partners include Doctor Design
            (Wind River) and Accelent.

            Software Developers and Resellers - Software developers in multiple
            markets, including operating systems, increasingly enable their
            software products with one or more speech-enabling technologies,
            resulting in leveraged product sales. Current partners include
            PurpleSoft, Microsoft and QNX.

            Product Developers and Manufacturers - Many companies are seeking
            speech-enabling technologies to integrate into a host of consumer
            electronics devices, commercial applications, and business
            solutions. Primary markets for these applications are in automotive
            and aviation telematics, industrial wearable computers, mobile
            communications devices and PDAs in both consumer and vertical
            markets. KME Panasonic is a current OEM customer.

            On December 14, 2001, the Company acquired the rights to certain TTS
technology from Force Computers, Inc. (see Recent Developments, below). This
technology ("DECtalk TM TTS") consists of a small- footprint TTS that
complements the Company's existing TTS technology. The acquisition of DECtalk
TTS


                                     Page 4

<PAGE>



positions Fonix to take greater advantage of opportunities in embedded
applications, especially those where memory capacity is limited. Additionally,
the acquired technology is already well established as a leading solution in
assistive applications with existing customers and market channels. Fonix will
continue to cultivate these opportunities and relationships while developing new
applications from the DECtalk TTS.

            COMPUTER TELEPHONY AND SERVER-BASED SOLUTIONS.   Fonix focuses on
product enhancement and delivery in computer telephony and server-based
applications such as:

            Interactive voice response ("IVR") - Telephony applications for
            corporate call centers, short messaging services and information
            retrieval from server databases are already common. Fonix s.Manager
            development framework facilitates upgrades and shortens development
            time required for new systems.

            Internet voice portals - Speech-enabled access to the Internet and
            website navigation are rapidly emerging needs. Fonix is developing
            products for voice portals to the Internet that may be purchased for
            use by portal companies, website and content providers, Internet
            service providers and browsers.

            Website readers - Because over 70% of all web content is text,
            demand for products allowing web content to be read to the user is
            quickly growing. Fonix has developed a web page reader that can be
            added to websites. This voice solution is targeted toward the
            largest web content providers worldwide in media, government and
            commercial enterprises.

            Network systems command and control and e-mail reader - Fonix
            provides TTS which can be seamlessly integrated into network
            software to speech-enable software applications.

            Markets targeted for the development and delivery of these solutions
include:

            General Systems Integrators and Value-added Resellers that implement
            solutions for customers for market segments in computer telephony
            and server applications;

            Military and Government Systems Integrators and Value-added
            Resellers that implement solutions for customers in support of
            government agencies and organizations;

            Enterprise Solution Providers that develop software infrastructure
            for large companies; and

            Telephone Service Providers that provide telephone services and
            products built around those services.

Currently, the Company believes that server-based markets are trending toward
the convergence of wireless data transmission and connectivity between mobile
computing and fixed-server databases. Fonix has entered into agreements with key
solution providers in these markets such as Nortel Networks, Nuance
Communications, Envox, and Motorola Mobile Internet Exchange.

            PERSONAL SOFTWARE FOR CONSUMER APPLICATIONS. Adaptations of certain
applications developed for embedded and server-based solutions have utility to
consumers for home computing and other personal uses. These adapted applications
are sold through retail distribution channels via the Internet, retail computer
stores and catalog outlets. As speech becomes a common means of interacting with
computers, Fonix believes that demand for such applications will increase
dramatically. Because speech applications are not widely available in these
markets, Fonix may help create the market for these products in many cases, and
expects to be well-positioned to sell its products into these markets.

            Personal software for consumer applications is currently available
for personal computers and PDAs using the Pocket PC operating system. Current
product offerings include the following:


                                     Page 5

<PAGE>



            iSpeak - A PC based application for reading text out loud in a male
            or female voice, in various languages.

            TimeTalk - A Windows PC and Pocket PC based application using Fonix
            TTS that speaks the time in intervals, voice and language selected
            by the user.

            TimeTalk Alert - A Pocket PC based application that utilizes Fonix
            TTS to remind the user of upcoming appointments or scheduled events
            from the user's calendar.

            Fonix Commander - A Pocket PC based application using Fonix TTS and
            ASR that allows the user to navigate through programs and locate
            files in the user's PDA using voice commands.

            SpeakThis - An Internet based application that uses Fonix TTS that
            allows users to activate a button on a SpeakThis-enabled website to
            have the text read to them out loud in a variety of voices and
            languages. Versions are available to individuals to speech-enable a
            website and to website developers to speech-enable an entire
            website.

            Primary market channels targeted for distribution of these products
include:

            Hardware bundles - manufacturers and distributors of personal
            computers, PDAs, MP3 players and other handheld computing devices
            include pre-installed software on their products or packaged
            software with their product for easy access for the user to order
            and download on line or to contact the Company for a keycode.

            Internet sales - Certain applications can be ordered, paid for and
            downloaded through the Internet from the Company's website and other
            locations.

            Retail outlets - Computer stores and retail outlets sell all types
            of applications including PDAs and personal computers. Fonix expects
            to reach these outlets by partnering with one or more distributors.

            Catalogs - Computer catalogs reach targeted consumers and offer a
            wide variety of application and products.

Market and Sales Strategy

            Fonix has identified market opportunities in each of the broad
categories described above. In January 2002, the Company began to organize new
business units to provide standard solutions within these markets. The business
units will be supported by dedicated sales professionals and product development
engineers.

            Sales efforts focus on developing sales partners, opportunities, and
relationships. Among these opportunities are OEM application development
projects, value-added resellers ("VAR") and other resellers, enterprise (large
corporate) sales, and cross-selling opportunities to the Company's existing
customer base. Key customer relationships are assigned to account
representatives who are responsible to pursue revenue opportunities.

            Fonix focuses its efforts on providing solutions and applications to
customers with existing significant market share and markets that it believes
have high margins, broad use and rapid development. Current strategy is governed
by the following general principles:

            Focus on revenues - Pursue specific markets where revenues,
            particularly recurring revenues, can be rapidly realized without
            significant continued research and development.



                                     Page 6

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            Standard and re-usable common solutions - Focus on common solutions
            that can be developed and sold to multiple customers. Pursue
            integration where Fonix technologies are directly compatible and can
            be integrated as part of existing or new OEM products with minimal
            additional effort.

            Existing marketing channels and significant market share - Partner
            with customers who have existing marketing channels and leverage
            product sales through those channels. Pursue customers with dominant
            or significant market share and who are able to rapidly bring
            products to market.

            Second-tier customer support - Position Fonix as a provider of
            second-tier customer support, providing training and tools for Fonix
            customers who operate front-line support systems for their end-user
            customers.

Fonix Speech Manager Development Framework - "s.Manager"

            As the worldwide market for speech-enabling technologies and
products expands, consumer products manufacturers and software and Internet
content developers have demanded increased and efficient time-to-market and
decreased development time for speech-enabling solutions as well as increased
quality of user interface. To address these market demands, Fonix provides its
customers with a speech technology development framework - the Fonix Speech
Manager or "s.Manager" (formerly known as Fonix Accelerated Application
Solutions Technologies or "FAAST").

            The s.Manager framework provides developers with a development
framework that enables rapid creation of speech-enabling applications that can
be integrated quickly and efficiently into products. Specifically, s.Manager
allows a developer to integrate into products a highly scalable framework that
includes a broad range of key features necessary to create speech-enabling
functionality such as highly flexible audio input drivers, output drivers,
speech application program integrators, and the Fonix graphical application
builder, as well as the ability to plug-and-play multiple ASR and TTS engines.
Furthermore, the s.Manager framework is designed to permit developers to employ
speech components from any source, as solution needs may dictate. Fonix
s.Manager framework has been released in versions for both embedded and
server-based markets.

"Powered by Fonix" Marketing Initiative

            In 2001, Fonix announced a strategic marketing program designed to
assist its channel partners to adopt and integrate Fonix s.Manager and
speech-enabling technologies. The "Powered by Fonix" program offers distinct
advantages to developers, resellers, and corporate partners.

            Developer Partners - Designed to provide developers with a central
            location for accessing a wide array of developer tools produced by
            Fonix to help developers successfully develop, deploy, and manage
            voice applications. The Company provides access to multiple tools,
            such as s.Manager, that help developers do their job. Some tools
            offer enhanced capabilities; others offer increased efficiency; and
            still others provide unique capabilities that Fonix believes
            interest developers. While some tools are offered in full versions,
            others are offered in evaluation versions so developers may try them
            before purchasing.

            Reseller Partners - Designed to establish and strengthen
            relationships with the reseller community, the "Powered by Fonix
            Channel Partner Program" offers benefits designed to strengthen
            relationships and promote the sale of Fonix technologies. Fonix
            provides its partners with the tools they need to successfully
            implement the Fonix line of speech-enabling solutions with benefits
            like sales leads, marketing collateral, training, TTS hosting
            services, premium support and a secure reseller web site.



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            Corporate Partner - Designed to address the needs of the Company's
            corporate customers, the Corporate Partner Program focuses on
            service, support and high level relationships directed at
            maintaining and recruiting key accounts and strategic partners.

            Because the Company is pursuing third-party integration of Fonix
speech-enabling technology into mass market, industrial, general business and
personal electronics products and computing solutions, lead time to revenue
recognition will be longer than that for software products released directly
into consumer channels. The Company's products sold and integrated into customer
applications are subject both to customer production schedules and customer
success in developing and marketing the products and generating product sales.

            Taking advantage of its innovative speech applications and
solutions, the Company markets personal software for consumer applications that
are available through the Fonix website and traditional retail channels such as
computer superstores and catalogs. As additional applications evolve from the
embedded and server-based markets, the Company plans to develop and release new
products, and applications will be developed and released through these
channels.

Employees

            As of March 26, 2002, the Company employed 139 people. Of this
total, 77 were employed in product development and delivery, 28 were employed in
sales and marketing, and 34 were employed in strategic development,
administration and support.


                               RECENT DEVELOPMENTS

Force Computers, Inc. Transaction

            On December 14, 2001, Fonix entered into an Asset Purchase Agreement
with Force Computers, Inc., under which the Company purchased tangible and
intangible assets and agreed to pay Force $150,000 in cash at closing, and
$1,280,000 in the form of a non-interest-bearing promissory note. Payments due
under the promissory note are payable at intervals through December 9, 2002. To
date, the Company has made all payments when due.

Grants of Stock Options

            During 2001, Fonix granted options to purchase 8,134,950 shares of
Class A common stock as follows:

Grantee                             Number of Shares       Exercise Prices
-------                             ----------------       ---------------
Directors and Executive Officers       2,500,000                $ 0.14
Employees                              5,126,950           $ 0.07 to $ 0.73
Consultants                              508,000           $ 0.19 to $ 0.40



                                     Page 8

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            The term of all of these stock options is ten years from the date of
grant and all were granted at the quoted market price on the date of grant.
During 2001, 3,878,837 options expired without exercise. As of December 31,
2001, the Company had a total of 24,078,813 options outstanding, of which
16,981,906 were exercisable at a weighted average exercise price of $2.50.


                                     Page 9

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                        CERTAIN SIGNIFICANT RISK FACTORS

The short- and long-term success of the Company is subject to certain risks,
many of which are substantial in nature and outside the control of the Company.
You should consider carefully the following risk factors, in addition to other
information contained herein. All forward-looking statements contained herein
are deemed by the Company to be covered by and to qualify for the safe harbor
protection provided by the Private Securities Litigation Reform Act of 1995. You
should understand that several factors govern whether any forward-looking
statement contained herein will or can be achieved. Any one of those factors
could cause actual results to differ materially from those projected herein.
These forward-looking statements include plans and objectives of management for
future operations, including the strategies, plans and objectives relating to
the products and the future economic performance of the Company and its
subsidiaries discussed above. In light of the significant uncertainties inherent
in the forward-looking statements included herein, the inclusion of any such
statement should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved.


The Company's substantial and continuing losses since inception, coupled with
significant ongoing operating expenses, raise doubt about its ability to
continue as a going concern.

            Since inception, the Company has sustained substantial losses. Such
losses continue due to ongoing operating expenses and a lack of revenues
sufficient to offset operating expenses. The Company had negative working
capital of $6,102,151 at December 31, 2001. The Company has raised capital to
fund ongoing operations by private sales of the Company's securities, some of
which sales have been highly dilutive and involve considerable expense. In the
Company's present circumstances, there is substantial doubt about its ability to
continue as a going concern absent significant sales of the Company's existing
products, substantial revenues from new licensing or co-development contracts,
or continuing large sales of its securities.

            The Company incurred net losses of $24,566,807, $22,761,229, and
$21,662,419 for the years ended December 31, 2001, 2000 and 1999, respectively.
As of December 31, 2001, the Company had an accumulated deficit of $167,616,372,
and owed trade payables of $1,062,237, of which $255,104 were more than 60 days
past due.

            The Company expects to spend significant amounts to enhance its
products and technologies, expand domestic and international sales and
operations and fund further research and development. As a result, it will need
to generate significant additional revenue to achieve profitability. Even if the
Company does achieve profitability, it may not be able to sustain or increase
profitability on a quarterly or annual basis. If it does not achieve and
maintain profitability, the market price for the Company's common stock may
further decline, perhaps substantially, and the Company may have to curtail or
cease its operations.

If the Company does not receive additional capital when and in the amounts
needed in the near future, its ability to continue as a going concern is in
substantial doubt.

            The Company anticipates incurring substantial sales and marketing,
product development and research and general operating expenses in the future
that will require substantial amounts of additional capital on an ongoing basis.
It will most likely have to obtain such capital from sales of its equity,
convertible equity and/or debt securities. Obtaining future financing may be
costly and will likely be dilutive to existing stockholders. If the Company is
not able to obtain financing when and in the amounts needed, and on terms that
are acceptable, the Company's operations, financial condition and prospects
could be materially and adversely affected, and it could be forced to curtail
some or all of its operations or sell part or all of its assets, including its
Core Technologies.



                                     Page 10

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Continuing debt obligations could impair the Company's ability to continue as a
going concern.

            As of December 31, 2001, the Company had debt obligations of
$4,539,503. At present, the Company's revenues from existing licensing
arrangements and products are not sufficient to offset its ongoing operating
expenses or to pay in full its current debt obligations. There is substantial
risk, therefore, that the existence and extent of the debt obligations described
above could adversely affect the Company, its operations and financial
condition.

Holders of the Company's Class A common stock are subject to the risk of
additional and substantial dilution to their interests as a result of the
issuances of Class A common stock in connection with the Equity Lines.

            Introduction

            The following table describes the number of shares of Class A common
stock that would be issuable as of March 26, 2002, assuming that the full
remaining amounts of the Private Equity Line and the Second Private Equity Line
(collectively, the "Equity Lines") had been put to the Equity Line investor, and
further assuming that the applicable conversion or exercise prices at the time
of such conversion or exercise were the following amounts:

                                                   Equity Lines- Shares
                                                   issuable upon put of
     Hypothetical Conversion/                remaining available credit
          Exercise Price                           totaling  $2,191,493
-----------------------------------          --------------------------
               $0.05                                         43,829,860
               $0.10                                         21,914,930
               $0.25                                          8,765,972
               $0.50                                          4,382,986
               $1.00                                          2,191,493
               $2.00                                          1,095,747


            Given the formulas for calculating the shares to be issued under the
Equity Lines, there effectively is no limitation on the number of shares of
Class A common stock which may be issued in connection with a put under the
Equity Lines. If the market price of the Class A common stock decreases, the
number of shares of Class A common stock issuable in connection with the Equity
Lines will increase proportionate to the decrease in the stock price.

            Overall Dilution to Market Price and Relative Voting Power of
Previously Issued Common Stock

            The issuance of Class A common stock in connection with the Equity
Lines may result in substantial dilution to the equity interests of other
holders of the Company's Class A common stock. Specifically, the issuance of a
significant amount of additional Class A common stock would result in a decrease
of the relative voting control of the Company's Class A common stock issued and
outstanding prior to the issuance of Class A common stock in connection with the
Equity Lines. Furthermore, public resales of Class A common stock following the
issuance of Class A common stock in connection with the Equity Lines likely
would depress the prevailing market price of its Class A common stock. Even
prior to the time of actual conversions, exercises and public resales, the
market "overhang" resulting from the mere existence of the Company's obligation
to honor such conversions or exercises could depress the market price of its
Class A common stock.

            Increased Dilution With Decreases in Market Price of Class A Common
Stock



                                     Page 11

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            The formulas for determining the number of shares of Class A common
stock under the Equity Lines are based, in part, on the market price of the
Class A common stock and include a discount from the market price. As a result,
the lower the market price of the Company's Class A common stock at and around
the time the Company puts shares under the Equity Lines, the more Class A common
stock the Equity Line investor receives. Any increase in the number of shares of
the Company's Class A common stock issued upon conversion or put of shares as a
result of decreases in the prevailing market price would compound the risks of
dilution described in the preceding paragraph.

            Increased Potential for Short Sales

            Downward pressure on the market price of the Company's Class A
common stock that likely would result from sales of its Class A common stock
issued in connection with a put under the Equity Lines could encourage short
sales of Class A common stock by the Equity Line investor. Material amounts of
such short selling could place further downward pressure on the market price of
the Company's Class A common stock.

            Limited Effect of Restrictions on Extent of Conversions

            The Company is prohibited from putting shares to the Equity Line
investor under the Equity Lines if such put would result in that investor
holding more than 4.999% of the then outstanding Class A common stock. These
restrictions, however, do not prevent the Equity Line investor from selling
shares of Class A common stock received in connection with a put, and then
receiving additional shares of Class A common stock in connection with a
subsequent put. In this way, the Equity Line investor could sell more than
4.999% of the outstanding Class A common stock in a relatively short time frame
while never holding more than 4.999% at one time.

The Company has a limited product offering and many of its key technologies are
still in the product development stage.

            Presently, there are a limited number of commercially available
applications or products incorporating the Company's Core Technologies. For the
Company to be ultimately successful, sales from these product offerings must be
substantially greater. An additional element of its business strategy is to
achieve revenues through appropriate strategic alliances, co-development
arrangements, and license arrangements with third parties. The Company has
entered into licensing and joint-marketing agreements with Intel and Microsoft.
These agreements provide for joint marketing and application development for
end-users or customers. There can be no assurance that these collaboration
agreements will produce license or other agreements which will generate material
revenues for the Company.

The market for many of the Company's technologies and products is largely
unproven and may never develop sufficiently to allow it to capitalize on its
technology and products.

            The market for speech-enabled technologies is relatively new and
rapidly evolving. Additionally, the Company's technologies are new and, in many
instances, represent a significant departure from technologies which already
have found a degree of acceptance in the speech-enabled technologies
marketplace. The Company's financial performance will depend, in part, on the
future development, growth, and ultimate size of the market for speech-enabled
applications and products generally, and applications and products incorporating
its technologies and applications. Accordingly, in order to achieve commercial
acceptance of the Core Technologies, the Company will have to educate
prospective customers, including large, established telecommunications
companies, about the uses and benefits of speech-enabled software in general and
its products in particular. If these efforts fail, or if speech-enabled software
platforms do not achieve commercial acceptance, the Company's business could be
harmed.



                                     Page 12

<PAGE>



            The applications and products which incorporate the Company's Core
Technologies will be competing with more conventional means of information
processing such as data entry, access by keyboard or touch-tone telephone, or
professional dictation services. The Company believes that there is a
substantial potential market for applications and products incorporating
advanced speech-enabled technologies including ASR, TTS, speech compression,
speaker identification and verification, pen and touch screen input, and natural
language understanding. Nevertheless, such a market for the Company's
technologies or for products incorporating its technologies may never develop to
the point that profitable operations can be achieved or sustained.

Speech-enabling technologies may not achieve widespread acceptance by businesses
or telecommunications carriers, which could limit the Company's ability to grow
its business.

            The market for speech-enabled technologies is relatively new and
rapidly evolving. The Company's ability to increase revenue in the future
depends on the acceptance of speech-enabling technologies by both its customers
and their end users. The adoption of speech-enabling technologies could be
hindered by the perceived costs of this new technology, as well as the
reluctance of enterprises that have invested substantial resources in existing
applications to replace their current systems with this new technology.
Accordingly, in order to achieve commercial acceptance, the Company will have to
educate prospective customers, including large, established telecommunications
companies, about the uses and benefits of speech-enabling technologies in
general and its products in particular. If these efforts fail, or if
speech-enabling technology platforms do not achieve commercial acceptance, its
business would not develop.

            Continued development of the market for the Company's products also
will depend upon the following factors over which the Company has little or no
control:

          .    widespread  deployment of  speech-enabling  applications by third
               parties, which is driven by consumer demand for services having a
               voice user interface;

          .    demand  for  new  uses  and   applications   of   speech-enabling
               technology,  including  adoption of speech-enabled  interfaces by
               companies that operate web sites;

          .    adoption of industry  standards for  speech-enabling  and related
               technologies; and

          .    continuing  improvements  in hardware  technology that may reduce
               the costs of speech-enabling technology solutions.

The application and delivery of the Company's Core Technologies to end users is
dependent upon third- party integration and may be subject to delays and
cancellations that are beyond its control.

            Because the Company is pursuing third-party integration of its
speech-enabled technologies into mass market, industrial, general business and
personal electronics products, and computing solutions, lead time to revenue
recognition will be longer than software products directly released into
consumer channels. Purchase of the Company's products often requires a
significant expenditure by a customer. Accordingly, the decision to purchase its
products typically requires significant pre-purchase evaluation. The Company
spends significant time educating and providing information to prospective
customers regarding the use and benefits of its products and technologies.
During this evaluation period, it may expend substantial sales, marketing and
management resources.

            Further, the Company's products and technologies sold and integrated
into customer applications are subject to both customer production schedules and
customer success in marketing the products and generating product sales. The
Company's revenues are thus subject to delays and possible cancellation
resulting from customer integration risks and delays.



                                     Page 13

<PAGE>



            In cases where the Company's contract with its customers specifies
milestones or acceptance criteria, it may not be able to recognize license or
services revenue until these conditions are met. The Company has in the past and
may in the future experience unexpected delays in recognizing revenue.
Consequently, the length of the Company's sales and implementation cycles and
the varying order amounts for its products make it difficult to predict the
quarter in which revenue recognition may occur and may cause license and
services revenue and operating results to vary significantly from period to
period. These factors could cause the Company's stock price to be volatile or to
decline.

Competition from other industry participants and rapid technological change
could impede the Company's ability to achieve profitable operations.

            The computer hardware and software industries are highly and
intensely competitive. In particular, the speech-enabled technologies market
sector and, specifically, the ASR, computer voice and communications industries
are characterized by rapid technological change. Competition in the
speech-enabled technologies market is based largely on marketing ability and
resources, distribution channels, technology and product superiority and product
service and support. The development of new technology or material improvements
to existing technologies by the Company's competitors may render its
technologies less attractive or even obsolete. Accordingly, the Company's
success will depend upon its ability to continually enhance its technologies and
interactive solutions and products to keep pace with or ahead of technological
developments and to address the changing needs of the marketplace. Barriers to
entry in the software industry are low, and as the market for various
speech-enabled products expands and matures, the Company expects more entrants
into this already competitive arena.

The Company's products can have a long sales cycle and, as a result, its
quarterly operating results and its stock price may fluctuate.

            The sales cycles for the Company's products are generally six to
twelve months but may be shorter or longer depending on the size and complexity
of the order, the amount of services to be provided and whether the sale is made
directly by the Company or indirectly through a VAR or systems integrator. The
length of the sales cycles could adversely impact the Company's operating
results.

The Company's current and potential competitors, some of whom have greater
resources and experience than it does, may develop products and technologies
that may cause a decline in demand for, and the prices of, the Company's
products.

            A number of companies have developed, or are expected to develop,
products that compete with the Company's products and technologies. Competitors
in the voice interface software market include AT&T, IBM, Locus Dialogue, Lucent
Technologies, Philips Electronics, SpeechWorks International, Nuance, ScanSoft
and Voice Signal. The Company expects additional competition from other
companies such as Microsoft, which has made investments in and acquired voice
interface technology companies. Furthermore, the Company's competitors may
combine with each other, and other companies may enter its markets by acquiring
or entering into strategic relationships with its competitors. Current and
potential competitors have established, or may establish, cooperative
relationships among themselves or with third parties to increase the abilities
of their speech and language technology products to address the needs of the
Company's prospective customers.

            Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical, product
development and marketing resources, greater name recognition and larger
customer bases than the Company does. The Company's present or future
competitors may be able to develop products comparable or superior to those it
offers, adapt more quickly to new technologies, evolving industry trends and
standards, or customer requirements than it does, or devote greater resources to
the development, promotion and


                                     Page 14

<PAGE>



sale of their products than it does. Accordingly, the Company may not be able to
compete effectively in its markets, and competition may intensify and may harm
the Company's business.

The Company's failure to respond to rapid change in the speech-enabled
technologies market could cause the Company to lose revenue and harm its
business.

            The speech-enabled technologies industry is relatively new and
rapidly evolving. The Company's success will depend substantially upon its
ability to enhance its existing technologies and products and to develop and
introduce, on a timely and cost-effective basis, new technologies, products and
features that meet changing end-user requirements and incorporate technological
advancements. If the Company is unable to develop new products and enhanced
functionalities or technologies to adapt to these changes, or if it cannot
offset a decline in revenue from existing technologies and products with sales
of new products, the Company's business will suffer.

            Commercial acceptance of the Company's products and technologies
will depend, among other things, on:

          o    the ability of its products and technologies to meet and adapt to
               the needs of its target markets;

          o    the  performance  and price of its products and its  competitors'
               products; and

          o    its ability to deliver customer services directly and through its
               resellers.

Any software defects in the Company's products could harm its business and
result in litigation.

            Complex software products such as the Company's may contain errors,
defects and bugs. With the planned release of any product, the Company may
discover these errors, defects and bugs and, as a result, products may take
longer to develop than expected. In addition, the Company may discover that
remedies for errors or bugs may be technologically infeasible. Delivery of
products with undetected production defects or reliability, quality, or
compatibility problems could damage the Company's reputation. Errors, defects or
bugs could also cause interruptions, delays or a cessation of sales to its
customers. The Company could be required to expend significant capital and other
resources to remedy these problems. In addition, customers whose businesses are
disrupted by these errors, defects and bugs could bring claims against us which,
even if unsuccessful, would likely be time-consuming and could result in costly
litigation and payment of damages.

In order to increase the Company's international sales, the Company must
increase the foreign language capacities of its products. If it is unable to do
so, it may be unable to grow its revenue and execute its business strategy.

            The Company intends to expand its international sales, which
requires a significant investment to create and refine different language models
for each particular language or dialect. These language models are required to
create versions of products that allow end users to speak the local language or
dialect and be understood. If the Company fails to develop additional foreign
language capacity of its products, its ability to address international market
opportunities and to grow its business will be limited.

The Company may encounter difficulties in managing its growth, which could
prevent it from executing its business strategy.

            The Company's growth has placed, and continues to place, a
significant strain on its resources. To accommodate this growth, the Company
must continue to upgrade a variety of operational and financial systems,
procedures and controls and hire additional employees to support increased
business and product development activity. This has resulted in increased
responsibilities for the Company's management. The Company's systems, procedures
and controls may not be adequate to support its operations. If the Company fails
to improve its


                                     Page 15

<PAGE>



operational, financial and managerial information systems, or to hire, train,
motivate or manage its employees, its business could be harmed.

The Company may incur a variety of costs to engage in future acquisitions of
companies, products or technologies, and the anticipated benefits of those
acquisitions may never be realized.

            The Company may make acquisitions of, or significant investments in,
complementary companies, products or technologies, such as the recent purchase
of assets from Force Computers, Inc. discussed elsewhere herein, although no
material acquisitions or investments are currently pending. Any future
acquisitions would be accompanied by risks such as:

          o    difficulties  in  assimilating  the  operations  and employees of
               acquired companies;

          o    diversion of the Company's  management's  attention  from ongoing
               business concerns;

          o    the Company's  potential  inability to maximize its financial and
               strategic  position  through  the  successful   incorporation  of
               acquired technology and rights into its products and services;

          o    additional  expense  associated  with  amortization  of  acquired
               assets;

          o    maintenance and  implementation of uniform  standards,  controls,
               procedures and policies; and

          o    impairment of existing  relationships  with employees,  suppliers
               and customers as a result of the  integration  of new  management
               employees.

            The Company cannot guarantee that it will be able to successfully
integrate any business, products, technologies or employees that it might
acquire in the future, and its failure to do so could harm its business.

If the Company is unable to hire and retain technical, sales and marketing and
operational employees, its business could be harmed.

            The Company intends to hire additional employees, including software
engineers, sales and marketing employees and operational employees. Competition
for hiring these individuals is intense, especially in the Salt Lake City area
where the Company is headquartered, and it may not be able to attract,
assimilate, or retain additional highly qualified employees in the future. The
failure to attract, integrate, motivate and retain these employees could harm
its business.

The Company's stock price is volatile, and an investor may not be able to resell
its shares at or above the purchase price.

            In recent years, the stock market in general, and the OTC Bulletin
Board and the securities of technology companies in particular, has experienced
extreme price and trading volume fluctuations. These fluctuations have often
been unrelated or disproportionate to the operating performance of individual
companies. These broad market fluctuations may materially adversely affect its
stock price, regardless of operating results.

The Company's independent public accountants have included a "going concern"
paragraph in their reports for the years ended December 31, 2001, 2000 and 1999.

            The independent public accountants' reports for the Company's
financial statements for the years ended December 31, 2001, 2000 and 1999
include an explanatory paragraph regarding substantial doubt about the


                                     Page 16

<PAGE>



Company's ability to continue as a going concern. This may have an adverse
effect on the Company's ability to obtain financing to further develop and
market its products.

The Company's operations and financial condition could be adversely affected by
its failure or inability to protect its intellectual property or if its
technologies are found to infringe the intellectual property of a third party.

            Dependence on proprietary technology

            The Company's success is heavily dependent upon its proprietary
technology. Certain elements of the Company's Core Technologies are the subject
of seven patents issued and allowed by the United States Patent and Trademark
Office and 10 other patent applications which are pending. In addition to its
patents, the Company relies on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary rights. Such means of protecting the Company's proprietary
rights may not be adequate because such laws provide only limited protection.
Despite precautions that the Company takes, it may be possible for unauthorized
third parties to duplicate aspects of its technologies or the current or future
products or technologies of its business units or to obtain and use information
that it regards as proprietary. Additionally, its competitors may independently
develop similar or superior technology. Policing unauthorized use of proprietary
rights is difficult, and some international laws do not protect proprietary
rights to the same extent as United States laws. Litigation periodically may be
necessary to enforce the Company's intellectual property rights, to protect its
trade secrets or to determine the validity and scope of the proprietary rights
of others.

            Risks of the Company's infringement upon the technology of unrelated
parties or entities

            The Company is not aware and does not believe that any of its
technologies or products infringe the proprietary rights of third parties.
Nevertheless, third parties may claim infringement with respect to its current
or future technologies or products or products manufactured by others and
incorporating its technologies. The Company expects that developers of
speech-enabled technologies increasingly will be subject to infringement claims
as the number of products and competitors in the industry grows and the
functionality of products in different industry segments overlaps. Responding to
any such claims, whether or not they are found to have merit, could be time
consuming, result in costly litigation, cause development delays, or require us
to enter into royalty or license agreements. Royalty or license agreements may
not be available on acceptable terms or at all. As a result, infringement claims
could have a material adverse affect on its business, operating results, and
financial condition.

The Company is subject to the risk that certain key personnel, including key
scientific employees and independent contractors named below, on whom it
depends, in part, for the Company's operations, will cease to be involved with
the Company.

            The Company is dependent on the knowledge, skill and expertise of
several key scientific  and business  development  employees,  including John A.
Oberteuffer,  Ph.D., Dale Lynn Shepherd,  Mark Hamilton,  R. Brian Moncur,  Doug
Jensen, Edward A. Bruckert, K. H. Loken-Kim,  John E. Holmgren, Kirk Flygare and
Kirk Feller.; independent contractors including C. Hal Hansen, Tony R. Martinez,
Ph.D.,  Kenneth  P.  Hite  and  Rolf-Juergen  Bruess;  and  executive  officers,
including  Thomas A. Murdock,  Roger D. Dudley and William A. Maasberg,  Jr. The
loss of any of the key  personnel  listed above could  materially  and adversely
affect its future business  efforts.  Although it has taken  reasonable steps to
protect its intellectual property rights including obtaining non-competition and
non-disclosure agreements from all of its employees and independent contractors,
if one or more of the Company's key scientific employees, executive employees or
independent  contractors resigns from Fonix to join a competitor,  to the extent
not prohibited by such person's  non-competition  and non-disclosure  agreement,
the loss of such  personnel and the employment of such personnel by a competitor
could  have a material  adverse  effect on the  Company.  The  Company  does not
presently have any key man life insurance on any of the its employees except Mr.
Dudley,  for whom it  carries a policy  with a face  amount of $4  million.  The
Company is the named beneficiary.


                                     Page 17

<PAGE>



The Company's charter and bylaws and Delaware law contain provisions which may
delay or prevent a change of control.

            Provisions of the Company's charter and bylaws may make it more
difficult for a third party to acquire, or discourage a third party from
attempting to acquire, control of it. These provisions could limit the price
that investors might be willing to pay in the future for shares of Class A
common stock. These provisions include:

          o    procedures for advance  notification  of stockholder  nominations
               and proposals; and

          o    the  ability  of the board of  directors  to alter the  Company's
               bylaws without stockholder approval.

            In addition, the board of directors has the authority to issue up to
50,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The board of
directors utilized this right when approving and issuing the Series A through
Series F preferred stock. The issuance of preferred stock, while providing
flexibility in connection with financings or acquisitions or other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the Company's outstanding voting stock.

The Company has no dividend history and has no intention to pay dividends in the
foreseeable future.

            The Company has never paid dividends on or in connection with any
class of its common stock and does not intend to pay any dividends to common
stockholders for the foreseeable future.

There may be additional unknown risks which could have a negative effect on the
Company and its business.

            The risks and uncertainties described in this section are not the
only ones facing the Company. Additional risks and uncertainties not presently
known to the Company or that it currently deems immaterial may also impair its
business operations. If any of the foregoing risks actually occur, its business,
financial condition, or results of operations could be materially adversely
affected. In such case, the trading price of its Class A common stock could
decline.


ITEM 2.                 PROPERTIES

            The Company owns no real property. Commencing in October 1996, the
Company leased a 25,600 square foot facility in Draper, Utah, from an
unaffiliated third party at which it conducts its principal scientific research,
product development and sales and marketing activities. The Company's lease of
that facility is for a term of eight years, with a right to terminate after five
years, which right the Company did not exercise in 2001. Provided that the
Company is not in default under the lease, the Company has the option to extend
the lease for five additional years. The average base monthly lease payment over
the eight-year life of the lease for that facility is $28,389.

            In addition to the Draper facility, the Company subleases office
space at market rates under subleases from SCC Asset Management, Inc., formerly
Studdert Companies Corporation ("SCC"). SCC is owned and controlled by three
individuals, two of whom are executive officers and directors of the Company.
(See "Certain Relationships and Related Transactions," and "Security Ownership
of Certain Beneficial Owners and Management"). The two executive officers and a
former executive officer of the Company have personally guaranteed these leases
in favor of SCC's landlord. The leases expire December 2002 and February 2003
and require monthly rental payments of $10,368.

            The Company leases approximately 1,377 square feet of office space
in Lexington, Massachusetts, where it conducts sales and marketing for its Core
Technologies and product development for pen/voice products and other


                                     Page 18

<PAGE>



applications. This lease expires November 30, 2002 and requires monthly rental
payments of $2,754. The Company has given the lessor proper notification of its
intent to terminate the lease early and currently occupies the space on a
month-to-month basis.

            Effective May 25, 1999, the Company entered into an agreement to
sublease a Cupertino, California facility to an unrelated third party. The
agreement requires the sublessee to pay the monthly rent of $35,432 directly to
the lessor through the end of the lease term on May 31, 2003. In the event the
sublessee fails to make timely payments, the Company could be required to cover
deficiencies in payments.

            The Company believes that the facilities described above are
adequate for its current operating needs.




ITEM 3.                 LEGAL PROCEEDINGS

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

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


ITEM 4.                 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

            On July 18, 2001, the Company held its Annual Meeting of
Shareholders in Salt Lake City, Utah. The record date for the meeting was June
14, 2001, on which date there were 219,569,513 shares of the Company's Class A
common stock outstanding.

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

                                   SHARES             SHARES
DIRECTOR                       VOTED IN FAVOR     VOTED AGAINST
--------                       --------------     -------------
Thomas A. Murdock               166,729,551         2,643,424
Roger D. Dudley                 166,683,380         2,689,595
John A. Oberteuffer, Ph.D       167,239,336         2,133,639
William A. Maasberg, Jr.        167,229,061         2,143,914
Mark S. Tanner                  166,899,913         2,473,062

            The second matter voted upon at the meeting was the approval of
Arthur Andersen LLP as independent auditors for the Company. The results of the
voting were 168,253,560 shares voted in favor, 835,205 shares against, and
284,210 shares withheld or abstaining.


                                     Page 19

<PAGE>



            The third matter voted upon at the meeting was the approval of a
proposed amendment to the Company's Certificate of Incorporation to increase the
authorized capital stock of the Company to include 500,000,000 shares of Class A
Common Stock. The results of the voting were 162,266,907 shares voted in favor,
6,663,363 shares against, and 442,705 shares withheld or abstaining.




                                     Page 20

<PAGE>

                                     PART II


ITEM 5.        MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
               MATTERS

            Fonix Class A common stock is listed on the OTC Bulletin Board under
the trading symbol FONX. The following table shows the range of high and low
sales price information for Class A common stock as quoted on the OTC Bulletin
Board for the four quarters of calendar 2001 and 2000. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not represent actual transactions.

<TABLE>
<CAPTION>
                                 Calendar Year 2001             Calendar Year 2000
                               -----------------------       ----------------------
                               High           Low            High          Low
                               ----           -----          -----         ----

<S>                            <C>            <C>            <C>           <C>
            First Quarter      $0.95          $0.31          $ 2.50        $ 0.25
            Second Quarter     $0.61          $0.28          $ 1.81        $ 1.00
            Third Quarter      $0.32          $0.06          $ 1.39        $ 0.50
            Fourth Quarter     $0.24          $0.07          $ 0.94        $ 0.28
</TABLE>


            As of March 26 2002, there were 463,280,512, shares of Fonix Class A
common stock outstanding, held by approximately 664 holders of record and 46,550
beneficial holders. This number of beneficial holders represents an estimate of
the number of actual holders of the Company's stock, including beneficial owners
of shares held in "nominee" or "street" name. The actual number of beneficial
owners is not known to the Company.

            The Company has never declared any dividend on its Class A common
stock and it is expected that earnings, if any, in future periods will be
retained to further the development and sale of the Company's speech- enabling
technologies and products. No dividends can be paid on the Class A common stock
until such time as all accrued and unpaid dividends on outstanding preferred
stock, if any, have been paid.


                 Recent Sales of Unregistered Equity Securities

            For the year ended December 31, 2001, the Company received
$5,510,000 in funds drawn under the Equity Line, less commissions and fees of
$165,300, and issued 26,353,141 shares of Class A common stock to the Equity
Line investor. Subsequent to December 31, 2001, the Company received $2,756,836
in funds drawn under the Equity Line, less commissions and fees of $82,705, and
issued 29,187,136 shares of Class A common stock to the Equity Line investor.
The shares were issued without registration under the 1933 Act in reliance on
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and the
rules and regulations promulgated thereunder. The resales of the shares were
subsequently registered under registration statements on Form S-2.

            Between May 25, 2001 and December 31, 2001, the Company received
$13,425,000 in funds drawn under the Second Equity Line, less commissions and
fees of $497,750, and issued 118,013,005 shares of Class A common stock to the
Equity Line investor. Subsequent to December 31, 2001, the Company received
$4,643,164 in funds drawn under the Second Equity Line, less commissions and
fees of $139,295, and issued 83,897,735 shares of Class A common stock to the
Equity Line investor. The shares were issued without registration under the 1933
Act in reliance on Section 4(2) of the 1933 Act and the rules and regulations
promulgated thereunder. The resales of the shares were subsequently registered
under registration statements on Form S-2.





                                     Page 21

<PAGE>



ITEM 6.                 SELECTED FINANCIAL DATA

            The selected consolidated financial information set forth below is
derived from the Company's consolidated balance sheets and statements of
operations as of and for the years ended December 31, 2001, 2000, 1999, 1998 and
1997. The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes thereto included in this
Report.


<TABLE>
<CAPTION>
                                                                              For the Year Ended December 31,
                                                             2001           2000           1999           1998           1997
                                                        --------------  -------------  -------------  -------------  ------------
Statement of Operations Data:
<S>                                                      <C>            <C>            <C>            <C>            <C>
Revenues                                                 $    607,644   $    656,853   $    439,507   $  2,604,724   $         --
Selling, general and administrative expenses               11,651,565     10,722,313      9,498,753      8,817,643     12,947,112
Product development and research                            8,119,924      5,871,414      7,909,228     13,060,604      7,066,294
Amortization of intangible assets                           2,453,491      2,457,829      2,588,896      1,712,267             --
Impairment loss on handwriting recognition technology       2,056,295             --             --             --             --
Purchased in-process research and  development                     --        474,000             --      9,315,000             --
Other expense, net                                           (173,221)    (3,991,348)    (3,698,789)    (6,507,245)    (1,558,678)
Loss from continuing operations                           (24,566,807)   (22,810,677)   (19,949,196)   (36,843,475)   (21,572,084)
Equity in loss of affiliate                                  (534,138)            --             --             --             --
Loss from discontinued operations                                  --             --     (2,187,080)    (6,275,307)             --
Gain (loss) on extraordinary items                                 --         49,448        473,857             --       (881,864)
Net loss                                                  (24,566,807)   (22,761,229)   (21,662,419)   (43,118,782)   (22,453,948)
Basic and diluted net loss per common share             $       (0.10)  $      (0.16)  $      (0.31)  $      (0.91)  $      (0.59)
Basic and diluted weighted average number of common       239,131,247    162,684,298     76,753,709     52,511,185     42,320,188
       shares outstanding
</TABLE>



<TABLE>
<CAPTION>
                                                                    As of December 31,
                                        ------------------------------------------------------------------------
                                           2001          2000            1999            1998          1997
                                        ------------  ------------  --------------  --------------  ------------
Balance Sheet Data:
<S>                                     <C>           <C>           <C>             <C>             <C>
Current assets                          $  1,244,767  $  3,752,210  $      480,885  $   20,638,070  $ 21,148,689
Total assets                              15,068,538    17,517,373      19,173,147      61,912,791    22,894,566
Current liabilities                        7,346,918     3,571,854       5,285,681      35,317,045    20,469,866
Long-term debt, net of current portion            --        19,767       3,971,107              --        52,225
Stockholders' equity                       7,721,620    13,925,752       8,086,359      24,765,746     2,372,475
</TABLE>




                                     Page 22

<PAGE>



ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

THIS REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED BY
THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED BELOW IN THE SECTION
ENTITLED "FACTORS AFFECTING FUTURE OPERATING RESULTS" AND UNDER THE HEADING
"CERTAIN SIGNIFICANT RISK FACTORS" IN ITEM 1 PART I OF THIS REPORT, ABOVE.

            The following discussion of the results of operations and financial
condition should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this report.

Overview

            Since inception, Fonix has devoted substantially all of its
resources to research, development and acquisition of software technologies that
enable intuitive human interaction with computers, consumer electronics, and
other intelligent devices. Through December 31, 2001, the Company has incurred
significant cumulative losses and losses are expected to continue until the
effects of recent marketing and sales efforts begin to take effect, if ever. The
Company continues to emphasize product delivery and sales while achieving
technology upgrades to maintain its perceived competitive advantages.

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

Significant Accounting Policies

            The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of sales and expenses during the reporting period. Significant accounting
policies and areas where substantial judgements are made include:

            Intangible and Long-lived Assets - Intangible assets consist of
            goodwill, purchased Core Technologies, customer relationships,
            trademarks and patents. Amortization is computed on a straight-line
            basis over the estimated useful lives, ranging from five to ten
            years.

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


                                     Page 23

<PAGE>



            value of the long-lived asset would not be recoverable, the carrying
            value would be reduced by the estimated excess of the carrying value
            over the projected discounted cash flows.

            During the fourth quarter of 2001, management of the Company
            determined that goodwill recorded in connection with its handwriting
            recognition ("HWR") technology was impaired due to the expiration or
            termination of related license agreements and insufficient funding
            to further develop or market the technology or pursue other
            prospects for future revenue generation. Accordingly, the
            unamortized balance of $2,056,295 was charged to expense in 2001.

            Management did not consider any of the Company's other intangible or
            long-lived assets to be impaired at December 31, 2001. However,
            should the Company's marketing and sales plans not materialize in
            the near term, the realization of the Company's intangible assets
            could be severely and negatively impacted. The accompanying
            consolidated financial statements have been prepared based on
            management's estimates of realizability, which estimates may change
            due to factors beyond the control of the Company.

            In July 2001, the Financial Accounting Standards Board ("FASB")
            issued Statement of Financial Accounting Standards ("SFAS") No. 142,
            "Goodwill and Other Intangible Assets." SFAS No. 142 changes the
            accounting for goodwill and intangible assets with indefinite lives
            from an amortization method to an impairment-only approach.
            Accordingly, effective January 1, 2002, amortization of goodwill and
            intangible assets with indefinite lives will discontinue. Other
            intangible assets will continue to be amortized over their useful
            lives. The Company amortized $1,029,545 of goodwill for each of the
            years ended December 31, 2001, 2000 and 1999. Effective January 1,
            2002, the Company will apply the requirements of SFAS No. 142, and
            management will perform an impairment test of goodwill and
            intangible assets with indefinite lives. The effect of the
            application of those requirements on the Company's financial
            position and results of operations has not been determined, but it
            could be material. Any transitional impairment loss will be
            recognized as a cumulative change in accounting principle.

            In October 2001, the FASB issued SFAS No. 144, "Accounting for the
            Impairment or Disposal of Long- Lived Assets." This statement
            establishes financial accounting and reporting standards for the
            impairment or disposal of long-lived assets. SFAS No. 144 is
            effective for financial statements issued for fiscal years beginning
            after December 15, 2001. The application of these requirements is
            not expected to have a material effect on the Company's financial
            position and results of operations.

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

            Revenues from license, royalties and maintenance are recognized upon
            shipment of the software if there are no significant post-contract
            obligations. If significant post-contract obligations exist,
            revenues are recognized when those obligations have been satisfied.
            Revenues from development and consulting services are recognized as
            the services are completed.

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

            Stock-based  Compensation  Plans - The Company  accounts  for its
            stock-based  compensation issued to employees and directors under
            Accounting  Principles Board ("APB") Opinion No. 25,  "Accounting
            for  Stock  Issued  to  Employees".  Under APB  Opinion  No.  25,
            compensation related to stock options, if any, is


                                     Page 24

<PAGE>



            recorded if an option's exercise price on the measurement date is
            below the fair value of the Company's common stock, and amortized to
            expense over the vesting period. Compensation expense for stock
            awards or purchases, if any, is recognized if the award or purchase
            price on the measurement date is below the quoted fair value of the
            Company's common stock, and is recognized on the date of award or
            purchase. SFAS No. 123, "Accounting for Stock Based Compensation",
            requires pro forma information regarding net loss and net loss per
            common share as if the Company had accounted for its stock options
            granted under the fair value method.

            The Company accounts for its stock-based compensation issued to
            non-employees using the fair value method in accordance with SFAS
            No. 123 and related interpretations. Under SFAS No. 123, stock-based
            compensation is determined as either the fair value of the
            consideration received or the fair value of the equity instruments
            issued, whichever is more reliably measurable. The measurement date
            for these issuances is the earlier of the date at which a commitment
            for performance by the recipient to earn the equity instruments is
            reached or the date at which the recipient's performance is
            complete.

            The estimated fair value of stock-based compensation issued to
            non-employees is subject to assumptions made regarding risk-free
            interest rates, expected exercise lives and volatility. Actual
            results could differ from these estimates.

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

Results of Operations

2001 Compared to 2000

            During 2001, the Company recorded revenues of $607,644, a decrease
of $49,209 from $656,853 for 2000. The decrease in 2001 was due in part to the
poor economic conditions in the telecommunications sector of the economy, where
much of the Company's revenue has been generated in the past. Furthermore, sales
and marketing efforts have not yet increased revenues, in spite of considerable
progress in developing partnerships in key markets. Also, certain advance
payments received for royalties have not yet been recognized.

            Selling, general and administrative expenses were $11,651,565 for
2001 and $10,722,313 for 2000, an increase of $929,252. The change is a result
of increases of $1,492,025 in compensation-related expenses due to personnel
added for sales and marketing efforts, $199,012 in occupancy costs, $496,518 in
legal fees related to acquisition, regulatory filing, litigation and other
general corporate activities, $480,452 in travel-related expenses and $421,550
in promotion and advertising expenses resulting from increased sales and
marketing efforts. These increases were offset, in part, by a decrease of
$2,033,024 in consulting and outside services incurred in 2000 but not repeated
in 2001 and a decrease of $51,731 in other operating expenses.

            The Company incurred research and product development expenses of
$8,119,924 during 2001, an increase of $2,248,510 from 2000. The greatest
portion of this increase was a result of $2,043,181 in additional
compensation-related expenses incurred by adding engineering and product
development personnel for development of product applications and solutions. In
addition to this increase, $299,864 of additional expenses were incurred by
consultants and outside services in development of speech-enabling applications
and solutions for customers. Future development efforts will continue to focus
on product applications and solutions utilizing the speech-enabling technologies
developed to date.

            In 2001, the Company recognized an impairment of goodwill related to
HWR technology that was acquired in 1998. Without immediate customer prospects,
the Company has chosen not to provide further funding to


                                     Page 25

<PAGE>



develop the market or the HWR technology at this time. Accordingly, management
has determined that the related goodwill is impaired and the unamortized balance
of $2,056,295 was expensed in 2001 . Even though the value of this technology
has been reduced to $0 for financial reporting purposes, the Company will
continue to evaluate opportunities for licensing this technology to others in
the future.

            Net other expense was $173,221 for 2001, a decrease of $3,818,127
from 2000. Financing activities in 2001 were accomplished through equity lines
of credit rather than debt securities or preferred stock. Accordingly, interest
expense incurred in 2001 was $3,968,773 less than in 2000. A beneficial
conversion feature of $3,447,623 was recorded in 2000 in connection with the
issuance of a convertible promissory note, along with other interest incurred on
the obligation. Interest income decreased by $58,910 due to lower cash balances
maintained throughout the year.

2000 Compared to 1999

            The results of operations disclosed below give effect to the sale of
the Company's Healthcare Solutions Group ("HSG") in September 1999 and the
classification of the HSG's net assets and operating activities as discontinued
operations.

            During 2000, the Company recorded revenues of $656,853, an increase
of $217,346 from $439,507 for 1999. The increase in 2000 resulted primarily from
increased activity in licensing of TTS channels in telephony applications.

            Selling, general and administrative expenses were $10,722,313 for
2000 and $9,498,753 for 1999, an increase of $1,223,560. Excluding a
compensation charge in 1999 in the amount of $1,443,300 for obligations to
certain executives for expenses incurred on behalf of the Company, the increase
from 1999 is actually $2,666,860. The increase is due to consulting expense of
$2,294,756 resulting from compensation paid in shares of Class A common stock
for services rendered to the Company by outside consultants. Also contributing
to the increase is other compensation expense in the amount of $628,000 incurred
as a result of the exercise of stock appreciation rights. Other changes
resulting from sales and marketing activity undertaken by the Company as
indicated by the marketing strategy described above were not significant in
2000, but will impact future periods.

            The Company incurred product development and research expenses of
$5,871,414 during 2000, a decrease of $2,037,814 from 1999. This decrease was
due to the ongoing effects of management's cost reduction initiatives
implemented in 1999 and the transition of emphasis from research and development
towards sales and marketing. The Company also experienced decreases in product
development and research costs as it completed development of certain TTS and
ASR products.

            Net other expense was $3,991,348 for 2000, an increase of $292,559
from 1999. Interest income increased by $44,260 from earnings on the funds held
in escrow in connection with the sale of the HSG. Interest and related finance
charges increased by $367,644 as a result of debt financing activities. Included
in interest expense are charges resulting from beneficial conversion features
incurred in connection with a convertible promissory note in the amount of
$3,447,623 in 2000 and the Series C convertible debentures in the amount of
$1,750,000 in 1999.

Selected Quarterly Operations Data

            The following tables set forth selected unaudited statement of
operations data for each of the quarters in the years ended December 31, 2001
and 2000. This data has been derived from the Company's unaudited financial
statements that have been prepared on the same basis as the audited financial
statements and in the opinion of management, include all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of the
information when read in connection with the financial statements and the
related notes. The Company's quarterly operating results have varied
substantially in the past and may vary substantially in the future.


                                     Page 26

<PAGE>



Conclusions about the Company's future results for any period should not be
drawn from the selected unaudited statement of operations data, either for any
particular quarter or taken as a whole.



<TABLE>
<CAPTION>
                                                                         For the Quarter Ended
                                                       ---------------------------------------------------------------
                                                            March 31,       June 30,     September 30,    December 31,
                                                              2001            2001           2001             2001
                                                       ---------------  -------------  ---------------  --------------
                                                                                 (Unaudited)

<S>                                                    <C>              <C>            <C>              <C>
Net sales                                              $       132,713  $     107,568  $       265,646  $      101,717
Loss before equity in loss of affiliate and
     extraordinary item                                    (4,248,617)    (6,349,338)      (5,744,452)     (7,690,262)
Net loss                                                   (4,248,617)    (6,543,765)      (5,931,343)     (7,843,082)
Basic and diluted loss before extraordinary
item per common share                                           (0.02)         (0.03)           (0.02)          (0.03)
Basic and diluted loss per common share                         (0.02)         (0.03)           (0.02)          (0.03)
</TABLE>



<TABLE>
<CAPTION>
                                                                            For the Quarter Ended
                                                       ---------------------------------------------------------------------
                                                          March 31,         June 30,       September 30,       December 31,
                                                            2000              2000              2000               2000
                                                       --------------   --------------   ----------------   ----------------
                                                                                     (Unaudited)

<S>                                                    <C>              <C>              <C>                <C>
Net sales                                              $       56,447   $      143,825   $        172,222   $        284,359
Loss before equity in loss of affiliate and
     extraordinary item                                   (5,819,130)      (4,778,159)        (8,451,438)        (3,761,950)
Net loss                                                  (5,787,153)      (4,731,272)        (8,451,438)        (3,791,366)
Basic and diluted loss before extraordinary
item per common share                                          (0.06)           (0.03)             (0.05)             (0.02)
Basic and diluted loss per common share                        (0.06)           (0.03)             (0.05)             (0.02)
</TABLE>


Liquidity and Capital Resources

            The Company must raise additional funds to be able to satisfy its
cash requirements during the next 12 months. Research and development, corporate
operations and marketing expenses will continue to require additional capital.
Because the Company presently has only limited revenue from operations, the
Company intends to continue to rely primarily on financing through the sale of
its equity and debt securities to satisfy future capital requirements until such
time as the Company is able to enter into additional third-party licensing,
collaboration or co-marketing arrangements such that it will be able to finance
ongoing operations from license, royalty and sales revenue. There can be no
assurance that the Company will be able to enter into such agreements.
Furthermore, the issuance of equity or debt securities which are or may become
convertible into equity securities of the Company in connection with such
financing could result in substantial additional dilution to the stockholders of
the Company.



                                     Page 27

<PAGE>



            The Company had negative working capital of $6,102,151 at December
31, 2001, compared to minimal working capital of $180,356 at December 31, 2000.
The current ratio was 1:5.9 at December 31, 2001, compared to 1.05:1 at December
31, 2000. Current assets decreased by $2,507,443 from December 31, 2000 to
December 31, 2001. Current liabilities increased by $3,775,064 to $7,346,918
during the same period. The change in working capital reflects, in part, the use
of the funds released from an escrow relating to the sale of the HSG in March
2001, plus an increase in current obligations related to notes payable issued in
connection with the purchase of assets from Force Computers, Inc. and the
investment in Audium Corporation. Total assets were $15,068,538 at December 31,
2001, compared to $17,517,373 at December 31, 2000, the decrease resulting
primarily from amortization of intangible assets.

Convertible Notes Receivable

            Through November 30, 2001, the Company loaned $455,000 under the
terms of convertible promissory notes to an unrelated entity (the "Borrower")
with whom the Company is engaged in development activities. The notes were
unsecured, bore interest at an annual rate of 7.5 percent, and were to mature
120 days from the issuance date of each note. The Borrower is a provider of
natural-language-understanding solutions for CRM applications. Fonix
speech-enabling technology is a component of these solutions.

            On December 1, 2001, the Company established a revolving line of
credit and convertible promissory note that permits the Borrower to draw up to
$1,000,000 for operations and other purposes, including the amounts loaned under
the initial convertible promissory notes. Effective February 1, 2002, the line
of credit and convertible promissory note were increased to $2,000,000. Draws
are subject to the approval of Fonix, bear interest at an annual rate of seven
percent, which interest is payable quarterly beginning June 30, 2002, and are
secured by intellectual property and other assets of the Borrower. The unpaid
principal, together with interest accrued thereon, is due and payable on
December 31, 2002, and is convertible into common shares of the Borrower at the
Company's option. Based upon borrowings through December 31, 2001, such
conversion would represent approximately a five percent ownership of the
Borrower.

            In December, the Borrower drew an additional $175,000 on the
convertible promissory note, bringing the total outstanding balance to $630,000
as of December 31, 2001. Subsequent to December 31, 2001 through March 26, 2002,
the Borrower drew an additional $505,000 under the terms of the convertible
promissory note.

Investment In Audium Corporation

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

            Note Receivable - In connection with the collaboration agreement
with Audium, in February and May 2001, the Company advanced an aggregate of
$400,000 to Audium as a bridge loan (the "Audium Note"). The loan bears interest
at a rate of 5 percent per year, has a term of four years and is convertible
into shares of Audium Series A Convertible Preferred Stock ("Audium Preferred
Stock"). The Audium Note is convertible into shares of Audium Preferred Stock at
a price of $1.46 per share in the event of (i) Audium raising an additional
$2,000,000 prior to October 6, 2002, (ii) Audium's merger or consolidation,
(iii) a qualified public offering of Audium common stock, (iv) an event of
default under a note payable from Fonix (see Fonix Note below), or (v) Audium's
aggregate gross revenues for the months of January through June 2003 exceeding
$1,000,000. The Audium Note is secured by Audium's intellectual property.
Further, at the closing, Audium granted the Company a fully paid, worldwide,
non- exclusive license to Audium's software to make, manufacture, and use the
software and any derivative works if Audium declares bankruptcy or ceases to do
business.


                                     Page 28

<PAGE>



            Management determined that a 12 percent annual interest rate better
reflects the risk characteristics of the Audium Note. Accordingly, interest was
imputed at 12 percent and the Audium Note was recorded at its original present
value of $302,909. For the year ended December 31, 2001, the Company recorded
interest income of $29,663, including contractual and imputed interest. As of
December 31, 2001, the balance of the Audium Note was $322,309, net of the
unaccreted discount.

            Investment - On April 11, 2001, the Company closed a stock purchase
agreement with Audium, wherein the Company agreed to purchase up to $2,800,000
of Audium Preferred Stock at a price of $1.46 per share. At closing the Company
paid $200,000 in cash and gave Audium a non-interest bearing note (the "Fonix
Note") for the remaining $2,600,000 (see below). Each share of Audium Preferred
Stock is convertible into one share of Audium's common stock. The stock purchase
agreement also entitles Fonix to elect one member of Audium's board of
directors. Audium also granted Fonix certain registration rights which become
effective after the closing of a public offering by Audium.

            On April 11, 2001, and through December 31, 2001, the Company's
investment in Audium represented 26.7 percent of the Audium's voting stock. As a
result, the Company accounts for its investment in Audium using the equity
method of accounting. Accordingly, the Company recognized a loss of $534,138 in
the consolidated statements of operations consisting of $259,414 related to the
Company's share of Audium's net loss for the period from April 11, 2001 through
December 31, 2001 and $274,724 for the amortization of the difference between
the purchase price of the Audium Preferred Stock and the Company's portion of
Audium's net stockholders' deficit that is amortized on a straight-line basis
over a period of eight years.

            A summary of the results of Audium's operations for the period from
April 11, 2001 through December 31, 2001 and net assets (liabilities) as of
December 31, 2001 is as follows:

                                                    (Unaudited)
  Net sales                                       $    434,859
  Loss from operations                                 959,285
  Net loss                                             971,583

  Current assets                                       591,646
  Total assets                                         832,670
  Current liabilities                                  604,677
  Total liabilities                                  1,027,272
  Net assets (liabilities)                            (194,602)

            Note Payable - The Fonix Note is payable in 13 monthly installments
of $200,000 beginning on June 1, 2001, and bears no interest unless an event of
default occurs, in which case it will bear interest at 12 percent per year. No
events of default have occurred to date.

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

            Through September 30, 2001, three payments of $200,000 were made on
the Fonix Note. Effective October 1, 2001, the terms of the Fonix Note were
modified to reduce the monthly payments to the following amounts: $75,000 for
September 2001, $100,000 for October 2001, $125,000 for November 2001 and
$150,000 for December 2001 and January 2002. Thereafter, monthly payments of
$200,000 are scheduled through August 2002.


                                     Page 29

<PAGE>



No other terms of the original Fonix Note were affected by the modification.
Subsequent to December 31, 2001, payments amounting to $550,000 have been made
as required by the modified terms.

            Management determined that a 12 percent annual interest rate
reflects the risk characteristics of the Fonix Note. Accordingly, interest has
been imputed at 12 percent and the Company recorded a present value of
$2,370,348 for the note payable. For the year ended December 31, 2001, the
Company recorded interest expense of $164,405 related to this note.

Promissory Note

            On December 14, 2001, the Company entered into an Asset Purchase
Agreement with Force Computers, Inc. As part of the consideration for the
purchase price Fonix issued a non-interest bearing promissory note in the amount
of $1,280,000. Management determined that a seven percent annual interest rate
reflects the risk characteristics of the this promissory note. Accordingly,
interest has been imputed at seven percent and the Company recorded a discount
of $40,245 for the note payable. From the purchase date through December 31,
2001, the Company recorded interest expense of $4,098 related to this promissory
note.

            As collateral for the promissory note, 7,000,000 shares of the
Company's Class A common stock were placed into escrow. Under the terms of the
escrow, the shares will not be released to Force unless the Company is
delinquent or late with respect to any payment under the Note. Also, under the
terms of the Asset Purchase Agreement, Fonix is required to deposit all receipts
from customers acquired in this transaction into a joint depository account.
Fonix has the right to withdraw such funds; however, in the event of default on
any payments to Force under the terms of the promissory note, Force has the
right to withdraw funds from the depository account until the deficiency in
payment is covered, at which time, Fonix may again have use of the funds. To
date, required payments have been made when due.

Notes Payable

            The Company had unsecured demand notes payable to former
stockholders of an acquired entity in the aggregate amount of $77,625
outstanding as of December 31, 2001. During 2000, certain holders of these notes
made demand for payment. The Company is attempting to negotiate a reduced payoff
of these notes.

Preferred Stock

            During 2001, 164,500 shares of Series D convertible preferred stock
and related accrued dividends were converted into 13,978,440 shares of Class A
common stock. As of December 31, 2001, there were no shares of Series D
preferred stock outstanding.

            During 2001, 6,073 shares of Series F convertible preferred stock
and related accrued dividends were converted into 519,067 shares of Class A
common stock. As of December 31, 2001, there were no shares of Series F
preferred stock outstanding.

Equity Lines of Credit

            On August 8, 2000, the Company entered into a Private Equity Line
Agreement ("Equity Line") with a private investor ("Equity Line Investor") that
gives the Company the right to draw up to $12,500,000 for operations and other
purposes, through a mechanism of draws and puts of stock. The Company is
entitled to draw funds and to "put" to the Equity Line Investor shares of Class
A common stock in lieu of repayment of the draw. The number of shares issued is
determined by dividing the dollar amount of the draw by 90 percent of the
average of the two lowest closing bid prices of Class A common stock over the
seven trading-day period following the date the put notice is


                                     Page 30

<PAGE>



tendered. The Equity Line Investor is required to fund the amounts requested by
the Company within two trading days after the seven trading-day period.

            During 2001, draws against the Equity Line in the amount of
$5,510,000 were converted into 26,353,141 shares of Class A common stock.
Subsequent to December 31, 2001, additional draws amounting to $2,756,836 were
converted into 29,187,136 shares of Class A common stock. As of March 26, 2002,
$259,657 remain available to be drawn on the Equity Line.

            On April 6, 2001, the Company entered into a second private equity
line agreement (the "Second Equity Line") with the same Equity Line Investor.
Under the Second Equity Line, the Company has the right to draw against an
equity line of credit up to $20,000,000 under terms that are substantially
similar to the terms of the initial Equity Line.

            From the inception of the Second Equity Line through December 31,
2001, draws taken under the Second Equity Line amounted to $13,425,000 and were
converted to 118,013,005 shares of Class A common stock. Subsequent to December
31, 2001, additional draws amounting to $4,643,164 were converted into
83,897,735 shares of Class A common stock. As of March 26, 2002, $1,931,836
remain available to be drawn on the Second Equity Line.

Stock Options and Warrants

            During 2001, the Company granted options to purchase 8,134,950
shares of Class A common stock at exercise prices ranging from $0.07 to $0.73
per share. All options were granted at the quoted market price at the date of
grant. Of the options granted during this period, 1,233,000 vested immediately,
625,000 vest over 18 months, and the balance of 6,276,950 vest over the three
years following issuance. If not exercised, all options expire within ten years
from the date of grant. As of December 31, 2001, the Company had options
outstanding to purchase 24,078,813 shares of Class A common stock.

            The Company's option plans provide for stock appreciation rights
that allow the grantee to receive shares of its Class A common stock equivalent
in value to the difference between the designated exercise price and the fair
market value of the Company's stock at the date of exercise. As of December 31,
2001, there are options to purchase 33,334 shares of Class A common stock
outstanding which provide for stock appreciation rights. These options have an
exercise price of $1.00 per share. If not exercised by September 2002, the
options with these rights will expire.

            As of March 26, 2002, the Company had warrants to purchase a total
of 2,675,000 shares of Class A common stock outstanding.

Summary of Contractual Obligations

            The following summary reflects payments due under long-term
obligations as of December 31, 2001:

<TABLE>
<CAPTION>
Contractual Obligations                                 Payments Due By Year
                                         Total             Less Than One         One to Three
<S>                                      <C>                  <C>                <C>
Notes payable                            $   2,907,625        $    2,907,625     $              --
Capital lease obligations                       20,310                20,310                    --
Operating lease obligations                  1,693,255               881,224               812,031
                                         -------------        --------------     -----------------
Total contractual cash obligations       $   4,621,190        $    3,809,159     $         812,031
                                         =============        ==============     =================
</TABLE>


                                     Page 31

<PAGE>

Other

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




                                     Page 32

<PAGE>



                                     Outlook

Corporate Objectives and Technology Vision

            The Company's objective is that its Core Technologies become the
platform for the next generation of speech-enabling applications and products.
Most speech recognition products offered by other companies are based on
technologies that are largely in the public domain and represent nothing
particularly "new" or creative. The Fonix Core Technologies are based on
proprietary technology that is protected by various patents and trade secrets.
Management believes the Company's speech-enabling technologies provide a
superior competitive advantage compared to other technologies available in the
marketplace. In order to accomplish this objective, the Company intends to
proceed as follows:

            Substantially Increase Marketing and Sales Activities. The Company
            intends to hire additional sales and marketing personnel, both
            domestically and internationally, who will focus on the automotive
            embedded and wireless mobile markets, computer telephony and server
            solution markets and personal software for consumer applications. To
            address global opportunities, the Company will continue to develop
            or acquire additional speech-enabling products and technologies for
            foreign languages and dialects. Fonix will also make a significant
            investment in the "Powered by Fonix" Partner Program in order to
            build sales and marketing opportunities with software developers,
            resellers and corporate partners.

            Expand Strategic Relationships. The Company has a number of
            strategic collaboration and marketing arrangements with developers
            and VARs. The Company intends to expand such relationships and add
            additional similar relationships, specifically in the mobile
            communications, PDA, IVR and Internet portal markets. As s.Manager
            becomes increasingly recognized as a dynamic development platform,
            Fonix expects s.Manager to be the product around which many of these
            relationships are structured. Further, when the Company is able to
            identify "first mover" speech-enabling applications in which it can
            integrate its Core Technologies, the Company intends to investigate
            investment opportunities in order that the Company can obtain
            preferred or priority collaboration rights.

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

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




                                     Page 33

<PAGE>



ITEM 8.                 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


 Index to Consolidated Financial Statements:


 Report of Independent Public Accountants                                   F-2


 Consolidated Balance Sheets as of December 31, 2001 and 2000               F-3


 Consolidated Statements of Operations for the Years Ended
     December 31, 2001, 2000 and 1999                                       F-4


 Consolidated Statements of Stockholders' Equity for the Years
     Ended December 31, 2001, 2000 and 1999                                 F-5


 Consolidated Statements of Cash Flows for the Years Ended December
     31, 2001, 2000 and 1999                                                F-6


 Notes to Consolidated Financial Statements                                 F-8


ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE

            During the years ended December 31, 2001, 2000 and 1999, and through
the date hereof, there have been no reportable events (as defined in Item
304(a)(1)(v) of Regulation S-K).




                                     Page 34

<PAGE>



                                    PART III

ITEM 10.                DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

            The following table sets forth certain information concerning the
executive officers and directors of the Company as of March 26, 2002:

<TABLE>
<CAPTION>
 Name                                           Age                     Position

<S>                                             <C>                     <C>
Thomas A. Murdock (1)*                          58                      Director, President & Chief Executive Officer
Roger D. Dudley         (2)*                    49                      Director, Executive Vice President & Chief Financial Officer
John A. Oberteuffer, Ph.D.                      61                      Director, Vice President & Chief Technology Officer
William A. Maasberg, Jr (1) (2)                 62                      Director, Chief Operating Officer
Mark S. Tanner (1) (2)                          47                      Director
</TABLE>

             (1) Member, Compensation Committee
             (2) Member, Audit Committee
             *    Committee Chairman

             All directors hold office until the next annual meeting of the
stockholders of the Company or until their successors have been elected and
qualified. The officers of the Company are elected annually and serve at the
pleasure of the Board of Directors.

               THOMAS A. MURDOCK is a  co-founder  of the Company and has served
               as an  executive  officer  and member of the  Company's  board of
               directors  since  June  1994.  He has  been the  Company's  chief
               executive  officer since January 26, 1999.  Mr.  Murdock also has
               served  as  president  of SCC  Asset  Management  Inc.,  formerly
               Studdert  Companies  Corporation  ("SCC"), a related party, since
               1992. For much of his career, Mr. Murdock was a commercial banker
               and a senior corporate  executive with significant  international
               emphasis and experience. Mr. Murdock also serves as a director of
               KLS Enviro Resources, Inc.("KLS") and SCC.

               ROGER D. DUDLEY is a co-founder  of the Company and has served as
               an  executive  officer  and  member  of the  Company's  board  of
               directors  since June 1994.  Mr. Dudley  currently  serves as the
               Company's  executive vice president and chief financial  officer.
               After several  years at IBM in marketing and sales,  he began his
               career  in the  investment  banking  industry.  He has  extensive
               experience  in  corporate   finance,   equity  and  debt  private
               placements  and asset  management.  Mr.  Dudley  also serves as a
               director of KLS and SCC and Audium Corporation.

               JOHN A.  OBERTEUFFER,  Ph.D.  has been a director  of the Company
               since March 1997,  vice  president  since  January 1998 and chief
               technology officer since March 2001. He is the founder and former
               president  of  Voice  Information  Associates,  Inc.  ("VIA"),  a
               consulting group that publishes the monthly newsletter,  ASRNews.
               Dr.   Oberteuffer   also  is  president  of  the  American  Voice
               Input/Output Society ("AVIOS"). He was formerly vice president of
               Voice  Processing  Corp. (now merged with Voice Control  Systems,
               Inc.),  and also was founder and CEO of Iris Graphics,  which was
               acquired by Seitex Corp. Dr. Oberteuffer  received his bachelor's
               and master's  degrees from  Williams  College,  and his Ph.D.  in
               Physics  from  Northwestern  University.  He was a member  of the
               research staff at Massachusetts  Institute of Technology for five
               years.

               WILLIAM A.  MAASBERG,  Jr.  became a director  of the  Company in
               September 1999 and was named chief operating  officer February 1,
               2000. From December 1997 through  February 1999, Mr. Maasberg was
               vice president and general  manager of the AMS Division of Eyring
               Corporation which manufactures


                                     Page 35

<PAGE>



               multi-media electronic work instruction software application.  He
               was also a  co-founder  and  principal  in  Information  Enabling
               Technologies,  Inc. ("IET"), and LIBRA Corporation ("LIBRA"), two
               companies  focusing  on  software  application  development,  and
               served in several key executive positions with both IET and LIBRA
               from May 1976 through  November 1997. Mr. Maasberg worked for IBM
               Corporation   from  July  1965   through   May  1976  in  various
               capacities.  He received his B.S. Degree from Stanford University
               in Electrical  Engineering and his M.S. in Electrical Engineering
               from the University of Southern California.

               MARK S. TANNER became a director of the Company in November 1999.
               Mr. Tanner is currently  self-  employed as a consultant  and was
               recently the chief financial officer and senior vice president of
               finance and  administration  for Mrs. Fields'  Original  Cookies,
               Inc. Mr.  Tanner spent nine years at PepsiCo,  where he was chief
               financial officer for Pepsi  International's  operations in Asia,
               the Middle East,  and Africa.  He was vice president of strategic
               planning  for Pepsi  North  America,  as well as chief  financial
               officer  for Pepsi North  America's  Pepsi East  Operations.  Mr.
               Tanner also spent ten years with United Technologies  Corporation
               in  various   capacities,   including   director   of   corporate
               development.  Mr. Tanner holds a B.A. in economics  from Stanford
               University  and an M.B.A.  in  Finance  and  Accounting  from the
               University of California at Los Angeles.

                      Significant Employees and Consultants

             In addition to the officers and directors identified above, the
Company expects the following individuals to make significant contributions to
the Company's business during 2002.

             ROLF-JUERGEN BRUESS is senior advisor for strategic implementation
             and marketing. He has over 20 years of senior and management
             experience in semiconductors, communications, consumer and
             automotive electronics, strategic technical marketing and sales
             with Siemens AG and Mannesmann VDO. He managed 1,500 world-wide
             engineering and sales personnel achieving $750 million in annual
             sales.

             KURT FLYGARE is vice president of sales and joined the Company in
             January 2001. He was previously senior vice president of sales
             business development at NetPartner Inc. Prior to NetPartner, he
             spent three years with Baan Company in various executive positions,
             including vice president of sales and indirect channel, North
             America, and director of sales and business partner alliances,
             North America. Previous sales experience includes positions with
             Corel, Novell, Inc., and WordPerfect Corporation. Mr. Flygare
             received his B.S. in Business from Brigham Young University.

             KIRK M. FELLER is vice president and general manager of consumer
             applications and joined the Company in January 2001. He was
             previously senior vice president of marketing at NetPartner Inc.
             Prior to NetPartner, he co-founded HighAltitude Sales and
             Marketing, where he managed and directed sales, advertising, and
             marketing efforts. Other prior experience includes two years with
             Zebra Technologies as director of channel sales and marketing, and
             ten years at WordPerfect Corporation and Novell, Inc., where he
             held various positions, including regional director of channel
             sales and marketing. Mr. Feller is a graduate of Brigham Young
             University, where he received a B.S. degree in Business.

             D. LYNN SHEPHERD is vice president and general manager of embedded
             automotive and wireless and mobile applications and has been
             employed by the Company since 1997. He was employed by Synergetics
             from 1992 to March 13, 1997. Before his employment with
             Synergetics, he was employed with Mentorgraphics where he acted as
             a software systems architect in automatic semiconductor design.
             Before Mentorgraphics, he worked on a contract basis with
             Signetics, Inc. Mr. Shepherd graduated from Brigham Young
             University with a Bachelor of Science Degree in Electrical
             Engineering. He also received a Masters of Business Administration
             from Brigham Young University.



                                     Page 36

<PAGE>



            J. MARK HAMILTON is vice president and general manager of computer
            telephony and server solutions and has been employed by the Company
            since 1997. Previously, he was employed by Synergetics from 1996 to
            March 13, 1997. He has been a project leader in developing the
            Company's SDK System and has worked on the Company's portable voice
            project. Before his employment with Synergetics, he was employed by
            Intelligent Technologies, Inc., where he helped form the company and
            designed and developed the educational software product called
            IntelliBots for Macintosh and Windows. Mr. Hamilton graduated from
            Brigham Young University with a Bachelor of Science in Electrical
            Engineering.

            R. BRIAN MONCUR is director of core  technologies  Implementation
            and has been  with the  Company  since  1997.  He was  previously
            employed by Synergetics  from 1992 to March 13, 1997.  Before his
            employment with Synergetics,  he was employed by Signetics,  Inc.
            and  Mentorgraphics,  where he was a senior process  engineer and
            software development engineer.  Mr. Moncur graduated from Brigham
            Young  University  with a Bachelor of Science  degree in chemical
            engineering.

            DOUGLAS A. JENSEN is director of embedded product development and
            has been with the Company since 1997. Previously, he was employed
            by Novell as strategic engineer between Novell and Intel. He also
            worked for North  American  Philips.  Mr. Jensen  graduated  from
            Brigham  Young  University  with a Bachelor of Science  Degree in
            Electrical Engineering.

            JOHN E. HOLMGREN is director of business development and has been
            employed by Fonix since August 2001. Previously, he worked with
            Lucent Speech Solutions group as manager of business development,
            focused on developing and marketing speech products for ISV,
            enterprise and service provider markets. He also fulfilled similar
            business development and product manager functions for other units
            of Lucent Technologies, Bell Labs and AT&T Direct Services Division.
            Mr Holmgren graduated from the University of Wisconsin with a
            Bachelor of Science in Psychology and from Stanford University with
            a Ph.D. in Mathematical Psychology.

            K.H. LOKEN-KIM is vice president and general manager of Fonix Asia
            and has been employed by Fonix since 1998. Previously, he was
            employed as a senior researcher at Fujitsu Laboratories in Akashi,
            Japan, where he was in charge of multimodal human-computer
            information processing research projects. He has over 20 years of
            related experience in telecommunications, including a four-year
            assignment at the Advanced Telecommunications Research Institute.
            Mr. Loken-Kim has a Bachelor of Arts in Metallurgical Engineering
            from Han Yang University in Seoul, Korea, a Master of Science in
            Industrial Engineering from North Carolina A&T State University, and
            a Ph.D. in Industrial Engineering from North Carolina State
            University.

            EDWARD A. BRUCKERT is an advisory scientist and has been employed
            by Fonix since  December  2001.  Previously,  he was  employed by
            Force Computers,  Inc. and Digital  Equipment  Corporation as the
            technical  leader for the  DECtalk  text-to-speech  product.  His
            experience  includes  31 years of work in  speech  synthesis  and
            hardware engineering.  Mr. Bruckert graduated from the University
            of  Massachusetts  with  a  Bachelor  of  Science  in  Electrical
            Engineering and a Bachelor of Science in Computing Engineering.

            C. HAL HANSEN is an independent consultant and is co-inventor of the
            Company's automated speech recognition technologies. He is chairman
            and CEO of Synergetics, IMC2, and Adiva Corporation. For
            approximately 14 years, he was employed by Signetics, Inc. in
            various capacities, including test equipment engineer,
            characterization engineer, product engineer, and electronic
            specialist. He was involved in the design, fabrication and release
            of layout design for PC boards and interfaces. In 1991, Mr. Hansen
            founded Synergetics, were he continues to have direct leadership
            with respect to new product development and engineering. IMC2
            currently provides consulting in research and development to the
            Company in the area of ASR. Mr. Hansen holds a degree in electronics
            from the Utah Trade Technical Institute of Provo, Utah.


                                     Page 37

<PAGE>



            TONY R. MARTINEZ,  Ph.D. is a senior consulting scientist for the
            Company's  neural  network   development.   He  is  an  associate
            professor of Computer  Science at Brigham  Young  University  and
            currently  heads  up the  Neural  Network  and  Machine  Learning
            Laboratory in the Brigham Young University Ph.D./MS program.  His
            principal  research  is in  neural  networks,  machine  learning,
            ASOCS,  connectionist systems,  massively parallel algorithms and
            architectures,  and  non-von  Neuman  computing  methods.  He  is
            associate  editor of the Journal of Artificial  Neural  Networks.
            Dr. Martinez received his Ph.D. in computer science at University
            of California at Los Angeles in 1986.

            KENNETH P. HITE is a consultant for the Company. He is developing
            the pen-voice user interface for the Windows 98 platform which
            involves integrating Fonix's HWR and ASR technologies for use in pen
            tablet computers. He has 14 years programming experience and has
            worked on a contract assignment for Modis Inc. He attended
            Northeastern University and has taken courses in management
            information systems.

            None of the executive officers or directors of the Company is
related to any other officer or director of the Company.

ITEM 11.                EXECUTIVE COMPENSATION

            The following table sets forth information concerning the
compensation paid to all persons serving as the Company's chief executive
officer and the Company's most highly compensated executive officers other than
its chief executive officer who were serving as executive officers at December
31, 2001 and whose annual compensation exceeded $100,000 during such year
(collectively the "Named Executive Officers"):

Summary Compensation Table

<TABLE>
<CAPTION>
                                                                 Annual Compensation           Long-Term Compensation
                                                                                Other
                                                                               Annual           Securities Underlying
Name and Principal Position                     Year         Salary             Bonus              Options/ SARs(5)
---------------------------                     -----      ----------    ----------------        --------------------

<S>                                             <C>        <C>                       <C>              <C>       <C>
Thomas A. Murdock (1)                           1999       $316,574                  -                        0/0
Chief Executive Officer &  President            2000       $320,804                  -                1,850,000/0
                                                2001       $315,057                  -                  700,000/0

Roger D. Dudley (1)                             1999       $317,764                  -                        0/0
Executive Vice President & Chief                2000       $320,845                  -                1,850,000/0
   Financial Officer                            2001       $314,895                  -                  700,000/0

William A. Maasberg, Jr.                        2000       $208,411                  -                  550,000/0
Chief Operating Officer                         2001       $226,584                  -                  450,000/0

John A. Oberteuffer                             1999       $199,238                  -                        0/0
Vice President & Chief                          2000       $227,348                  -                  350,000/0
    Technology Officer                          2001       $234,716                  -                  450,000/0
</TABLE>


            (1)     The Company has executive employment agreements with Messrs.
                    Murdock and Dudley that were initiated  November 1, 1996 and
                    amended effective January 31, 2000 to extend the term of the
                    agreement  and reduce the base  compensation.  The  material
                    terms of each  executive  employment  agreement with Messrs.
                    Murdock and Dudley are  identical  and are as  follows:  the
                    annual  base salary for each  executive  officer is $309,400
                    and  may be  adjusted  upward  in  future  years  as  deemed
                    appropriate by the board of directors.  The expiration  date
                    is December 31, 2005.  As bonus  compensation  for extending
                    the term of each agreement at a compensation level less than
                    provided  in the  original  agreement,  each  executive  was
                    granted options to purchase


                                     Page 38

<PAGE>



                    1,400,000  options of the Company's  Class A common stock at
                    an  exercise  price of $1.01.  The  options  expire July 19,
                    2010.

                    Each such  executive  officer  also is entitled to customary
                    insurance benefits,  office and support staff and the use of
                    an automobile.  In addition,  if any executive is terminated
                    without  cause during the contract term then all salary then
                    and thereafter due and owing under the executive  employment
                    agreement shall, at the executive's  option,  be immediately
                    paid in a lump sum payment to the executive  officer and all
                    stock options,  warrants and other similar rights granted by
                    the Company and then vested or earned  shall be  immediately
                    granted to the  executive  officer  without  restriction  or
                    limitation of any kind.

                    Each    executive    employment    agreement    contains   a
                    non-disclosure,   confidentiality,    non-solicitation   and
                    non-competition    clause.    Under   the   terms   of   the
                    non-competition clause, each executive has agreed that for a
                    period of one year after the  termination  of his employment
                    with  the  Company  the  executive  will not  engage  in any
                    capacity in a business  which  competes  with or may compete
                    with the Company.

            (2)     The Company has an employment  agreement  with Mr.  Maasberg
                    that  was  effective  February  1,  2000.  The  terms of the
                    agreement  establish  the annual  base  salary of  $225,000,
                    which  may be  adjusted  upward  in  future  years as deemed
                    appropriate  by the  board of  directors.  Mr.  Maasberg  is
                    entitled to customary insurance benefits, office and support
                    staff. In addition,  if any executive is terminated  without
                    cause  during the  contract  term then all  salary  then and
                    thereafter  due and  owing  under the  employment  agreement
                    shall, at the executive's  option,  be immediately paid in a
                    lump sum  payment  to the  executive  officer  and all stock
                    options,  warrants and other similar  rights  granted by the
                    Company  and then  vested  or  earned  shall be  immediately
                    granted to the  executive  officer  without  restriction  or
                    limitation of any kind. The  expiration  date is January 31,
                    2003.

                    The   employment   agreement   contains  a   non-disclosure,
                    confidentiality,   non-solicitation   and  non-  competition
                    clause.  Under the terms of the non-competition  clause, Mr.
                    Maasberg has agreed that for a period of 18 months after the
                    termination of his employment with the Company the executive
                    will not engage in any capacity in a business which competes
                    with or may compete with the Company.

            (3)     The Company has an employment agreement with Mr. Oberteuffer
                    that was effective February 1, 2000 and subsequently amended
                    effective   April  1,  2001.  The  terms  of  the  agreement
                    establish  the annual base salary of $235,000,  which may be
                    adjusted upward in future years as deemed appropriate by the
                    board of directors. Mr. Oberteuffer is entitled to customary
                    insurance benefits, office and support staff, and the use of
                    an automobile.  In addition,  if any executive is terminated
                    without  cause during the contract term then all salary then
                    and thereafter due and owing under the employment  agreement
                    shall, at the executive's  option,  be immediately paid in a
                    lump sum  payment  to the  executive  officer  and all stock
                    options,  warrants and other similar  rights  granted by the
                    Company  and then  vested  or  earned  shall be  immediately
                    granted to the  executive  officer  without  restriction  or
                    limitation of any kind. The  expiration  date is January 31,
                    2003.

                    The   employment   agreement   contains  a   non-disclosure,
                    confidentiality,   non-solicitation   and  non-  competition
                    clause.  Under the terms of the non-competition  clause, Mr.
                    Oberteuffer  has agreed that for a period of 18 months after
                    the  termination  of his  employment  with the  Company  the
                    executive  will not  engage in any  capacity  in a  business
                    which competes with or may compete with the Company.



                                     Page 39

<PAGE>



            (4)     All  options  granted  in 2001,  2000 and 1999 were  granted
                    pursuant to the Company's 1998 Stock Option Plan.



                                     Page 40

<PAGE>




                        Option Grants in Fiscal Year 2001


<TABLE>
<CAPTION>
                                                                                       Potential Realizable
                                                                                         Value at Assumed
                                                                                          Annual Rates of
                                                                                            Stock Price
                                                                                           Appreciation for
                                            Individual Grant                                Option Term


     (a)                       (b)          (c)               (d)           (e)         (f)           (g)
                            Number of
                             Securities     %  of Total
                           Underlying        Options to    Exercise
                              Options        Employees      Price       Expiration
  Name                      Granted (#)    in Fiscal Year  ($/Share)        Date         5%            10%
------------------------  ---------------  --------------- ---------  --------------  ----------  ---------------

<S>                           <C>             <C>           <C>           <C>          <C>             <C>
Thomas A. Murdock             700,000         8.6%          $0.14         12/07/11     $61,632         $156,187

Roger D. Dudley               700,000         8.6%          $0.14         12/07/11     $61,632         $156,187

William A. Maasberg           450,000         5.5%          $0.14         12/07/11     $39,620         $100,406

John A. Oberteuffer, Ph D.    450,000         5.5%          $0.14         12/07/11     $39,620         $100,406
</TABLE>





<TABLE>
<CAPTION>
                                  Aggregated Option/SAR Exercises in Last Fiscal Year
                                    and Related December 31, 2001 Option/SAR Values

            (a)                 (b)            (c)                      (d)                                 (e)
                                                               Number of Securities                      Value of
                              Shares                          Underlying Unexercised                   In-the-Money
                             Acquired                              Options/SARs                       Options/SARs at
                                on            Value            at December 31, 2001                  December 31, 2001
  Name                     Exercise (#)   Realized ($)    Exercisable/Unexercisable ( #)      Exercisable/Unexercisable ( #)
-------------------------  -------------  ------------  --------------------------------    ---------------------------------
<S>                              <C>           <C>               <C>       <C>                             <C>
Thomas A. Murdock                0             $ 0               3,600,000/500,000                         $0/$0

Roger D. Dudley                  0             $ 0               3,600,000/500,000                         $0/$0

William A. Maasberg, Jr.         0             $ 0                950,000/250,000                          $0/$0

John A. Oberteuffer, Ph D.       0             $ 0               1,110,000/250,000                         $0/$0
</TABLE>


        Board of Directors Meetings, Committees and Director Compensation

            The Company's board of directors took action at four duly noticed
meetings of the board during 2000. Each director attended (in person or
telephonically) all of the meetings of the Company's board of directors. During
2001, the Company's board of directors had the following committees: Audit
Committee, comprised of Messrs. Dudley (chairman), Maasberg and Tanner; and
Compensation Committee, comprised of Messrs. Murdock (chairman), Maasberg and
Tanner. These standing committees conducted meetings in conjunction with
meetings of the full board of directors.





                                     Page 41

<PAGE>

             Compensation Committee Report on Executive Compensation

            Preliminary Note: Notwithstanding anything to the contrary set forth
in any of the previous filings made by the Company under the 1933 Act or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings, including, but not limited to, this Annual Report on Form 10-K, in
whole or in part, the following Executive Compensation Report and the
performance graph appearing herein shall not be deemed to be incorporated by
reference into any such future filings.

            This Executive Compensation Report discusses the Company's executive
compensation policies and the basis for the compensation paid to the Named
Executive Officers, including the person serving as its chief executive officer
during the year ended December 31, 2001.

Compensation   Policy.   The  Committee's   policy  with  respect  to  executive
compensation has been designed to:

          o    Adequately and fairly compensate  executive  officers in relation
               to their responsibilities,  capabilities and contributions to the
               Company and in a manner that is  commensurate  with  compensation
               paid by  companies  of  comparable  size or within the  Company's
               industry;

          o    Reward  executive  officers  for the  achievement  of  short-term
               operating goals and for the enhancement of the long-term value of
               the Company; and

          o    Align the interests of the  executive  officers with those of the
               Company's shareholders with respect to short-term operating goals
               and  long-term  increases  in the price of the  Company's  common
               stock.

            The components of compensation paid to executive officers consist
of: (a) base salary, (b) incentive compensation in the form of annual bonus
payments and stock options awarded by the Company under the Company's stock
incentive plans and (c) certain other benefits provided to the Company's
executive officers. The Company's Compensation Committee is responsible for
reviewing and approving cash compensation paid by the Company to its executive
officers and members of the Company's senior management team, including annual
bonuses and stock options awarded under the Company's stock incentive plans,
selecting the individuals who will be awarded bonuses and stock options under
the stock incentive plans, and for determining the timing, pricing and amount of
all stock options granted thereunder, each within the terms of the Company's
stock incentive plans.

            The Company's executive compensation program historically has
emphasized the use of incentive-based compensation to reward the Company's
executive officers and members of senior management for the achievement of goals
established by the board of directors. The Company uses stock options to provide
an incentive for a substantial number of its officers and employees, including
selected members of management, and to reward such officers and employees for
achieving goals that have been established for the Company. The Company believes
its incentive compensation plan rewards management when the Company and its
shareholders have benefitted from achieving the Company's goals and targeted
research and development objectives, all of which the Compensation Committee
feels will dictate, in large part, the Company's future operating results. The
Compensation Committee believes that its policy of compensating officers and
employees with incentive-based compensation fairly and adequately compensates
those individuals in relation to their responsibilities, capabilities and
contribution to the Company, and in a manner that is commensurate with
compensation paid by companies of comparable size or within the Company's
industry.

            Components of Compensation. The primary components of compensation
paid by the Company to its executive officers and senior management personnel,
and the relationship of such components of compensation to the Company's
performance, are discussed below:

          o    Base Salary.  Subject to the terms of employment  agreements with
               certain   executive   officers,    the   Compensation   Committee
               periodically  reviews  and  approves  the base salary paid by the
               Company  to its  executive  officers  and  members  of the senior
               management team. Adjustments to base salaries are


                                     Page 42

<PAGE>



                  determined based upon a number of factors, including the
                  Company's performance (to the extent such performance can
                  fairly be attributed or related to each executive's
                  performance), as well as the nature of each executive's
                  responsibilities, capabilities and contributions. In addition,
                  the Compensation Committee periodically reviews the base
                  salaries of senior management personnel in an attempt to
                  ascertain whether those salaries fairly reflect job
                  responsibilities and prevailing market conditions and rates of
                  pay. The Compensation Committee believes that base salaries
                  for the Company's executive officers have historically been
                  reasonable in relation to the Company's size and performance
                  in comparison with the compensation paid by similarly sized
                  companies or companies within the Company's industry.

          o    Incentive Compensation. As discussed above, a substantial portion
               of each executive officer's  compensation  package is in the form
               of incentive  compensation  designed to reward the achievement of
               short-term operating goals and long-term increases in shareholder
               value.  The Company's  stock  incentive  plans allow the Board of
               Directors or the Compensation Committee to grant stock options to
               executive  officers and  employees  for the purchase of shares of
               the Company's Class A common stock.  Under the terms of the stock
               incentive  plans,  the Board of  Directors  and the  Compensation
               Committee have authority, within the terms of the stock incentive
               plans, to select the executive officers and employees who will be
               granted stock  options and to determine  the timing,  pricing and
               number of stock options to be awarded. The Compensation Committee
               believes that the stock options granted under the stock incentive
               plans  reward   executive   officers  only  to  the  extent  that
               shareholders  have  benefitted from increases in the value of the
               Company's common stock.

          o    Other  Benefits.  The Company  maintains  certain other plans and
               arrangements  for  the  benefit  of its  executive  officers  and
               members of senior management. The Company believes these benefits
               are   reasonable  in  relation  to  the  executive   compensation
               practices of other similarly sized companies or companies  within
               the Company's industry.

            Compensation of the Chief Executive Officer. As described elsewhere
in this Report, the Company has entered into an executive employment agreement
with Mr. Murdock. The material terms of this executive employment agreement are
described above. The Compensation Committee believes that the monthly
compensation under such contract adequately and fairly compensates this
executive officer in relation to his respective responsibilities, capabilities,
contributions and dedication to the Company and secures for the Company the
benefit of his leadership, management and financial skills and capabilities.
Moreover, the Compensation Committee believes that the salary and other benefits
are reasonable in relation to the responsibilities, capabilities, contributions
and dedication of Mr. Murdock to the Company and are warranted to keep them in
line with the compensation earned by chief executive officers employed by
companies of comparable size or within the Company's industry.

            Conclusion. The Compensation Committee believes that the concepts
discussed above further the shareholders' interests because a significant part
of executive compensation is based upon the Company achieving its marketing,
sales and product development goals and other specific goals set by the board of
directors. At the same time, the Compensation Committee believes that the
program encourages responsible management of the Company in the short-term. The
Compensation Committee regularly considers plan design so that the total program
is as effective as possible in furthering shareholder interests.

            The Compensation Committee bases its review on the experience of its
own members, on information requested from management personnel, and on
discussions with and information compiled by various independent consultants
retained by the Company.

                                    Respectfully submitted,



                                     Page 43

<PAGE>



                                    Compensation Committee:

                                    Thomas A. Murdock
                                    William A. Maasberg, Jr.
                                    Mark S. Tanner

                            Compensation of Directors

            Prior to April 1996, the Company's directors received no
compensation for their service. The Company historically has reimbursed its
directors for actual expenses incurred in traveling to and participating in
directors' meetings, and the Company intends to continue that policy for the
foreseeable future. On March 30, 1996, the Company's board of directors adopted,
and the Company's shareholders subsequently approved, the Company's 1996
Directors' Stock Option Plan (the "Directors' Plan"). Under the Directors' Plan,
members of the Board as constituted on the date of adoption received options to
purchase 200,000 shares of the Company's Class A common stock for each year (or
any portion thereof consisting of at least six months) during which such persons
had served on the board for each of fiscal years 1994 and 1995 and were granted
200,000 shares for each of fiscal years 1996 through 2000, which options vested
after completion of at least six months' service on the board during those
fiscal years. These options have terms of ten years. Similar grants have been
made to the Company's directors under the Company's 1998 Stock Option Plan.
Under the Directors Plan and the 1998 Stock Option Plan, the Company granted the
following stock options to non-employee members of the board during 2001:


           Stock Options Granted to Directors During Fiscal Year 2001

                Shares               Date                     Exercise
Name(1)         Granted            Granted                 Price Per Share
----            -------            -------                 ---------------

Mark S. Tanner    200,000         12/07/01                    $0.14

(1)  Directors who are also Named  Executive  Officers  received  options as set
     forth elsewhere in this report.


                Compliance With Section 16(a) of the Exchange Act

            Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who beneficially own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than 10% shareholders are required by regulation
of the Securities and Exchange Commission to furnish the Company with copies of
all Section 16(a) forms which they file. Based solely on its review of the
copies of such forms furnished to the Company during the fiscal year ended
December 31, 2001, the Company is aware of the following untimely filings:

            Thomas A. Murdock received options to purchase 700,000 shares of the
Company's Class A common stock on December 7, 2001. The transactions will be
reported on a Form 5 to be filed.

            Roger D. Dudley received options to purchase 700,000 shares of the
Company's Class A common stock on December 7, 2001. The transactions will be
reported on a Form 5 to be filed.

            William A. Maasberg, Jr., received options to purchase 450,000
shares of the Company's Class A common stock on December 7, 2001.  The
transactions will be reported on a Form 5 to be filed.



                                     Page 44

<PAGE>



            John O. Oberteuffer, received options to purchase 450,000 shares of
the Company's Class A common stock on December 7, 2001. The transactions will be
reported on a Form 5 to be filed.

            Mark S. Tanner received options to purchase 200,000 shares of the
Company's Class A common stock on December 7, 2001. The transaction will be
reported on a Form 5 to be filed.





                                     Page 45

<PAGE>



                             Stock Performance Graph

            The following graph compares the yearly cumulative total returns
from the Company's Class A common stock during the five fiscal year period ended
December 31, 2001 with the cumulative total return on the Media General Index
and the Standard Industrial Classification (SIC) Code Index for that same
period. The comparison assumes $100 was invested on December 31, 1996, in the
Company's Class A common stock and in the common stock of the companies in the
referenced Indexes and further assumes reinvestment of dividends.


     COMPARE 5-YEAR CUMULATIVE TOTAL RETURN AMONG FONIX CORPORATION, NASDAQ
                         MARKET INDEX AND SIC CODE INDEX
                                [GRAPHIC_OMITTED]



<TABLE>
<CAPTION>

                                   1996         1997        1998         1999        2000         2001
---------------------------------------------------------------------------------------------------------
<S>                               <C>          <C>         <C>          <C>         <C>           <C>
Fonix Corporation                 100.00        35.09       15.05         3.37        3.42          1.17
SIC Code Index                    100.00       133.68      126.58       229.12      264.16         77.11
NASDAQ Market Index               100.00       122.32      172.52       304.29      191.25        152.46
</TABLE>



                                     Page 46

<PAGE>



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT.

            The following table sets forth, as of March 26, 2002, the number of
shares of Common Stock of the Company beneficially owned by all persons known to
be holders of more than five percent of the Company's Common Stock and by the
executive officers and directors of the Company individually and as a group.
Unless indicated otherwise, the address of the stockholder is the Company's
principal executive offices, 180 West Election Road, Suite 200, Draper, Utah
84020.

<TABLE>
<CAPTION>
                                                               Number of
                                                                Shares
Name and Address of 5% Beneficial Owners,                    Beneficially          Percent of
     Executive Officers and Directors                            Owned              Class(1)



<S>                                                          <C>                       <C>
Thomas A. Murdock                                            12,269,645(2)             2.6%
Chairman of the Board & Chief
   Executive Officer

Roger D. Dudley,                                              6,648,723(3)             1.4%
Executive Vice President & Chief
   Financial Officer, Director

John A. Oberteuffer, Ph.D.,                                   1,910,000 (4)            *
Vice President & Chief Technology Officer,
Director

William A. Maasberg Jr., Chief Operating Officer,             1,150,000(4)             *
Director

Mark S. Tanner, Director                                        800,000(4)             *

Officers and Directors as a Group (5 persons)                22,778,368                4.8%
</TABLE>


*           Less than 1 percent.

(1)         Percentages rounded to nearest 1/10th of one percent. Except as
            indicated in the footnotes below, each of the persons listed
            exercises sole voting and investment power over the shares of Common
            Stock listed for each such person in the table.

(2)         Includes 8,627,333 shares of Common Stock deposited in a voting
            trust (the "Voting Trust") as to which Mr. Murdock is the sole
            trustee. Persons who have deposited their shares of Common Stock
            into the Voting Trust have dividend and liquidation rights
            ("Economic Rights") in proportion to the number of shares of Common
            Stock they have deposited in the Voting Trust, but have no voting
            rights with respect to such shares. All voting rights associated
            with the shares deposited into the Voting Trust are exercisable
            solely and exclusively by the Trustee of the Voting Trust. The
            Voting Trust expires, unless extended according to its terms, on the
            earlier of September 30, 2002, or any of the following events: (i)
            the Trustee terminates it; (ii) the participating shareholders
            unanimously terminate it; or (iii) the Company is dissolved or
            liquidated. Although as the sole trustee of the Voting Trust Mr.
            Murdock exercises the voting rights of all of the shares deposited
            into the Voting Trust, and accordingly has listed all shares in the
            table above, he has no economic or pecuniary interest in any of the
            shares deposited into the Voting Trust except for 2,839,976 shares
            as to which he directly owns Economic Rights, and 185,793 shares the
            Economic Rights


                                     Page 47

<PAGE>



            as to which are owned by SCC Asset Management, Inc. ("SCC"), a
            corporation of which Mr. Murdock is a 1/3 equity owner. Also
            includes 2,813 shares owned directly by Mr. Murdock, 11,400 shares
            owned by a limited liability company of which Mr. Murdock is a 1/3
            equity owner, 28,099 shares (including shares issuable upon the
            exercise of options) beneficially owned by members of Mr. Murdock's
            immediate family residing in the same household, and 3,600,000
            shares of Common Stock underlying stock options owned by Mr. Murdock
            and exercisable presently or within 60 days of March 26, 2002. Does
            not include 1,250,000 options which are not exercisable presently or
            within 60 days of March 26, 2002.

(3)         Includes (i) 2,848,417 shares owned by Mr. Dudley and deposited into
            the Voting Trust, (ii) 185,793 shares owned by SCC as to which Mr.
            Dudley shares investment power because of his management position
            with and 1/3 ownership of SCC, which shares are deposited into the
            Voting Trust; (iii) 2,813 shares owned directly by Mr. Dudley; (iv)
            300 shares owned by Mr. Dudley's minor children; (v) 11,400 shares
            owned by a limited liability company of which Mr. Dudley is a 1/3
            equity owner; and (vi) 3,600,000 shares underlying stock options
            exercisable presently or within 60 days of March 26, 2002. Does not
            include 1,250,000 options which are not exercisable presently or
            within 60 days of March 26, 2002.

(4)         Consisting of options or warrants which are presently exercisable.


ITEM 13.                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SCC Asset Management Inc.("SCC") (formerly Studdert Companies Corp.)

            SCC is a Utah corporation that provides investment and management
services. The officers, directors and owners of SCC are Stephen M. Studdert,
former chairman and CEO of the Company, and Thomas A. Murdock and Roger D.
Dudley, each of whom is a director and executive officer of the Company.

            The Company subleases from SCC office space located at 60 East South
Temple Street, Salt Lake City, Utah. The subleases, which expire in December
2002 and February 2003, require the Company to pay the actual monthly rental of
$10,368 and all common area charges payable under the lease with SCC's landlord.

John A. Oberteuffer

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





                                     Page 48

<PAGE>



                                     PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) Documents filed as part of this Form 10-K:

1.        Consolidated Financial Statements (included in Part II, Item 8)

          Consolidated Balance Sheets as of December 31, 2001 and 2000

          Consolidated Statements of Operations for the Years Ended December 31,
          2001, 2000 and 1999

          Consolidated  Statements of  Stockholders'  Equity for the Years Ended
          December 31, 2001, 2000 and 1999

          Consolidated Statements of Cash Flows for the Years Ended December 31,
          2001, 2000 and 1999

          Notes to Consolidated Financial Statements

2.        Financial Statement Schedules: None

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

            Exhibit No.             Description of Exhibit
            (2)(i)                  Agreement and Plan of Reorganization among
                                    the Company, Fonix Acquisition Corporation
                                    and AcuVoice dated as of January 13, 1998,
                                    incorporated by reference from the Company's
                                    Current Report on Form 8-K, filed March 20,
                                    1998

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

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

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

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

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

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

                                     Page 49

<PAGE>

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

            (4)(i)                  Description of the Company's common stock
                                    and other securities and specimen
                                    certificates representing such securities
                                    which are incorporated by reference from the
                                    Company's Registration Statement on Form
                                    S-18 dated as of September 12, 1989, as
                                    amended

            (4)(ii)                 Certificate of Designation of Rights and
                                    Preferences of Series A Preferred Stock,
                                    filed with the Secretary of State of
                                    Delaware on September 24, 1997, which is
                                    incorporated by reference from the Company's
                                    Quarterly Report on Form 10-Q for the period
                                    ended September 30, 1997

            (4)(iii)                Certificate of Designation of Rights and
                                    Preferences of Series B Convertible
                                    Preferred Stock, filed with the Secretary of
                                    State of Delaware on October 27, 1997, which
                                    is incorporated by reference from the
                                    Company's Quarterly Report on Form 10-Q for
                                    the period ended September 30, 1997

            (4)(iv)                 Certificate of Designation of Rights and
                                    Preferences of 5% Series C Convertible
                                    Preferred Stock, filed with the Secretary of
                                    State of Delaware on October 24, 1997, which
                                    is incorporated by reference from the
                                    Company's Quarterly Report on Form 10-Q for
                                    the period ended September 30, 1997

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

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

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

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

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


                                     Page 50

<PAGE>

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

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

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

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

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

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

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

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

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

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

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



                                     Page 51

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                     Page 52

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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


                                     Page 53

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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


            (22)                    Subsidiaries of Registrant

            (23)                    Consent of Independent Public Accountants

            (99)                    Letter from Fonix Corporation to Securities
                                    and Exchange Commission dated March 27, 2002


                                     Page 54

<PAGE>

(B) Reports filed on Form 8-K during the last quarter of the fiscal year ended
December 31, 2001:


            NONE




                                     Page 55

<PAGE>



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 27th day of March
2002.

                              Fonix Corporation


Date: March 27, 2002          By:      /s/ Thomas A. Murdock
      ----------------           ---------------------------------------
                                 Thomas A. Murdock, President and
                                 Chief Executive Officer


Date: March 27, 2002          By:     /s/ Roger D. Dudley
      ----------------           ----------------------------------------
                                 Roger D. Dudley, Executive Vice President
                                 Finance and Chief Financial Officer
                                 (Principal Financial and Accounting Officer)



In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:


    /s/ Thomas A. Murdock               /s/ William A. Maasberg
-----------------------------           ---------------------------------------
Thomas A. Murdock, President and        William A. Maasberg, Jr., Director
           Chief Executive Officer

March 27, 2002                          March 27, 2002
--------------                          --------------
Date                                    Date



   /s/ Roger D. Dudley                  /s/ Mark S. Tanner
----------------------------            ---------------------------------------
Roger D. Dudley, Executive Vice         Mark S. Tanner, Director
President, Director

March 27, 2002                          March 27, 2002
--------------                          --------------
Date                                    Date



   /s/ John A. Oberteuffer
-----------------------------------
John A. Oberteuffer, Ph.D., Director

March 27, 2002
Date





                                     Page 56




<PAGE>

                                TABLE OF CONTENTS



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                    F-2

CONSOLIDATED FINANCIAL STATEMENTS:

  Consolidated Balance Sheets as of December 31, 2001 and 2000              F-3

  Consolidated Statements of Operations for the Years Ended
     December 31, 2001, 2000 and 1999                                       F-4

  Consolidated Statements of Stockholders' Equity for the Years
     Ended December 31, 2001, 2000 and 1999                                 F-5

  Consolidated Statements of Cash Flows for the Years Ended
     December 31, 2001, 2000 and 1999                                       F-6

  Notes to Consolidated Financial Statements                                F-8






                                       F-1

<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Fonix Corporation:

We have audited the accompanying consolidated balance sheets of Fonix
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Fonix
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred significant losses
and negative cash flows from operating activities since its inception. The
Company expects these losses and negative cash flows from operating activities
to continue at least through December 31, 2002. As of December 31, 2001, the
Company has negative tangible net worth of $2,087,421, an accumulated deficit of
$167,616,372, negative working capital of $6,102,151, accounts payable of
$255,104 over 60 days past due, and limited remaining capital capacity of
$5,991,493 available through the Company's two equity lines of credit. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to these matters are also
described in Note 1. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.




ARTHUR ANDERSEN LLP

Salt Lake City, Utah
February 26, 2002

                                       F-2

<PAGE>

                                Fonix Corporation
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
ASSETS
                                                                                                      December 31,   December 31,
                                                                                                         2001            2000
                                                                                                    --------------- ---------------
Current assets:
<S>                                                                                                 <C>             <C>
      Cash and cash equivalents                                                                     $      201,401  $    1,413,627
      Subscriptions receivable                                                                             852,970               -
      Funds held in escrow                                                                                       -       2,151,006
      Accounts receivable, net of allowance for doubtful accounts of $0 and $20,000, respectively           58,170         131,872
      Inventory                                                                                             37,154               -
      Prepaid expenses and other current assets                                                             95,072          55,705
                                                                                                    --------------- ---------------

          Total current assets                                                                           1,244,767       3,752,210

Property and equipment, net of accumulated depreciation of $1,314,960 and $1,445,288, respectively         903,159         718,711

Convertible note receivable                                                                                630,000               -

Investment in and note receivable from affiliate, net of unamortized discount of $77,691                 2,358,519               -

Intangible assets, net of accumulated amortization of $7,757,321 and $6,850,286, respectively            9,809,041      12,941,764

Other assets                                                                                               123,052         104,688
                                                                                                    --------------- ---------------

          Total assets                                                                              $   15,068,538  $   17,517,373
                                                                                                    =============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Note payable to affiliate, net of unamortized discount of $65,247                             $    1,484,753  $            -
      Note payable, net of unamortized discount of $40,245                                               1,239,755               -
      Notes payable - related parties                                                                       77,625          77,625
      Accounts payable                                                                                   1,062,237         655,352
      Accrued liabilities                                                                                  961,299         553,448
      Accrued liabilities - related parties                                                              1,451,633       1,564,133
      Deferred revenues                                                                                  1,049,849         677,071
      Capital lease obligation, current portion                                                             19,767          44,225
                                                                                                    --------------- ---------------

          Total current liabilities                                                                      7,346,918       3,571,854

Capital lease obligation, net of current portion                                                                 -          19,767
                                                                                                    --------------- ---------------

          Total liabilities                                                                              7,346,918       3,591,621
                                                                                                    --------------- ---------------

Commitments and contingencies (Notes 1, 5, 6, 13, 14, 16 and 17)

Stockholders' equity:
      Preferred stock, $0.0001 par value; 50,000,000 shares authorized; Series
          A, convertible; 166,667 shares outstanding
               (aggregate liquidation preference of $6,055,012 at December 31, 2001 and 2000)              500,000         500,000
          Series D, 4% cumulative convertible; 164,500 shares outstanding in 2000
               (aggregate liquidation preference of $3,601,819 in 2000)                                          -       4,288,178
          Series F, 6% cumulative convertible; 6,073 shares outstanding in 2000
               (aggregate liquidation preference of $128,242 in 2000)                                            -         112,438
      Common stock, $0.0001 par value; 500,000,000 shares authorized;
          Class A voting,  350,195,641 and 191,296,988 shares outstanding, respectively                     35,020          19,130
          Class B non-voting, no shares outstanding                                                              -               -
      Additional paid-in capital                                                                       171,985,508     148,904,860
      Outstanding warrants to purchase Class A common stock                                              2,832,400       3,141,430
      Deferred consulting expenses                                                                         (17,777)              -
      Cumulative foreign currency translation adjustment                                                     2,841               -
      Accumulated deficit                                                                             (167,616,372)   (143,040,284)
                                                                                                    --------------- ---------------

          Total stockholders' equity                                                                     7,721,620      13,925,752
                                                                                                    --------------- ---------------

          Total liabilities and stockholders' equity                                                $   15,068,538  $   17,517,373
                                                                                                    =============== ===============
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-3

<PAGE>

                                Fonix Corporation
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                             AND COMPREHENSIVE LOSS

                                Fonix Corporation
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                             AND COMPREHENSIVE LOSS

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                  ---------------------------------------------------------------
                                                                         2001                  2000                  1999
                                                                  -------------------   --------------------  -------------------
Revenues:
<S>                                                               <C>                   <C>                   <C>
      Licenses, royalties and maintenance                         $          478,444    $           567,621   $          439,507
      Services                                                               129,200                 89,232                    -
                                                                  -------------------   --------------------  -------------------
                                                                             607,644                656,853              439,507
                                                                  -------------------   --------------------  -------------------
Cost of revenues:
      Licenses, royalties and maintenance                                    138,308                 27,436               24,932
      Services                                                                47,509                      -                    -
                                                                  -------------------   --------------------  -------------------
                                                                             185,817                 27,436               24,932
                                                                  -------------------   --------------------  -------------------

      Gross profit                                                           421,827                629,417              414,575
                                                                  -------------------   --------------------  -------------------

Expenses:
      Selling, general and administrative                                 11,651,565             10,722,313            9,498,753
      Product development and research                                     8,119,924              5,871,414            7,909,228
      Amortization of intangible assets                                    2,453,491              2,457,829            2,588,896
      Impairment loss on handwriting recognition technology                2,056,295                      -                    -
      Purchased in-process research and development                                -                474,000                    -
                                                                  -------------------   --------------------  -------------------

          Total expenses                                                  24,281,275             19,525,556           19,996,877
                                                                  -------------------   --------------------  -------------------

Loss from operations                                                     (23,859,448)           (18,896,139)         (19,582,302)
                                                                  -------------------   --------------------  -------------------

Other income (expense):
      Interest income                                                         80,373                139,283               95,023
      Interest expense                                                      (185,802)            (4,004,111)          (3,636,467)
      Other                                                                  (67,792)              (126,520)            (157,345)
                                                                  -------------------   --------------------  -------------------

          Total other expense, net                                          (173,221)            (3,991,348)          (3,698,789)
                                                                  -------------------   --------------------  -------------------

Loss from continuing operations before equity in net loss of
      affiliate and income tax benefit                                   (24,032,669)           (22,887,487)         (23,281,091)

Equity in net loss of affiliate                                             (534,138)                     -                    -

Income tax benefit                                                                 -                 76,810            3,331,895
                                                                  -------------------   --------------------  -------------------

Loss from continuing operations                                          (24,566,807)           (22,810,677)         (19,949,196)

Discontinued operations:
      Operating loss of HealthCare Solutions Group                                 -                      -           (5,953,726)
      Gain on disposal of HealthCare Solutions Group,
          net of income taxes of $3,100,000                                        -                      -            3,766,646
                                                                  -------------------   --------------------  -------------------

Loss before extraordinary item                                           (24,566,807)           (22,810,677)         (22,136,276)

Extraordinary item - gain on forgiveness of debt, net of
      income taxes of $29,416 in 2000 and $281,895 in 1999                         -                 49,448              473,857
                                                                  -------------------   --------------------  -------------------

Net loss                                                                 (24,566,807)           (22,761,229)         (21,662,419)

Other comprehensive income - foreign currency translation                      2,841                      -                    -
                                                                  -------------------   --------------------  -------------------

Comprehensive loss                                                $      (24,563,966)   $       (22,761,229)  $      (21,662,419)
                                                                  ===================   ====================  ===================


Basic and diluted net loss per common share                       $            (0.10)   $             (0.16)  $            (0.31)
                                                                  ===================   ====================  ===================
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>


                                Fonix Corporation
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


                                Fonix Corporation
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                                                                                     Outstanding
                                                                                                       Additional     Warrants
                                                 Preferred Stock             Common Stock               Paid-in      to Purchase
                                                 --------------------------- -----------------------
                                                   Shares         Amount       Shares      Amount       Capital      Common Stock
                                                 ------------  ------------- ------------ ----------  -------------  -------------
<S>                                              <C>           <C>           <C>          <C>         <C>            <C>

BALANCE, DECEMBER 31, 1998                         1,310,073   $ 25,958,822   64,324,480  $   6,432   $ 88,517,711   $ 3,323,258

Options issued during the year for services                -              -            -          -         12,540             -

Extension of option expiration dates                       -              -            -          -        241,375             -

Conversions of preferred stock                      (761,683)   (18,129,770)  52,981,431      5,298     18,124,472             -

Common stock issued for services                           -              -    1,200,000        120        474,880             -

Common stock issued for principal reduction
     on debentures                                         -              -    6,000,000        600      3,278,293             -

Common stock returned and canceled                         -              -     (970,586)       (97)    (1,000,819)            -

Warrants issued with Series C debentures                   -              -            -          -              -       438,240

Warrants issued for services                               -              -            -          -              -       260,000

Expiration of warrants                                     -              -            -          -      1,170,968    (1,170,968)

Amortization of deferred consulting expenses               -              -            -          -              -             -

Beneficial conversion features on Series C
     debentures                                            -              -            -          -      1,750,000             -

Preferred stock dividends                                  -      1,766,858            -          -              -             -

Reduction of accrued offering costs                        -              -            -          -        200,000             -

 Net loss for the year ended December 31, 1999             -              -            -          -              -             -
                                                 ------------  ------------- ------------ ----------  -------------  -------------

BALANCE, DECEMBER 31, 1999                           548,390      9,595,910  123,535,325     12,353    112,769,420     2,850,530

Conversion of promissory note                              -              -   11,544,775      1,154      7,589,717             -

Beneficial conversion features on
     promissory note                                       -              -            -          -      3,447,623             -

Conversions of Series C debentures                         -              -   10,385,364      1,039      4,261,025             -

Sale of Series F preferred shares                    316,036      2,750,000            -          -              -             -

Beneficial conversion features on Series D
    preferred stock                                        -        236,400            -          -              -             -

Conversions of preferred stock to common stock      (527,186)   (10,622,745)  23,779,198      2,379     10,620,366             -

Reclassification of common stock subject
     to redemption                                         -              -    1,801,802        180      1,829,820             -

Exercise of repricing rights                               -              -    4,568,569        457           (457)            -

Issuance of common stock under equity line
     of credit                                             -              -   12,492,680      1,249      3,853,053             -

Shares issued upon settlement of litigation                -              -      260,145         26         81,269             -

 Issuance of common stock for services                     -              -    1,862,069        186      2,016,491             -

Issuance of stock options and warrants for
     services and technology                               -              -            -          -        234,856       530,250

Appreciation of warrants issued for services               -              -            -          -              -       537,500

Extension of option expiration dates                       -              -            -          -         52,067             -

Exercise of stock options and stock
     appreciation rights                                   -              -      767,061         77      1,094,790             -

Exercise of warrants                                       -              -      300,000         30        392,970      (115,000)

Expiration of warrants                                     -              -            -          -        661,850      (661,850)

Amortization of deferred consulting expenses               -              -            -          -              -             -

Preferred stock dividends                                  -      2,941,051            -          -              -             -

Net loss for the year ended December 31, 2000              -              -            -          -              -             -
                                                 ------------  ------------- ------------ ----------  -------------  -------------

BALANCE, DECEMBER 31, 2000                           337,240      4,900,616  191,296,988     19,130    148,904,860     3,141,430

Conversions of preferred stock to common stock      (170,573)    (4,409,897)  14,497,507      1,449      4,408,448             -

Issuance of common stock under equity
     lines of credit                                       -              -  144,366,146     14,437     18,257,513             -

Issuance of stock options for services                     -              -            -          -         33,360             -

Exercise of stock options                                  -              -       35,000          4          9,797             -

Issuance of warrants                                       -              -            -          -              -        62,500

Expiration of warrants                                     -              -            -          -        371,530      (371,530)

Amortization of deferred consulting expenses               -              -            -          -              -             -

Preferred stock dividends                                  -          9,281            -          -              -             -

Cumulative foreign currency translation
     adjustment                                            -              -            -          -              -             -

Net loss for the year ended December 31, 2001              -              -            -          -              -             -

                                                 ------------  ------------- ------------ ----------  -------------  ------------
BALANCE, DECEMBER 31, 2001                           166,667   $    500,000  350,195,641  $  35,020   $ 171,985,508  $ 2,832,400
                                                 ============  ============= ============ ==========  =============  ============
</TABLE>



<TABLE>
<CAPTION>
                                                                   Cumulative
                                                                     Foreign
                                                     Deferred       Currency
                                                    Consulting     Translation    Accumulated
                                                     Expenses      Adjustment       Deficit           Total
                                                    ------------- -------------- --------------  ----------------
<S>                                                 <C>           <C>            <C>             <C>
BALANCE, DECEMBER 31, 1998                          $   (106,700) $           -  $ (92,933,777)  $    24,765,746

Options issued during the year for services                    -              -              -            12,540

Extension of option expiration dates                           -              -              -           241,375

Conversions of preferred stock                                 -              -              -                 -

Common stock issued for services                        (375,000)             -              -           100,000

Common stock issued for principal reduction
     on debentures                                             -              -              -         3,278,893

Common stock returned and canceled                             -              -              -        (1,000,916)

Warrants issued with Series C debentures                       -              -              -           438,240

Warrants issued for services                            (127,500)             -              -           132,500

Expiration of warrants                                         -              -              -                 -

Amortization of deferred consulting expenses             174,149              -              -           174,149

Beneficial conversion features on Series C
     debentures                                                -              -              -         1,750,000

Preferred stock dividends                                      -              -     (2,110,607)         (343,749)

Reduction of accrued offering costs                            -              -              -           200,000

 Net loss for the year ended December 31, 1999                 -              -    (21,662,419)      (21,662,419)
                                                    ------------- -------------- --------------  ----------------

BALANCE, DECEMBER 31, 1999                              (435,051)             -   (116,706,803)        8,086,359

Conversion of promissory note                                  -              -              -         7,590,871

Beneficial conversion features on
     promissory note                                           -              -              -         3,447,623

Conversions of Series C debentures                             -              -              -         4,262,064

Sale of Series F preferred shares                              -              -              -         2,750,000

Beneficial conversion features on Series D
    preferred stock                                            -              -       (236,400)                -

Conversions of preferred stock to common stock                 -              -              -                 -

Reclassification of common stock subject
     to redemption                                             -              -              -         1,830,000

Exercise of repricing rights                                   -              -              -                 -

Issuance of common stock under equity line
     of credit                                                 -              -              -         3,854,302

Shares issued upon settlement of litigation                    -              -              -            81,295

 Issuance of common stock for services                         -              -              -         2,016,677

Issuance of stock options and warrants for
     services and technology                                   -              -              -           765,106

Appreciation of warrants issued for services            (537,500)             -              -                 -

Extension of option expiration dates                           -              -              -            52,067

Exercise of stock options and stock
     appreciation rights                                       -              -              -         1,094,867

Exercise of warrants                                           -              -              -           278,000

Expiration of warrants                                         -              -              -                 -

Amortization of deferred consulting expenses             972,551              -              -           972,551

Preferred stock dividends                                      -              -     (3,335,852)         (394,801)

Net loss for the year ended December 31, 2000                  -              -    (22,761,229)      (22,761,229)
                                                    ------------- -------------- --------------  ----------------

BALANCE, DECEMBER 31, 2000                                     -              -   (143,040,284)       13,925,752

Conversions of preferred stock to common stock                 -              -              -                 -

Issuance of common stock under equity
     lines of credit                                           -              -              -        18,271,950

Issuance of stock options for services                   (30,000)             -                            3,360

Exercise of stock options                                      -              -              -             9,801

Issuance of warrants                                           -              -              -            62,500

Expiration of warrants                                         -              -              -                 -

Amortization of deferred consulting expenses              12,223              -              -            12,223

Preferred stock dividends                                      -              -         (9,281)                -

Cumulative foreign currency translation
     adjustment                                                -          2,841              -             2,841

Net loss for the year ended December 31, 2001                  -              -    (24,566,807)      (24,566,807)

                                                    ------------- -------------- --------------  ----------------
BALANCE, DECEMBER 31, 2001                          $    (17,777) $       2,841  $ (167,616,372) $     7,721,620
                                                    ============= ============== ==============  ================
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-5

<PAGE>

                                Fonix Corporation
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                Fonix Corporation
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                           Years Ended December 31,
                                                                                ------------------------------------------------
                                                                                    2001            2000             1999
                                                                                -------------   -------------   ----------------
Cash flows from operating activities:
<S>                                                                             <C>             <C>             <C>
     Net loss                                                                   $(24,566,807)   $(22,761,229)   $   (21,662,419)
     Adjustments to reconcile net loss to net cash
       used in operating activities:
        Issuance of common stock for services                                              -       1,328,100            158,600
        Non-cash expense related to issuance of debentures,
          warrants, preferred and common stock                                        62,500       4,725,201          2,411,349
        Non-cash compensation expense related to issuance and
          extension of stock options                                                  15,583         914,922            360,615
        Non-cash portion of purchased in-process research and development                  -         474,000                  -
        Accretion of discount on note receivable from affiliate                      (19,400)              -                  -
        Accretion of discount on note payable from affiliate                         164,405               -                  -
        Loss on disposal of property and equipment                                    68,736         126,520            154,940
        Impairment loss on handwriting recognition technology                      2,056,295               -                  -
        Gain on sale of HealthCare Solutions Group                                         -               -         (3,766,646)
        Depreciation and amortization                                              2,850,362       3,093,612          5,256,532
        Equity in net loss of affiliate                                              534,138               -                  -
        Income tax benefit                                                                 -         (76,810)        (3,331,895)
        Gain on forgiveness of debt                                                        -         (49,448)          (473,857)
        Changes in assets and liabilities, net of effects of acquisitions:
          Accounts receivable                                                         92,268          53,029           (245,432)
          Inventory                                                                  (37,154)              -                  -
          Prepaid expenses and other current assets                                  (39,367)          8,127             (5,560)
          Funds held in escrow                                                     2,151,006        (113,003)           (38,003)
          Other assets                                                               (18,364)          1,176                944
          Accounts payable                                                           406,885        (543,529)        (1,650,337)
          Accrued liabilities                                                        407,851         120,638            514,312
          Accrued liabilities - related party                                       (112,500)       (250,001)         1,143,185
          Deferred revenues                                                          372,778         549,222            632,242
          Cumulative foreign currency translation adjustment                           2,841               -                  -
                                                                                -------------   -------------   ----------------

        Net cash used in operating activities                                    (15,607,944)    (12,399,473)       (20,541,430)
                                                                                -------------   -------------   ----------------

Cash flows from investing activities, net of effects of acquisitions:
     Issuance of note receivable                                                    (630,000)              -                  -
     Purchase of property and equipment                                             (586,106)       (239,908)           (99,090)
     Issuance of note receivable from affiliate                                     (302,909)              -                  -
     Investment in affiliate                                                        (200,000)              -                  -
     Purchase of assets from Force Computers, Inc.                                  (220,223)              -                  -
     Proceeds from sale of property and equipment                                        400               -             50,000
     Payments received on notes receivable                                                 -               -            245,000
     Proceeds from sale of HealthCare Solutions Group                                      -               -         21,805,982
                                                                                -------------   -------------   ----------------

        Net cash provided by (used in) investing activities                       (1,938,838)       (239,908)        22,001,892
                                                                                -------------   -------------   ----------------

Cash flows from financing activities:
     Proceeds from sale of Class A common stock, net                              17,418,980       3,854,302                  -
     Payments on note payable to affiliate                                        (1,050,000)              -                  -
     Principal payments on capital lease obligation                                  (44,225)        (28,312)           (60,684)
     Proceeds from exercise of stock options and warrants                              9,801         744,866                  -
     Proceeds from issuance of convertible promissory note payable
        and convertible debentures, net                                                    -       7,500,000          6,254,240
     Proceeds from sale of preferred stock, net                                            -       1,750,000                  -
     Payments on revolving note payable, net                                               -               -        (20,038,193)
     Payments on revolving note payable - related parties, net                             -               -         (7,895,178)
     Advances on proceeds from issuance of Series F preferred stock                        -               -          1,000,000
     Payments on other notes payable                                                       -               -           (834,240)
     Proceeds from sale of warrants                                                        -               -            438,240
     Bank overdraft                                                                        -               -           (138,034)
                                                                                -------------   -------------   ----------------

        Net cash provided by (used in) financing activities                       16,334,556      13,820,856        (21,273,849)
                                                                                -------------   -------------   ----------------

Net (decrease) increase in cash and cash equivalents                              (1,212,226)      1,181,475        (19,813,387)

Cash and cash equivalents at beginning of the year                                 1,413,627         232,152         20,045,539
                                                                                -------------   -------------   ----------------

Cash and cash equivalents at end of the year                                    $    201,401    $  1,413,627    $       232,152
                                                                                =============   =============   ================
</TABLE>


          See accompanying notes to consolidated financial statements.

                                      F-6

<PAGE>

                             Fonix Corporation
             CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

                             Fonix Corporation
             CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                                            --------------------------------------------
Supplemental disclosure of cash flow information:                               2001           2000           1999
                                                                            -------------- -------------- --------------

<S>                                                                         <C>            <C>            <C>
      Cash paid during the year for interest                                $     171,494  $     455,047  $   1,186,695
      Cash paid during the year for income taxes                                    2,986          2,606              -
</TABLE>

Supplemental schedule of non-cash investing and financing activities:

      For the year ended December 31, 2001:

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

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

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

        Issued warrants for the purchase of 250,000 shares of Class A common
stock as consideration for a perpetual, nonexclusive technology license valued
at $62,500.

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

        Issued a non-interest bearing promissory note in the amount of
$1,280,000 to purchase tangible and intangible assets from Force Computers, Inc.

        Entered into a capital lease obligation for equipment in the amount of
$29,064.

        Issued a note payable for purchase of equipment in the amount of
$19,039.

        Issued 73,100 shares of Class A common stock for $852,970 in
subscription receivable.

      For the Year Ended December 31, 2000:

        Accrued preferred stock dividends of $191,051 on Series D and Series F
preferred stock.

        Converted 217,223 shares of Series D preferred stock and related
dividends of $255,600 into 15,436,378 shares of Class A common stock.

        Converted 309,963 shares of Series F preferred stock and related
dividends of $34,042 into 8,342,820 shares of Class A common stock.

        Recorded preferred stock dividends of $2,750,000 related to the
beneficial conversion features of Series F convertible preferred stock.

        Converted $7,500,000 of principal and $90,870 of interest from the
convertible promissory note into 11,544,775 shares of Class A common stock.

        Issued 600,000 warrants valued at $474,000 to an executive officer and
director of the Company as consideration for the rights to certain pen and voice
input technology.

        Issued 228,364 shares of Class A common stock to two former directors of
the Company upon the exercise of 400,000 options as stock appreciation rights.

        Converted $3,971,107 in principal of Series C convertible debentures and
related interest of $290,957 into 10,385,364 shares of Class A common stock.

        Issued 4,568,569 shares of Class A common stock upon the exercise of
repricing rights associated with the common stock subject to redemption.

        Issued 1,250,000 shares of Class A common stock to an unrelated party
for consulting fees valued at $1,328,100.

        Issued 612,069 shares of Class A common stock valued at $688,578 as
payment for liquidation damages and a restructuring fee in connection with the
Series D preferred stock agreement.

        Recorded interest expense of $3,447,623 for a beneficial conversion
feature on a promissory note.

        Entered into a capital lease obligation for equipment in the amount of
$92,304.

        Dividends totaling $514,800 were accrued relating to the liquidation
damage provision of the Series D preferred stock.

        Issued 260,145 shares of Class A common stock having a market value of
$81,295 in settlement of litigation.

        Issued 45,000 warrants valued at $11,250 for consulting services.

      For the Year Ended December 31, 1999:

        Entered into capital lease obligations for equipment in the amount of
$57,332.

        Applied advances to employees totaling $59,986 as payments on a
related-party note payable.

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

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

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

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

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

        Accrued preferred stock dividends of $769,710 on Series D and Series E
preferred stock.

        Recorded dividends totaling $343,749 relating to the liquidation damage
provisions of Series D and Series E preferred stock and Series C convertible
debentures.

        Issued 200,000 shares of Class A common stock to an unrelated party for
consulting fees valued at $100,000.

        Converted 626,611 shares of Series D preferred stock and related
dividends of $587,388 into 47,252,275 shares of Class A common stock.

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

        Of the sales proceeds from the sale of the HealthCare Solutions Group,
$2,500,000 was placed in an escrow account, $500,000 of which was subsequently
released.

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

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

        Issued 1,000,000 shares of Class A common stock to two unrelated parties
for consulting fees valued at $375,000 of which $316,400 was deferred at
December 31, 1999.

        Issued 1,000,000 warrants to three unrelated parties for legal services
valued at $260,000 of which $118,651 was deferred at December 31, 1999.

          See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>



                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 1.  NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations - Fonix Corporation and subsidiaries (collectively, the
"Company"or "Fonix") is engaged in developing, acquiring and marketing
proprietary speech-enabling technologies. The Company's speech-enabling
technologies include automated speech recognition ("ASR") and text-to-speech
("TTS"). The Company offers its speech-enabling technologies to markets for
embedded automotive and wireless and mobile devices, computer telephony and
server solutions and personal software for consumer applications. The Company
has received various patents for certain elements of its core technologies and
has filed applications for other patents covering various aspects of its
technologies. The Company seeks to develop relationships and strategic alliances
with third-party developers and vendors in telecommunications, computers,
electronic devices and related industries, including producers of application
software, operating systems, computers and microprocessor chips. Revenues are
generated through licensing of speech-enabling technologies, maintenance
contracts and services.

Basis of Presentation - The Company generated  revenues of $607,644,  incurred a
net loss of $24,566,807  and had negative cash flows from  operating  activities
totaling  $15,607,944  for the year ended  December 31, 2001. As of December 31,
2001, the Company had negative tangible net worth of $2,087,421,  an accumulated
deficit of $167,616,372,  negative working capital of $6,102,151 and $255,104 of
accounts payable over 60 days past due. The Company has limited capital capacity
of  $5,991,493  available  through its two equity  lines of credit.  The Company
expects to continue to incur  significant  losses and  negative  cash flows from
operating  activities  through at least  December  31,  2002,  primarily  due to
significant  expenditure  requirements  associated with marketing and developing
its speech-enabling technologies. These factors, as well as the risk factors set
out elsewhere in the Company's  Annual  Report on Form 10-K,  raise  substantial
doubt  about  the  Company's  ability  to  continue  as  a  going  concern.  The
accompanying  financial  statements  do not include any  adjustments  that might
result  from  the  outcome  of this  uncertainty.  Management  plans to fund the
operations  of the  Company  through  proceeds  from  sales of debt  and  equity
securities and cash flows from license and royalty arrangements. There can be no
assurance that management's plans will be successful.

Consolidation - The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Fonix Korea Sales
Group, Ltd. Fonix/AcuVoice, Inc. and Fonix/Papyrus, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
Investments in 20 to 50 percent owned affiliates are accounted for on the equity
method (see Note 5).

During 1999, two wholly owned subsidiaries, Fonix Systems Corporation and
Fonix/Articulate, Inc., were merged into the Company. In September 1999, the
Company sold its HealthCare Solutions Group ("HSG"), consisting primarily of the
assets and operations of Fonix/Articulate, Inc. The results of the operations of
the HSG are presented as discontinued operations (see Note 2).

Cash and Cash Equivalents - The Company considers all highly liquid, short-term
investments with a maturity of three months or less to be cash equivalents.

Subscriptions Receivable - Proceeds from certain sales of the Company's equity
securities prior to December 31, 2001 had not been received by the Company as of
year end. The cash proceeds were subsequently received in January 2002.

Funds Held in Escrow - Funds held in escrow pursuant to terms of the sale of the
HSG were held in interest-bearing accounts and became available to the Company
on March 2, 2001. These funds were received by the Company on March 29, 2001.


                                       F-8

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Property and Equipment - Property and equipment are stated at cost. Depreciation
is computed on a straight-line basis over the estimated useful lives of the
assets as follows:


Furniture and fixtures                                5 years
Computer equipment                                    3 to 5 years
Leasehold improvements                                18 months to 8 years

Leasehold improvements are amortized over the shorter of the useful life of the
applicable asset or the remaining lease term. Maintenance and repairs are
charged to expense as incurred and major improvements are capitalized. Gains or
losses on sales or retirements are included in the consolidated statements of
operations in the year of disposition.

Intangible Assets - Intangible assets consist of the following and are amortized
on a straight-line basis over the estimated useful lives indicated:


<TABLE>
<CAPTION>
                                          Useful Life             2001                  2000
                                          -----------             ----                  ----
<S>                                      <C>                    <C>                    <C>
Goodwill                                 8 to 10 years          $    4,926,902         $   8,435,590
Core technologies                        8 to 10 years              12,127,000            11,192,000
Customer relationships                     10 years                    306,000                    --
Trademarks                                 10 years                     42,000                    --
Patents                                     5 years                    164,460               164,460
                                                                --------------      ----------------
                                                                    17,566,362            19,792,050
Less accumulated amortization                                      (7,757,321)           (6,850,286)
                                                                 -------------       ---------------
Net intangible assets                                            $   9,809,041        $   12,941,764
                                                                 =============       ===============
</TABLE>



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

During the fourth quarter of 2001, management of the Company determined that
goodwill recorded in connection with its handwriting recognition technology was
impaired. Without immediate customer prospects or current license agreements,
management has chosen not to provide further funding to develop or market the
handwriting recognition technology. Accordingly, the unamortized balance of
$2,056,295 was recorded as an expense in 2001.

Management does not consider any of the Company's other long-lived assets to be
impaired at December 31, 2001. However, should the Company's marketing and sales
plans not materialize in the near term, the realization of the Company's
intangible assets could be severely and negatively impacted. The accompanying
consolidated financial statements have been prepared based on management's
estimates of realizability, which estimates may change due to factors beyond the
control of the Company. See "Recently Enacted Accounting Standards" below.

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

                                       F-9

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Revenue from license, royalties and maintenance is recognized upon shipment of
the software if there are no significant post-contract obligations. If
post-contract obligations exist, revenue is recognized when those obligations
have been satisfied. Revenue from consulting and development services is
recognized as the services are completed.

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

Product Development and Research - All expenditures for product development and
research are charged to expense as incurred. During 2000, the Company recorded
$474,000 of in-process research and development costs related to the acquisition
of certain technology rights from a director and executive officer of the
Company in exchange for warrants to purchase 600,000 shares of Class A common
stock (see Note 13).

Income Taxes - The Company recognizes deferred income tax assets or liabilities
for the expected future tax consequences of events that have been recognized in
the financial statements or tax returns. Deferred income tax assets or
liabilities are determined based upon the difference between the financial and
income tax bases of assets and liabilities using enacted tax rates expected to
apply when differences are expected to be settled or realized.

Stock-based Compensation Plans - The Company accounts for its stock-based
compensation issued to employees and directors under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". Under APB
Opinion No. 25, compensation related to stock options, if any, is recorded if an
option's exercise price on the measurement date is below the fair value of the
Company's common stock, and amortized to expense over the vesting period.
Compensation expense for stock awards or purchases, if any, is recognized if the
award or purchase price on the measurement date is below the fair value of the
Company's common stock, and is recognized on the date of award or purchase.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation", requires pro forma information regarding net loss and
net loss per common share as if the Company had accounted for its stock options
granted under the fair value method. This pro forma disclosure is presented in
Note 12.

The Company accounts for its stock-based compensation issued to non-employees
using the fair value method in accordance with SFAS No. 123 and related
interpretations. Under SFAS No. 123, stock-based compensation is determined as
either the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. The
measurement date for these issuances is the earlier of the date at which a
commitment for performance by the recipient to earn the equity instruments is
reached or the date at which the recipient's performance is complete.

Concentration of Credit Risks - The Company's cash and cash equivalents are
maintained in bank deposit accounts which occasionally may exceed federally
insured limits. Cash equivalents consist of highly liquid securities with
maturities of three months or less when purchased. The Company has not
experienced any losses with respect to these deposits. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs on-going credit evaluations of its customers and maintains
allowances for possible losses, which when realized, have been within the range
of management's expectations.

Accounting Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could

                                      F-10

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


differ from those estimates.

Fair Value of Financial Instruments - The book values of the Company's assets
and liabilities approximate their fair values. The estimated fair values have
been determined using appropriate market information and valuation
methodologies.

Net Loss Per Common Share - Basic and diluted net loss per common share are
calculated by dividing net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding during the year.
At December 31, 2001, 2000 and 1999, there were outstanding common stock
equivalents to purchase 27,120,480 shares, 38,541,003 shares and 56,869,449
shares of common stock, respectively, that were not included in the computation
of diluted net loss per common share as their effect would have been anti-
dilutive, thereby decreasing the net loss per common share.

The following table is a reconciliation of the net loss numerator of basic and
diluted net loss per common share for the years ended December 31, 2001, 2000
and 1999.


<TABLE>
<CAPTION>
                                                   2001                           2000                           1999
                                         ----------------------------   ----------------------------   ---------------------------
                                                              Loss                           Loss                           Loss
                                            Loss           Per Share        Loss          Per Share        Loss          Per Share
                                         --------------   -----------   --------------   -----------   --------------   -----------
<S>                                      <C>              <C>           <C>              <C>           <C>              <C>
Loss from continuing operations          $ (24,566,807)                 $ (22,810,677)                 $ (19,949,196)
Preferred stock dividends                       (9,281)                    (3,335,852)                    (2,110,607)
                                         --------------                 --------------                 --------------
Net loss from continuing operations
        attributable to common
        shareholders                       (24,576,088)   $    (0.10)     (26,146,529)   $    (0.16)     (22,059,803)   $    (0.29)
Discontinued operations, net of taxes               --           --               --             --       (2,187,080)        (0.03)
Extraordinary item, net of taxes                    --           --            49,448            --          473,857          0.01
                                         --------------   -----------   --------------   -----------   --------------   -----------
Net loss attributable to common
        stockholders                     $ (24,576,088)   $    (0.10)   $ (26,097,081)   $    (0.16)   $ (23,773,026)   $    (0.31)
                                         ==============   ===========   ==============   ===========   ==============   ===========
Weighted average common shares
  outstanding                              239,131,247                    162,684,298                     76,753,709
                                         ==============                 ==============                 ==============
</TABLE>

Imputed Interest Expense and Income - Interest is imputed on long-term debt
obligations and notes receivable where management has determined that the
contractual interest rates are below the market rate for instruments with
similar risk characteristics (see Notes 5 and 6).

Inventory - Inventory, consisting primarily of retail products, is stated at the
lower of cost (first-in, first-out method) or market value.

Foreign Currency Translation - The functional currency of the Company's Korean
subsidiary is the South Korean won. Consequently, assets and liabilities of the
Korean operations are translated into United States dollars using current
exchange rates at the end of the year. All revenue is invoiced in South Korean
won and revenues and expenses are translated into United States dollars using
weighted-average exchange rates for the year.

Comprehensive  Income - Other comprehensive income presented in the accompanying

                                      F-11

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


consolidated financial statements consists of cumulative foreign currency
translation adjustments. The Company had no items of comprehensive income or
loss prior to April 1, 2001.

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

SFAS No. 142 changes the accounting for goodwill and intangible assets with
indefinite lives from an amortization method to an impairment-only approach.
Accordingly, effective January 1, 2002, amortization of goodwill and intangible
assets with indefinite lives will discontinue. Other intangible assets will
continue to be amortized over their useful lives. The Company amortized
$1,029,545 of goodwill for each of the years ended December 31, 2001, 2000 and
1999.

Effective January 1, 2002, the Company will apply the requirements of SFAS No.
142, and management will perform an impairment test of goodwill and intangible
assets with indefinite lives. The effect of the application of those
requirements on the Company's financial position and results of operations has
not been determined, but it could be material to the Company's financial
position and results of operations. Any transitional impairment loss will be
recognized as a cumulative change in accounting principle.

In August 2001, the FASB issued SFAS No. 143 , "Accounting for Asset Retirement
Obligations." This statement establishes financial accounting and reporting
standards for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
adoption of this statement is not expected to have a material effect on the
Company's financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement establishes financial accounting
and reporting standards for the impairment or disposal of long-lived assets.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The application of these requirements is not
expected to have a material effect on the Company's financial position or
results of operations.

Reclassifications - Certain reclassifications have been made in the prior years'
consolidated financial statements to conform with the current year presentation.

2.  ACQUISITION AND DISCONTINUED OPERATIONS

DECtalk Assets - On December 14, 2001, the Company entered into an Asset
Purchase Agreement with Force Computers, Inc., under which the Company purchased
from Force tangible and intangible assets (the "DECtalk Assets"). The Company
agreed to pay $150,000 in cash at closing and $1,280,000 in the form of a
non-interest- bearing promissory note (see Note 6). Payments due under the
promissory note are payable at intervals through December 9, 2002.


                                      F-12

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The purchase price of $1,459,978, including direct acquisition costs of $70,223
is allocated as follows:

     Purchased core technology                        $     935,000
     Customer relationships                                 306,000
     Trademark                                               42,000
     Goodwill                                                94,062
     Furniture and equipment                                 64,350
     Accounts receivable                                     18,566
                                                      -------------
        Total purchase price                          $   1,459,978
                                                      =============

Sale of the HealthCare Solutions Group - On September 1, 1999, the Company
completed a sale of the operations and a significant portion of the assets of
the  HSG,  to  Lernout  &  Hauspie  Speech  Products  N.V.  ("L&H"),  for  up to
$28,000,000 (the "Sale"). Of this sales price, $21,500,000, less certain credits
of $194,018,  was received at closing,  and  $2,500,000  was held in an 18 month
escrow account in connection with the representations and warranties made by the
Company in the sales transaction.  All of the funds were released from escrow by
March 29, 2001.  Another  $4,000,000  of the sales price was to be  contingently
paid as an earnout in two  installments  of $2,000,000 each over two years based
on the performance of the HSG. To date, no earnout has been received and,
because of the bankruptcy filing of L&H, it is unlikely that any earnout will be
received in the future. The assets sold included  inventory,  property and
equipment, certain prepaid expenses, purchased core technology and other assets.
Additionally, L&H assumed the capital and operating lease obligations related to
the HSG and the obligations related to certain deferred revenues.

Upon the closing of the Sale, the Company discontinued the operations of the
HSG. The results of operations of the HSG have been reported separately as
discontinued operations in the accompanying 1999 consolidated statement of
operations. Revenues from the HSG's operations were $1,726,262 for the period
from January 1, 1999 through September 1, 1999, the date of the Sale. These
amounts have not been included in revenues in the accompanying 1999 consolidated
statement of operations, but are included in the operating loss from
discontinued operations.

3.  CONVERTIBLE NOTES RECEIVABLE

Through November 30, 2001, the Company loaned $455,000 under the terms of
convertible promissory notes to an unrelated entity (the "Borrower") with whom
the Company is engaged in development activities. The notes were unsecured, bore
interest at an annual rate of 7.5 percent, and were to mature 120 days from the
issuance date of each note. The Borrower is a provider of
natural-language-understanding solutions for CRM applications. Fonix speech-
enabling technology is a component of these solutions.

On December  1, 2001,  the Company  established  a revolving  line of credit and
convertible  promissory  note that permits the Borrower to draw up to $1,000,000
for  operations  and other  purposes,  including  the amounts  loaned  under the
initial  convertible  promissory notes.  Effective February 1, 2002, the line of
credit and convertible  promissory  nore were increased to $2,000,000.  Draws on
the line of credit  bear  interest  at an annual  rate of seven  percent,  which
interest  is payable  quarterly  beginning  June 30,  2002,  and are  secured by
intellectual  property and other assets of the Borrower.  The unpaid  principal,
together with interest accrued thereon, is due and payable on December 31, 2002,
and is convertible  into common shares of the Borrower at the Company's  option.
Based upon borrowings through December 31, 2001, such conversion would represent
approximately five percent of the ownership of the Borrower.

In December 2001, the Borrower drew an additional $175,000 on the line of
credit, bringing the total outstanding balance to $630,000 through December 31,
2001.   Subsequent to December 31, 2001 through February 26, 2002, the Borrower
drew an additional $395,000 under the terms of the credit line.



                                      F-13

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.  PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                  2001                2000
                                                               ---------------     ---------------
<S>                                                            <C>                 <C>
Computer equipment                                             $    1,166,731      $    1,193,942

Furniture and fixtures                                                959,069             851,436

Leasehold improvements                                                 92,319             118,621
                                                               ---------------      -------------
                                                                    2,218,119           2,163,999
Less accumulated depreciation and amortization                     (1,314,960)         (1,445,288)
                                                               ---------------      --------------
Net property and equipment                                     $      903,159       $     718,711
                                                               ===============      ==============
</TABLE>

5. INVESTMENT IN AFFILIATE

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

Note Receivable - In connection with the collaboration agreement with Audium, in
February and May 2001, the Company advanced an aggregate of $400,000 to Audium
as a bridge loan (the "Audium Note"). The loan bears interest at a rate of 5
percent per year, has a term of four years and is convertible into shares of
Audium Series A Convertible Preferred Stock ("Audium Preferred Stock"). The
Audium Note is convertible into shares of Audium Preferred Stock at a price of
$1.46 per share in the event of (i) Audium raising an additional $2,000,000
prior to October 6, 2002, (ii) Audium's merger or consolidation, (iii) a
qualified public offering of Audium common stock, (iv) an event of default under
a note payable from Fonix (see Fonix Note below), or (v) Audium's aggregate
gross revenues for the months of January through June 2003 exceeding $1,000,000.
The Audium Note is secured by Audium's intellectual property. Further, at the
closing, Audium granted the Company a fully paid, worldwide, non-exclusive
license to Audium's software to make, manufacture, and use the software and any
derivative works if Audium declares bankruptcy or ceases to do business.

Management determined that a 12 percent annual interest rate better reflects the
risk characteristics of the Audium Note. Accordingly, interest was imputed at 12
percent and the Audium Note was recorded at its original present value of
$302,909. For the year ended December 31, 2001, the Company recorded interest
income of $29,663, including contractual and imputed interest. As of December
31, 2001, the balance of the Audium Note was $322,309, net of the unaccreted
discount.

Investment in Affiliate - On April 11, 2001, the Company closed a stock purchase
agreement with Audium, wherein the Company agreed to purchase up to $2,800,000
of Audium Preferred Stock at a price of $1.46 per share. At closing, the Company
paid $200,000 in cash and gave Audium a non-interest bearing note (the "Fonix
Note") for the remaining $2,600,000.

Each share of Audium Preferred Stock is convertible into one share of Audium's
common stock. Holders of Audium Preferred Stock are entitled to eight percent
cumulative dividends, a liquidation preference in excess of the original
purchase price plus any declared but unpaid dividends, anti-dilution rights,
and voting rights equal to the corresponding number of common shares. The stock
purchase agreement also entitles Fonix to elect one

                                      F-14

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


member of Audium's board of directors. Audium also granted Fonix certain
registration rights after the closing of a public offering by Audium.

On April 11, 2001, and through December 31, 2001, the Company's investment in
Audium represented 26.7 percent of the Audium's voting stock. As a result, the
Company accounts for its investment in Audium using the equity method of
accounting. Accordingly, the Company recognized a loss of $534,138 in the
accompanying consolidated statements of operations consisting of $259,414
to reflect the Company's share of Audium's net loss for the period from April
11, 2001 through December 31, 2001 and $274,724 for the amortization of the
difference between the purchase price of the Audium Preferred Stock and the
Company's portion of Audium's net stockholders' deficit that is amortized on a
straight-line basis over a period of eight years.

A summary of the results of Audium's operations for the period from April 11,
2001 through December 31, 2001 and net assets (liabilities) as of December 31,
2001 is as follows:
                                                     (Unaudited)
  Net sales                                         $    434,859
  Loss from operations                                   959,285
  Net loss                                               971,583

  Current assets                                         591,646
  Total assets                                           832,670
  Current liabilities                                    604,677
  Total liabilities                                    1,027,272
  Net assets (liabilities)                              (194,602)

Note Payable to Affiliate - The Fonix Note is payable in 13 monthly installments
of $200,000 beginning on June 1, 2001, and bears no interest unless an event of
default occurs, in which case it will bear interest at 12 percent per year. No
events of default have occurred to date.

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

Through September 30, 2001, three payments of $200,000 were made on the Fonix
Note. Effective October 1, 2001, the terms of the Fonix Note were modified to
reduce the monthly payments to the following amounts: $75,000 for September
2001, $100,000 for October 2001, $125,000 for November 2001 and $150,000 for
December 2001 and January 2002. Thereafter, monthly payments of $200,000 are
scheduled through August 2002. No other terms of the original Fonix Note were
affected by the modification. Subsequent to December 31, 2001, payments
amounting to $350,000 have been made as required by the modified terms.

Management determined that a 12 percent annual interest rate reflects the risk
characteristics of the Fonix Note. Accordingly, interest has been imputed at 12
percent and the Company recorded a present value of $2,370,348 for the note
payable. For the year ended December 31, 2001, the Company recorded interest
expense of $164,405 related to this note.

                                      F-15

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



6.  PROMISSORY NOTE

As discussed in Note 2, the Company entered into an Asset Purchase Agreement
with Force Computers, Inc. ("Force") As part of the consideration for the
purchase price Fonix issued a non-interest bearing promissory note in the amount
of $1,280,000. Management determined that a seven percent annual interest rate
reflects the risk characteristics of this promissory note. Accordingly,
interest has been imputed at seven percent and the Company recorded a discount
of $40,245 for the note payable. From the purchase date through December 31,
2001, the Company recorded interest expense of $4,098 related to this promissory
note.

As collateral for the promissory note, 7,000,000 shares of the Company's Class A
common stock were placed into escrow.  Under the terms of the escrow, the shares
will not be released  to Force  unless the  Company is  delinquent  or late with
respect  to any  payment  under  the  Note.  Also,  under the terms of the Asset
Purchase  Agreement,  Fonix is required to deposit all receipts  from  customers
acquired in this  transaction  into a joint  depository  account.  Fonix has the
right to withdraw such funds;  however,  in the event of default on any payments
to Force under the terms of the promissory note, Force has the right to withdraw
funds from the depository account until the deficiency in payment is covered, at
which time,  Fonix may again have use of the funds. To date,  required  payments
have been made when due.

7.  RELATED-PARTY NOTES PAYABLE

In connection with the acquisition of certain entities in 1998, the Company
issued unsecured demand notes payable to former stockholders of the acquired
entities in the aggregate amount of $1,710,000. Demands for payment on the notes
were made as follows: $1,190,000 on February 28, 1999, $180,000 on April 30,
1999 and $340,000 on September 30, 1999, and bore interest at six percent after
their due date. The Company did not make payments on the due dates pending the
result of certain legal actions undertaken by the Company. In September 1999,
the actions were settled resulting in cancellation of certain of the promissory
notes totaling $1,632,375 upon payment to certain former shareholders of
$1,217,384 and the return of 970,586 shares of restricted Class A common stock
previously issued in connection with the acquisition. Of the notes payable,
$77,625 remain unpaid as of December 31, 2001. During 2000, the holders of these
notes made demand for payment and the Company is negotiating with the holders of
these notes to reduce the outstanding balance.

8.  SERIES C CONVERTIBLE DEBENTURES

On January 29, 1999, the Company entered into an agreement with four investors
pursuant to which the Company sold its Series C convertible debentures in the
aggregate principal amount of $4,000,000. The outstanding principal amount of
the debentures was convertible at any time at the option of the holders into
shares of Class A common stock at a conversion price equal to the lesser of
$1.25 or 80 percent of the average of the closing bid price of the Class A
common stock for the five trading days immediately preceding the conversion
date. The Company recorded $687,500 as interest expense upon the issuance of the
debentures in connection with the beneficial conversion feature. The Company
also issued 400,000 warrants in connection with this financing. The warrants are
exercisable for a period of three years from the date of grant. The estimated
fair value of the warrants of $192,000, as computed under the Black-Scholes
pricing model, was recorded as interest expense upon the issuance of the
debentures. On March 3, 1999, the Company executed a supplemental agreement
pursuant to which the Company agreed to sell another $2,500,000 principal amount
of Series C convertible debentures on the same terms and conditions as the
January 29, 1999 agreement, except no additional warrants were issued.

The obligations of the Company for repayment of the  debentures,  as well as its
obligation to register the common

                                      F-16

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


stock underlying the potential conversion of the debentures and the exercise of
the warrants issued in these transactions, were personally guaranteed by two
executive officers and directors and one former executive officer and director
(the "Guarantors"). These personal guarantees were secured by a pledge of
6,000,000 shares of Fonix Class A common stock beneficially owned by the
Guarantors. The Company entered into an indemnity agreement with the Guarantors
relating to this and other guarantees and pledges (see Note 13).

Subsequent to the March 3, 1999 funding, the holders of the Series C convertible
debentures notified the Company and the Guarantors that a default had occurred
under certain terms of the stock pledge agreement as a result of the Company's
failure to register in a timely manner the resale of the shares underlying the
debentures, and that the holders had exercised their right to sell the shares
pledged by the Guarantors. The Company was informed that proceeds from the sale
of the 6,000,000 pledged shares amounted to $3,278,893. Of this total, $406,250
was allocated to penalties attributable to default provisions of the stock
pledge agreement and recorded by the Company as interest expense and $343,750
related to penalty provisions of the Series D preferred stock (held by a related
group of investors) and recorded by the Company as preferred stock dividends.
The remaining $2,528,893 was applied as a reduction to the principal balance of
the debentures. Under its indemnity agreement with the Guarantors, the Company
was obligated to issue 6,000,000 replacement shares to the Guarantors for the
shares sold by the holders of the Debentures. Additionally, the Company has
recorded a related-party liability of $1,296,600 as a reimbursement to the
Guarantors for expenses incurred by the Guarantors as a result of the sales of
the shares pledged by the Guarantors.

During 2000, the remaining balance of $3,971,107 of the Series C convertible
debentures was converted into 10,385,364 shares of Class A common stock.

9. PREFERRED STOCK

The Company's certificate of incorporation allows for the issuance of preferred
stock in such series and having such terms and conditions as the Company's board
of directors may designate.

Series A Convertible Preferred Stock - In 1995, the Company entered into an
agreement with Beesmark Investments, L.C., a Utah limited liability company
controlled by an individual who assumed a position on the Company's board of
directors in connection with the execution of the agreement. The individual
later resigned from the board. Under the agreement, the Company issued Series A
convertible debentures in the amount of $500,000. The debentures bore interest
at five percent and were originally due October 23, 1996. The debentures were
converted into 166,667 shares of Series A convertible preferred stock on
September 25, 1997. Holders of the Series A convertible preferred stock have the
same voting rights as common stockholders, have the right to elect one person to
the board of directors and are entitled to receive a one time preferential
dividend of $2.905 per share of Series A convertible preferred stock prior to
the payment of any dividend on any class or series of stock. At the option of
the holder, each share of Series A convertible preferred stock is convertible
into one share of Class A common stock and in the event that the common stock
price has equaled or exceeded $10 for a 15 day period, the Series A convertible
preferred stock shares are automatically converted into Class A common stock. In
the event of liquidation, the holder is entitled to a liquidating distribution
of $36.33 per share and a conversion of Series A convertible preferred stock at
an amount equal to 1.5 shares of common stock for each share of Series A
convertible preferred stock.

Series D Convertible Preferred Stock - During 1998, the Company entered into an
agreement with investors whereby the Company issued 550,000 shares of Series D
convertible preferred stock for $11,000,000. Additionally, the Company issued to
certain investors a total of 608,334 shares of Series D convertible preferred
stock in return for their relinquishment of their contractual right to receive
shares in connection with a March 1998 private

                                      F-17

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


placement offering and as a cost of the Series D convertible preferred stock
placement. Dividends accrued on the stated value ($20 per share) of Series D
convertible preferred stock at the rate of four percent per year, were payable
annually or upon conversion, in cash or Class A common stock, at the option of
the Company, and were convertible into shares of Class A common stock at the
holders' option any time. In the event of liquidation, the holders of the Series
D convertible preferred stock were entitled to an amount equal to the stated
value ($20 per share) plus accrued but unpaid dividends whether declared or not.
The holders of Series D convertible preferred stock had no voting rights. Shares
of Series D convertible preferred stock, together with dividends accrued
thereon, could be converted into shares of Class A common stock at the lesser
of: $3.50 per share; or the lesser of 110 percent of the average per share
closing bid price for the 15 trading days immediately preceding the date of
issuance of the shares of Series D convertible preferred stock; or 90 percent of
the average of the three lowest per share closing bid prices during the 22
trading days immediately preceding the conversion date. If the holders had
converted at the $3.50 per share price, the Company was obligated to issue
warrants to purchase 0.8 shares of Class A common stock for each share of Series
D convertible preferred stock converted to common stock. Using the conversion
terms most beneficial to the holders, the Company recorded a preferred stock
dividend of $3,638,147 for the beneficial conversion feature of the Series D
convertible preferred stock.

In 1998, 150,000 shares of Series D convertible preferred stock were exchanged
for 150,000 shares of Series E convertible preferred stock (see below). In June
2000, the Company issued 612,069 shares of Class A common stock (having a market
value of $688,578 on that date) to the holder of the shares of Series D
convertible preferred stock in consideration for the waiver of certain rights
and amendment of certain terms relating to the conversion of shares of Series D
convertible preferred stock, including reducing the conversion rate from 90
percent to 85 percent of the average of the three lowest per share closing bid
prices during the 22 trading days preceding the conversion date. The Company
recorded a preferred stock dividend in the amount of $236,400 for the beneficial
conversion feature resulting from the issuance of the shares. In 2001, 2000 and
1999, 164,500 shares, 217,223 shares and 626,611 shares, respectively, of Series
D convertible preferred stock and related dividends were converted into
13,978,440 shares, 15,436,378 shares and 47,252,275 shares, respectively, of
Class A common stock. As of December 31, 2001, no shares of Series D convertible
preferred stock remain outstanding.

Series E Convertible Preferred Stock - In 1998, the Company entered into an
agreement with two of the purchasers of the Series D convertible preferred stock
whereby the Company issued 100,000 shares of the Company's Series E convertible
preferred stock for $2,000,000. Additionally, the Company issued to the
purchasers of the Series E convertible preferred stock a total of 150,000
additional shares of Series E convertible preferred stock in exchange for a
total of 150,000 shares of Series D convertible preferred stock. Dividends
accrued on the stated value ($20 per share) of Series E convertible preferred
stock at a rate of four percent per year, were payable annually or upon
conversion, in cash or common stock, at the option of the Company, and were
convertible into shares of Class A common stock at any time at the holders'
option. In the event of liquidation, the holders of the Series E convertible
preferred stock were entitled to an amount equal to the stated value ($20 per
share) plus accrued but unpaid dividends whether declared or not. The holders of
Series E convertible preferred stock had no voting rights. Shares of Series E
convertible preferred stock, together with dividends accrued thereon, could be
converted into shares of Class A common stock at the lesser of: $3.50 per share;
or the lesser of 110 percent of the average per share closing bid price for the
15 trading days immediately preceding the date of issuance of the Series E
convertible preferred stock; or 90 percent of the average of the three lowest
per share closing bid prices during the 22 trading days immediately preceding
the conversion date. If the holders had converted at the $3.50 per share price,
the Company was obligated to issue warrants to purchase 0.8 shares of Class A
common stock for each share of Series E convertible preferred stock converted to
common stock. Using the conversion terms most beneficial to the holders, the
Company recorded a preferred stock dividend of $968,047 for the beneficial
conversion feature of the Series E convertible preferred stock.


                                      F-18

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In 1998, 114,928 shares of Series E convertible preferred stock and related
dividends were converted into 2,591,733 shares of Class A common stock. In 1999,
the remaining 135,072 shares of Series E convertible preferred stock and related
dividends were converted into 5,729,156 shares of Class A common stock. There
are no shares of Series E convertible preferred stock outstanding.

Series F Convertible Preferred Stock - In 2000, the Company entered into an
agreement and a related amendment thereto whereby it sold a total of 316,036
shares of its Series F convertible preferred stock for $2,750,000. Dividends
accrued on the stated value ($20 per share) of Series F convertible preferred
stock at a rate of six percent per year, were payable annually or upon
conversion, in cash or common stock, at the option of the Company, and were
convertible into shares of Class A common stock at any time at the holders'
option. Shares of Series F convertible preferred stock could be converted into
shares of Class A common stock at a price of $0.75 per share during the first 90
days following the close of the transaction, and thereafter at a price equal to
85 percent of the average of the three lowest closing bid prices in the 20-day
trading period immediately preceding the conversion date. Using the conversion
terms most beneficial to the holders, the Company recorded a preferred stock
dividend of $2,750,000 for the beneficial conversion feature of the Series F
convertible preferred stock.

In 2001 and 2000, 6,073 shares and 309,963 shares, respectively, of Series F
convertible preferred stock and related dividends were converted into 519,067
shares and 8,342,820 shares, respectively, of Class A common stock.

10.  CONVERTIBLE PROMISSORY NOTE AND EQUITY LINES OF CREDIT

Convertible Promissory Note - In June 2000, the Company executed a convertible
promissory note (the "2000 Note") with a private investor in the amount of
$7,500,000, against which the Company was permitted to draw funds as needed for
operating purposes. The 2000 Note bore interest at six percent annually,
compounded monthly, and was due September 30, 2001. Principal drawn under the
terms of the 2000 Note was designated as the "Initial Investment Amount" under
the Private Equity Line Agreement described below. The investor had the right to
convert, at its option, all or any portion of the outstanding principal and
interest into shares of Class A common stock at the lesser of $0.75 or 85
percent of the average of the three lowest closing bid prices of Class A common
stock in the 20-day trading period prior to the date of conversion. During 2000,
the Company drew the entire amount available under the 2000 Note and recorded
$106,348 as interest expense. Principal and interest were converted into
11,544,775 shares of Class A common stock. The Company also recorded a
beneficial conversion feature as interest expense in the amount of $3,447,623
related to borrowings under the 2000 Note.

Equity Line of Credit - In August 2000, the Company entered into a Private
Equity Line Agreement ("Equity Line") with the same investor ("Equity Line
Investor") which gives the Company the right to draw up to $20,000,000 for
operations and other purposes. The Initial Investment Amount of $7,500,000 was
drawn as part of the 2000 Note described above. The balance remaining under the
Equity Line is available to the Company through a mechanism of draws and puts of
stock. The Company is entitled to draw funds and to "put" to the Equity Line
Investor shares of Class A common stock in lieu of repayment of the draw. The
number of shares issued is determined by dividing the dollar amount of the draw
by 90 percent of the average of the two lowest closing bid prices of Class A
common stock over the seven trading-day period following the date the Company
tenders the put notice. The Equity Line Investor funds the amounts requested by
the Company within two trading days after the seven trading-day period.

From its inception through December 31, 2000, draws taken under the Equity Line,
excluding the Initial Investment Amount, amounting to $3,973,508 were converted
into 12,492,680 shares of Class A common stock. During 2001, draws amounting to
$5,510,000, less commissions and related fees of $165,300, were converted into
26,353,141 shares of Class A common stock. Subsequent to December 31, 2001,
additional draws amounting to $156,836, less commissions and fees of $4,705,
were converted into 2,292,920 shares of Class A common stock. As of February

                                      F-19

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


26, 2002, $2,859,657 of credit remains available to be drawn on the Equity Line.

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

From the inception of the Second Equity Line through December 31, 2001, draws
under the Second Equity Line amounting to $13,425,000, less commissions and fees
of $497,750, were converted to 118,013,005 shares of Class A common stock.
Subsequent to December 31, 2001, additional draws amounting to $3,443,164, less
commissions and fees of $103,295, were converted into 51,769,221 shares of Class
A common stock. As of February 26, 2002, $3,131,836 remains available to be
drawn on the Second Equity Line.

11.  COMMON STOCK AND COMMON STOCK SUBJECT TO REDEMPTION

Common Stock - During 2001, the Company issued 158,898,653 shares of Class A
common stock. Of such shares, 14,497,507 shares were issued upon the conversion
of preferred stock with related dividends, 144,366,146 shares were issued upon
conversion of draws on the equity lines, and 35,000 shares were issued upon the
exercise of options. At the annual meeting of shareholders held on July 18,
2001, the shareholders of the Company approved an increase in the number of
common shares authorized from 300,000,000 to 500,000,000.

During 2000, the Company issued 65,959,861 shares of Class A common stock. Of
such shares, 34,164,562 shares were issued upon the conversion of convertible
debentures with related interest and preferred stock with related dividends,
24,037,455 were issued upon conversion of draws on the Equity Line and 2000
Note, 1,067,061 shares were issued upon the exercise of warrants, options and
stock appreciation rights, 4,568,569 shares were issued upon exercise of
repricing rights (see below), 260,145 shares were issued upon the settlement of
litigation (see Note 17), and 1,862,069 were issued to consultants as
consideration for services rendered.

During 1999, the Company issued 60,181,431 shares of Class A common stock. Of
such shares, 52,981,431 shares were issued upon the conversion of preferred
stock and related dividends, 6,000,000 were issued as replacement shares under
an indemnification agreement in favor of the Guarantors (see Notes 8 and 13) and
1,200,000 were issued to consultants as consideration for services rendered. The
Company canceled 970,586 shares of Class A common stock that were returned in
connection with the settlement with the former shareholders of and acquired
entity (see Note 7). At the annual meeting of shareholders held on October 29,
1999, issuance of Class B non- voting common stock was approved by the
shareholders of the Company. Also approved was an increase in the number of
common shares authorized from 100,000,000 to 300,000,000 and in the number of
preferred shares authorized from 20,000,000 to 50,000,000.

In connection with a 1998 acquisition, 1,985,000 shares of Class A common stock
were placed in escrow to be converted at a later date to Class B Non-Voting
common stock, subject to approval by the shareholders of the Company. By vote of
the shareholders at the annual meeting held October 29, 1999, the issuance of
1,985,000 shares of Class B Non-Voting common stock was approved. The Class B
shares are authorized, but have not yet been exchanged for the corresponding
Class A shares held in escrow. The shares held in escrow have been excluded from
the calculation of basic net loss per common share for the year ended December
31, 2001, 2000 and 1999.

Voting Trust - As of December 31, 2001, 8,627,333 shares of the Company's
outstanding Class A common stock were held in a voting trust as to which the
president and chief executive officer of the Company is the sole trustee.
Persons who have deposited their shares of the Company's Class A common stock
into the voting trust have

                                      F-20

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


dividend and liquidation rights in proportion to the number of shares of the
Company's Class A common stock they have deposited in the voting trust, but have
no voting rights with respect to such shares. All voting rights associated with
the shares deposited into the voting trust are exercisable solely and
exclusively by the trustee of the voting trust. The voting trust expires, unless
extended according to its terms, on the earlier of September 30, 2002 or any of
the following events: (i) the trustee terminates it; (ii) the participating
stockholders unanimously terminate it; or (iii) the Company is dissolved or
liquidated.

Common Stock Subject to Redemption - In 1998, the Company entered into a private
placement agreement with an unaffiliated investor, pursuant to which the Company
received $1,980,000 in net proceeds in exchange for 1,801,802 shares of Class A
common stock, an equal number of repricing rights, both subject to certain
repurchase rights, and warrants to purchase 200,000 shares of Class A common
stock at $1.67 per share for a term of three years. The Company assigned a fair
value of $150,000 to the warrants as determined on December 21, 1998 using the
Black-Scholes pricing model assuming a dividend yield of 0 percent, expected
volatility of 85 percent, a risk free interest rate of 4.5 percent and an
expected life of 3 years.

Each repricing right entitled the holder to receive a number of additional
shares of Class A common stock for no additional consideration according to a
formula based on the lowest closing bid price of the Company's Class A common
stock during the 15 consecutive trading days immediately preceding the exercise
date and a repricing price, as defined, ranging from $1.3875 to $1.4319
depending upon the date of the exercise. The repricing rights became exercisable
on March 21, 1999.

Each holder of the Class A common stock described above had the right, based on
certain conditions, to require the Company to repurchase all or a portion of the
holder's common shares and repricing rights. The repurchase rights could only be
exercised simultaneously with or after the occurrence of a major transaction or
triggering event as defined in the private placement securities agreement. Such
events included certain consolidations, mergers or other business combinations,
sale or transfer of all or substantially all the Company's assets, purchase,
tender or exchange offering of more than 40 percent of the Company's outstanding
Class A common stock made and accepted, failure to have a registration statement
describing the Class A common stock declared effective prior to 180 days after
the closing date or suspension from listing or delisting of the Company's Class
A common stock for a period of three days. The repurchase price for the Class A
common stock was $1.3875 per share.

On February 14, 2000, the repricing rights were converted into 4,568,569 shares
of Class A common stock, which shares were subsequently sold by the holder into
the open market. Simultaneously, the initial shares subject to the repurchase
rights were sold. Consequently, the Company has no further obligation under the
repricing rights or the repurchase rights.

Delisting from The Nasdaq SmallCap Market - On December 3, 1999, the Company
received notice that its Class A common stock had been delisted from The Nasdaq
SmallCap Market principally because the Company's stock had failed to meet
Nasdaq minimum bid price requirements. The Company's Class A common stock is
currently trading on the OTC Bulletin Board.

12. STOCK OPTIONS AND WARRANTS

Common Stock Options - In 1998, the Company's board of directors and
shareholders approved the 1998 Stock Option and Incentive Plan for directors,
employees and other persons acting on behalf of the Company, under which the
aggregate number of shares authorized for issuance was 10,000,000. In 2000, the
Company's board of directors approved an increase in the number of shares under
the Plan from 10,000,000 to 20,000,000. As of December 31, 2001, the number of
shares available for grant under this plan was 2,760,831.


                                      F-21

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



In 1997, the Company's board of directors approved the 1997 Stock Option and
Incentive Plan for directors, employees and other persons acting on behalf of
the Company, under which the aggregate number of shares authorized for issuance
is 7,500,000. As of December 31, 2001, the number of shares available for grant
under this plan was 2,362,993.

In 1996, the Company's board of directors and shareholders approved the 1996
Directors' Stock Option Plan, under which the aggregate number of shares of
Class A common stock authorized for issuance is 5,400,000. The plan provides
that each director shall receive options to purchase 200,000 shares of Class A
common stock for services rendered as a director during each entire calendar
year or portion of a calendar year in excess of six months. The exercise price
of such options is the closing market price of the Class A common stock on the
date the options are granted. The option term is 10 years from date of grant. As
of December 31, 2001, the number of shares available for grant under this plan
was 2,800,000.

In 1996, the Company's board of directors approved a Long-Term Stock Investment
and Incentive Plan for officers, key employees and other persons acting on
behalf of the Company under which the aggregate number of shares authorized for
issuance is 900,000. The exercise price of these options is the closing market
price of the Class A common stock on the date the options are granted. The term
of the plan is 10 years and options are subject to a three-year vesting
schedule, pursuant to which one-third of the total number of options granted may
be exercised each year. As of December 31, 2001, the number of shares available
for grant under this plan was 773,666.

In 1999, the Company granted options to purchase 400,000 shares of Class A
common stock to new members of the board of directors, waiving the requirement
that they serve for six months prior to such granting. In 2000, options to
purchase 1,000,000 shares of Class A common stock were granted to members of the
board of directors for services performed as directors during the year. In 2001
and 2000, options to purchase 1,500,000 shares and 3,800,000 shares,
respectively, of Class A common stock, were issued to directors who were also
executive officers of the Company for compensation and other services rendered
to the Company. No such options were issued in 1999.

A summary of options granted under the Company's various stock option plans for
the years ended December 31, 2001, 2000 and 1999 is presented below:

<TABLE>
<CAPTION>
                                                        2001                       2000                           1999
                                                       ------                     ------                         -----
                                                              Weighted                      Weighted                     Weighted
                                                              Average                        Average                       Average
                                                Stock         Exercise        Stock         Exercise        Stock        Exercise
                                               Options         Price         Options          Price         Options         Price
                                               ------------  ---------      ------------   ----------     ------------   ----------
<S>                                             <C>          <C>             <C>             <C>           <C>             <C>
  Outstanding at beginning of the year          19,857,700   $   2.97        14,355,900      $  4.06       15,877,782      $  4.10
       Granted                                   8,134,950       0.22         7,116,067         0.65        1,294,000         1.31
       Exercised                                   (35,000)      0.39          (938,697)        1.00              --            --
       Forfeited or canceled                    (3,878,837)      4.23          (675,570)        4.59       (2,815,882)        3.01
                                               ------------                 ------------                  ------------
  Outstanding at end of the year                24,078,813       1.84        19,857,700         2.97       14,355,900         4.06
                                               ============                 ============                  ============
  Exercisable at the end of the year            16,981,906       2.50        18,923,001         3.07       13,484,237         4.20
                                               ============                 ============                  ============
</TABLE>



                                      F-22

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  A summary of options outstanding and options exercisable under the Company's
  various stock option plans at December 31, 2001 is presented below:


<TABLE>
<CAPTION>
                               Options Outstanding                                     Options Exercisable
      --------------------------------------------------------------------------   --------------------------------
                                                   Weighted
                                                   Average           Weighted                           Weighted
        Range of                                  Remaining           Average                            Average
        Exercise              Number             Contractual         Exercise        Number             Exercise
         Prices             Outstanding             Life               Price       Exercisable            Price
         ------             -----------             ----               -----       -----------            -----
<S>   <C>                    <C>               <C>                 <C>             <C>                  <C>
      $ 0.07-1.00            12,887,110        8.9 years           $     0.32         5,881,866         $   0.41
        1.01-1.78             5,028,800        7.9 years                 1.12         4,937,137             1.12
        2.97-4.06             1,893,000        4.6 years                 3.95         1,893,000             3.95
        5.06-6.00               801,000        5.9 years                 5.68           801,000             5.68
        6.50-8.50             3,468,903        5.5 years                 6.51         3,468,903             6.51
                             ----------                                            ------------
      $ 0.07-8.50            24,078,813        7.8 years                 1.84        16,981,906             2.50
                             ==========                                            ============
</TABLE>

  Had compensation expense for these options been determined in accordance with
  the method prescribed by SFAS No. 123, "Accounting for Stock-Based
  Compensation", the Company's net loss per common share would have been
  increased to the pro forma amounts indicated below for the years ended
  December 31, 2001, 2000, and 1999:


<TABLE>
<CAPTION>
                                                                    2001           2000            1999
                                                                   ------         ------           -----
<S>                                                         <C>              <C>             <C>
  Net loss attributable to common stockholders:
              As reported                                   $  24,576,088    $  26,097,081   $  23,773,026
           Pro forma                                           25,336,697       30,602,028      28,567,009
  Basic and diluted net loss per common share:
              As reported                                   $       (0.10)   $       (0.16)  $       (0.31)
           Pro forma                                                (0.11)           (0.19)          (0.37)
</TABLE>

  The weighted average fair value of options granted during the years ended
  December 31, 2001, 2000 and 1999 were $0.27, $0.64 and $1.31, respectively.

  The fair value of options and warrants is estimated on the date granted using
  the Black-Scholes option pricing model with the following weighted-average
  assumptions used for grants during 2001, 2000 and 1999:


                                    2001         2000          1999
                                   ------       ------        -----
  Risk-free interest rate          4.66%        6.08%         5.70%
  Expected dividend yield           0.0%         0.0%          0.0%
  Expected exercise lives         5 years      5 years       5 years
  Expected volatility               130%         130%          102%

  The estimated fair value of options granted is subject to the assumptions
  made, and if the assumptions were to change the estimated fair value amounts
  could be significantly different.


                                      F-23

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  Warrants - A summary of warrants granted by the Company during the years ended
  December 31, 2001, 2000 and 1999 is presented below:


<TABLE>
<CAPTION>
                                                         2001                        2000                         1999
                                               ------------------------      ------------------------   -------------------------
                                                              Weighted                      Weighted                   Weighted
                                                               Average                      Average                     Average
                                                              Exercise                      Exercise                   Exercise
                                                Shares          Price          Shares        Price       Shares          Price
                                               -----------   ----------      -----------   ----------   ------------  -----------
<S>                                            <C>           <C>             <C>           <C>          <C>          <C>
  Outstanding at beginning of the year           3,470,000    $  2.06         3,025,000      $  2.71      1,925,000    $   13.08
       Granted                                     250,000       0.33           945,000         0.93      2,250,000         0.66

       Exercised                                        --         --          (300,000)        0.93           --            --
       Forfeited                                  (845,000)      0.92          (200,000)        8.13     (1,150,000)       16.06
                                               -----------                   -----------                ------------
  Outstanding at end of the year                 2,875,000       2.22         3,470,000         2.06      3,025,000         2.71
                                               ===========                   ===========                ============
  Exercisable at end of the year                 2,875,000       2.22         3,470,000         2.06      2,525,000         3.16
                                               ===========               \    ===========                ============
</TABLE>

  Stock Appreciation Rights - The option plans described above also provide for
  stock appreciation rights that allow the grantee to receive shares of Class A
  common stock equivalent in value to the difference between the designated
  exercise price and the fair market value of Class A common stock at the date
  of exercise. In 2000, stock appreciation rights related to 400,000 outstanding
  stock options with a weighted average exercise price of $1.18 were exercised
  resulting in the recording of $628,000 of selling, general and administrative
  expense. As of December 31, 2001, there are options to purchase 33,334 shares
  of Class A common stock outstanding which provide for stock appreciation
  rights, all of which have an exercise price of $1.00 per share. If not
  exercised by September 2002, the remaining options with these rights will
  expire.

  13.  RELATED-PARTY  TRANSACTIONS

  Purchase of Technology Rights - In February 2000, the Company entered into an
  agreement to purchase from an executive officer and director of the Company,
  all of his rights and interests in certain methods and apparatus for
  integrated voice and pen input for use in computer systems. In payment for
  this technology, the Company granted the executive officer warrants to
  purchase 600,000 shares of the Company's Class A common stock at an exercise
  price of $1.00 per share. The warrants expire on February 10, 2010. Also, the
  Company granted the executive officer the right to repurchase the technology
  from the Company at fair market value if the Company subsequently determines
  not to commercialize the technologies.

  Guarantees of Company Obligations and Related Indemnity Agreement - In 1998
  and 1999, two executive officers and directors and a former executive officer
  and director of the Company (the "Guarantors") guaranteed certain obligations
  of the Company, including obligations under the Series C debentures and
  certain real estate leases.

  In March 1999, the Guarantors pledged 6,000,000 shares of Class A common stock
  as collateral security for the Series C convertible debentures. In
  consideration for this pledge, the board of directors authorized the issuance
  of warrants to the Guarantors to purchase one share of Class A common stock
  for every three shares pledged. The purchase warrants would have a term of 10
  years and an exercise price of 125 percent of the closing bid price of the
  Company's common stock on January 29, 1999, the date of issuance of the
  debentures. The warrants would not have been exercisable for at least six
  months after the date of issuance. The Guarantors subsequently deferred
  receipt of the warrants, but retained the right to accept them at some later
  date. Accordingly, no warrants have yet been issued pursuant to this
  transaction. The Company also agreed to indemnify the Guarantors if they were

                                      F-24

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  required to pay any sums for the benefit of the Company under their guaranty
  of the Series C convertible debentures. The indemnity agreement provides that
  the Company would issue shares of Class A common stock of sufficient value to
  reimburse the guarantors in full, plus interest at 10 percent per annum, for
  all costs associated with meeting the guarantee commitment, including any
  income taxes resulting therefrom.

  Subsequent to the March 1999 Series C debenture issuance, the holders of the
  Series C debentures notified the Company and the Guarantors that a default had
  occurred under certain terms of the stock pledge agreement and that the
  holders had sold the 6,000,000 shares pledged by the Guarantors. The proceeds
  from the sale of the pledged shares were applied to certain penalties incurred
  on the Series D preferred stock (held by a related group of investors) and the
  remainder was applied to reduce the principal balance of the Series C
  convertible debentures as of September 30, 1999 (see Note 8). Under its
  indemnity agreement with the Guarantors, the Company issued 6,000,000
  replacement shares to the Guarantors for the shares sold and reimbursed the
  Guarantors for resulting costs. Accordingly, the Company recorded an expense
  of $1,296,600 during 1999.

  In December 1998, the Guarantors guaranteed certain additional obligations of
  the Company. As security for some of the guarantees, the Guarantors also
  pledged shares of Class A common stock beneficially owned by them. In March
  1999, 143,230 of the shares pledged to a bank were sold by the bank and the
  proceeds were used to pay Company credit card balances and the related accrued
  interest in full totaling $244,824. In May 1999, 100,000 of the shares pledged
  to another creditor of the Company were sold by the creditor and the proceeds,
  totaling $72,335, were used to pay amounts owed by the Company. The Company
  recorded an expense of $146,700 during 1999 to reimburse the Guarantors for
  expenses resulting from these sales.

  During 1999, two executive officers of the Company advanced funds totaling
  $317,159 related to sales of shares of the Company's stock owned by them that
  was pledged as collateral under certain borrowing agreements. The balance was
  subsequently repaid in full in 1999. Also, an executive officer of the Company
  advanced an additional $68,691 to the Company for operating expenses, all of
  which was subsequently repaid to him in 1999.

  SCC Asset Management Inc. - SCC Asset Management,  Inc.  ("SCC"),  formerly
  Studdert  Companies Corp., is a Utah  corporation that previously  provided
  investment  and  management  services to the Company.  Two of the officers,
  directors and owners of SCC are  directors  and  executive  officers of the
  Company.  A third officer,  director and owner of SCC is a former  director
  and executive officer of the Company.  The Company rents office space under
  subleases  from SCC.  Payments  under the  leases are  guaranteed  by three
  officers,  owners and directors of SCC noted above.  The subleases  require
  monthly payments of $10,368. Payments for the sublease and related expenses
  amounted to $149,261 in 2001, $111,196 in 2000 and $124,416 in 1999.

  Other Transactions - In December 1999, the Company issued warrants to purchase
  250,000 of the Company's Class A common stock to a law firm having a
  weighted-average exercise price of $0.31 and a term of five years. During
  2001, 2000 and 1999, the Company paid approximately $847,000, $505,000, and
  $902,000, respectively, to the law firm for services provided to the Company.

  14.  RESEARCH AND PRODUCT DEVELOPMENT

  Synergetics - Prior to March 1997, the Company's scientific research and
  development activities were conducted solely by Synergetics, pursuant to
  product development and assignment contracts (collectively, the "Synergetics
  Agreement"). Under that arrangement, Synergetics provided personnel and
  facilities, and the Company financed the Synergetics research and development
  activities on an as-required basis and the Company was obligated to pay to
  Synergetics a royalty of 10 percent (the "Royalty") of net revenues from sales
  of products incorporating Synergetics' "VoiceBox" technology as well as
  technology derivatives thereof. Synergetics compensated its

                                      F-25

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  developers and others contributing to the development effort, in part, by
  granting "Project Shares" to share in a portion of the Royalty received by
  Synergetics. On April 6, 1998, the Company and Synergetics entered into a
  Royalty Modification Agreement whereby the Company agreed to offer an
  aggregate of 4,800,000 non- transferable common stock purchase warrants to the
  holders of the Project Shares in consideration for which Synergetics agreed to
  cancel any further obligation on the part of the Company to pay the Royalty.
  In 2000, the Company and Synergetics entered into a Restated Royalty
  Modification Agreement whereby the Company paid Synergetics $28,000 to cancel
  the obligation of the Company to pay the Royalty. The Company has no further
  obligations to Synergetics, including prior obligations to issue 4,800,000
  warrants.

  Under the terms of the Synergetics Agreement, as modified, the Company
  incurred no expenses in 2001, $28,000 in 2000 and $50,455 in 1999 for research
  and development efforts.

  Adiva - During 1998 and 1999, the Company utilized the research and
  development services of Adiva. The president of Adiva is also the president of
  Synergetics and IMC2. In 2000, the Company terminated its relationship with
  Adiva and made a final payment of $85,000 in settlement of the relationship.
  The Company incurred expenses of $85,000 in 2000 and $63,395 in 1999 for
  services provided by Adiva.

  IMC2 - In March 1998, the Company entered into a professional services
  agreement with IMC2, a research and development entity, to provide assistance
  to the Company in the continuing development of specific ASR technologies. The
  president of IMC2 is also the president of Synergetics and Adiva. The
  agreement was for an initial term of 36 months and required the Company to
  make monthly payments of $22,000. In February 2001, the Company and IMC2
  agreed to extend the contract on a month-to-month basis. Under the terms of
  the agreement, the Company expended $391,000 in 2001, $264,000 in 2000 and
  $264,000 in 1999 for research and development efforts provided by IMC2.

  Advocast - In July 1997, the Company entered into an arrangement with
  Advocast, Inc. ("Advocast"), an Internet research and development entity,
  whereby Advocast assisted the Company in development of technologies to create
  and locate searchable databases on the Internet through the use of interactive
  video and voice technologies. Under the terms of the arrangement, the Company
  paid $816,750 in 1998 and $705,005 in 1997 for Advocast research and
  development efforts.

  On November 25, 1998, Advocast issued 60,200 shares of Advocast Series A 6%
  convertible preferred stock ("Advocast Preferred Stock") to the Company and
  the chief executive officer of the Company became a director of Advocast. The
  Advocast Preferred Stock, if converted to Advocast common stock, represented
  less than 20 percent of the total outstanding shares of Advocast voting common
  stock. Advocast is a development stage company with minimal operations and no
  market for its stock. As a result, there was substantial uncertainty as to the
  value of the Advocast Preferred Stock and the Company did not record a value
  for the Advocast shares in its consolidated financial statements.

  On February  26, 2001,  Fonix  agreed to provide to Advocast an  additional
  $100,000 of financing under the terms of a six percent secured  convertible
  debenture  due  February  26,  2002.   Fonix  advanced  $57,498  under  the
  debenture.  The debenture was  convertible  into shares of Advocast  common
  stock at a rate of $8.62  per share at the  option  of Fonix.  Furthermore,
  Fonix had the right to convert its Advocast Preferred Stock into additional
  principal  under  the  debenture  at a rate of $25 per  share  of  Advocast
  Preferred  Stock.  If  converted,  the  resulting  balance  due  under  the
  debenture was subject

                                      F-26

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  to the same terms of conversion into Advocast common stock or became due and
  payable six months following the original due date of the convertible
  debenture. Advocast and Fonix also agreed that Advocast would provide
  consulting services to Fonix for development of Internet applications
  of the Company's technologies. The term of the agreement was three months and
  could be renewed at the Company's option for an additional three months. Fonix
  paid $30,000 to Advocast pursuant to the consulting agreement.

  On June 18, 2001, Fonix canceled the debenture, terminated the consulting
  agreement, agreed that Advocast could redeem the Advocast Preferred Stock
  owned by Fonix and issued warrants to Advocast for the purchase of 250,000
  shares of Fonix Class A common stock at an exercise price of $0.33 per share
  in return for a perpetual, fully paid-up, nonexclusive license to certain
  technology developed by Advocast for Internet speech applications. The
  warrants were valued at $62,500 using the Black-Scholes option pricing model
  and were recorded as product development costs at the date of the transaction.
  Fonix has no further obligation to provide funding, management consultation
  and development services or technology to Advocast.

  15.  INCOME TAXES

At December 31, 2001 and 2000, net deferred income tax assets, before
considering the valuation allowance, totaled $37,549,884 and $30,159,421,
respectively. The amount of and ultimate realization of the benefits from the
deferred income tax assets is dependent, in part, upon the tax laws in effect,
the Company's future earnings, and other future events, the effects of which
cannot be determined. The Company has established a valuation allowance for all
deferred income tax assets not offset by deferred income tax liabilities due to
the uncertainty of their realization. The benefit for income taxes in the
accompanying consolidated statement of operations for 1999 represents net
operating loss carryforwards utilized to offset income tax liabilities
associated with the sale of the HSG and the gain on forgiveness of debt. The net
change in the valuation allowance was an increase of $7,390,463 for 2001 and
$5,073,474 for 2000.

At December 31, 2001, the Company has unused federal net operating loss
carryforwards available of approximately $91,290,000 and unused state net
operating loss carryforwards of approximately $82,570,000 which may be applied
against future taxable income, if any, and which expire in various years from
2008 through 2021. The Internal Revenue Code contains provisions which likely
will reduce or limit the availability and utilization of these net operating
loss carryforwards. For example, limitations are imposed on the utilization of
net operating loss carryforwards if certain ownership changes have taken place
or will take place. The Company has not performed an analysis to determine
whether any such limitations have occurred.

The temporary differences and carryforwards which give rise to the deferred
income tax assets as of December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
Deferred income tax assets:                           2001             2000
                                                ---------------  ----------------
       Net operating loss carryforwards:
<S>                                             <C>                  <C>
           Federal                              $    31,039,516      $24,673,999
                                                     24,673,999       24,673,999
           State                                      2,724,704        2,106,874

       Research and development credits               2,366,311        2,224,742
       Accrued liabilities                              800,197          798,240
       Deferred revenues                                389,515          274,689
       Other                                            229,641           80,877
                                                ---------------  ----------------
       Total deferred income tax assets              37,549,884       30,159,421
       Valuation allowance                          (37,549,884)     (30,159,421)
                                                ---------------  ----------------
       Net deferred income tax assets           $            --  $            --
                                                ---------------  ----------------
</TABLE>


                                      F-27

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




  A reconciliation of income taxes at the federal statutory rate to the
Company's effective rate is as follows:






<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                                   2001            2000           1999
                                                                -----------     ---------      ---------

<S>                                                             <C>             <C>            <C>
  Federal statutory income tax rate                                34.0%          34.0%          34.0%

  State and local income tax rate, net of federal
  benefit                                                           3.3            3.3            3.3
  Non-deductible items                                             (7.8)         (14.8)          (9.0)
                                                                                 (22.2)


  Valuation allowance                                             (22.2)                        (14.0)
                                                                -----------                    ---------
  Effective income tax rate                                         0.0%           0.3%         14.3%
                                                                ===========     =========      =========
</TABLE>







  16.  COMMITMENTS AND CONTINGENCIES

  Executive Employment Agreements - The Company has employment agreements with
  two executive officers that were initiated November 1, 1996 and amended
  effective January 31, 2000 to extend the term of the agreements and reduce the
  base compensation. The current annual base salary for each executive officer
  is $309,400 and may be adjusted upward in future years as deemed appropriate
  by the Company's board of directors. The expiration date of the agreements is
  December 31, 2005. In July 2000, as compensation for extending the term of
  each agreement at a compensation level less than provided in the original
  agreement, each executive was granted options to purchase 1,400,000 shares of
  the Company's Class A common stock at an exercise price of $1.01. These
  options vested immediately and expire on July 19, 2010.

  In the event that, during the contract term, both a change of control occurs,
  and within six months after such change in control occurs, the executive's
  employment is terminated by the Company for any reason other than cause,
  death, or retirement, the executive shall be entitled to receive an amount in
  cash equal to all base salary then and thereafter payable within 30 days of
  termination.

  Another executive officer of the Company resigned in January 1999 and his
  employment agreement was canceled. He subsequently entered into a separation
  agreement pursuant to which he was paid $250,000 per year for the years ended
  January 31, 2000 and 2001, and $100,000 for the year ended January 31, 2002.
  The Company has no further obligations to the former executive.

  During 2000, the Company entered into  employment  contracts with two other
  executive  officers  which expire in January 31, 2003.  The minimum  annual
  salaries  required  by  these  agreements  total  $460,000.  The  executive
  employees are also entitled to other normal benefits extended to executives
  and employees of the Company.  In the event that, during the contract term,
  both a change of control occurs and, within six months after such change in
  control was to occur,  the executive  officers'  services are terminated by
  the  Company  for any reason  other than cause,  death or  retirement,  the
  executive  officers shall be entitled to receive an amount in cash equal to
  all base salary then and thereafter  payable within 30 days of termination.
  The agreements contain a non-disclosure, confidentiality,  non-solicitation
  and non-competition  clause. Under the terms of the non-competition clause,
  each

                                      F-28

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  executive has agreed that for a period of 18 months after the termination of
  his employment with the Company the executive will not engage in any capacity
  in a business which competes with or may compete with the Company.

  Other Employment Agreements - On January 23, 2001, the Company entered into an
  employment agreement with an employee under which the employee is paid an
  annual salary of $225,000 and received options to purchase 600,000 shares of
  the Company's Class A common stock at an exercise price of $0.49 per share.
  Vesting of the options was to occurr over the term of the contract as follows:
  100,000 on January 23, 2001, 100,000 on November 30, 2001, 200,000 on November
  30, 2002, and 200,000 on November 30, 2003. The agreement was to expire
  November 30, 2003, but was terminated by mutual agreement.

  Professional Services Agreements - In 2001, the Company entered into a
  professional services agreement with a marketing consultant. The terms of the
  agreement require monthly payments of $20,000 for a period of 24 months. Also,
  in connection with the agreement, the Company issued options to purchase
  500,000 shares of Class A common stock. The options were valued at $0.06 per
  share using the Black-Scholes option pricing model assuming a risk-free
  interest rate of 4.62 percent, expected dividend yield of 0 percent; expected
  exercise life of five years, and expected volatility of 130 percent. The
  resulting amount was recorded as deferred consulting expense and is being
  amortized into general and administrative expense over the period of service.

  In July 2000, the Company entered into professional services agreements with
  two consulting firms. In connection with these agreements, the Company issued
  a total of 1,000,000 shares of Class A common stock. The stock was valued at
  $1,015,600 using the fair value of the Class A common stock on the date each
  contract commenced and was recorded as deferred consulting expense and
  amortized as general and administrative expense over the period of service.

  In May 2000, the Company issued 250,000 shares of Class A common stock (having
  a market value of $312,500 at that date) to an unrelated third party in
  consideration for services rendered in connection with equity financing
  transactions.

  In January 2000, the Company issued warrants to purchase 300,000 shares of
  Class A common stock for services rendered by a professional services firm.
  The warrants have a three-year life, exercise prices ranging from $0.28 to
  $1.25 per share and vested during the year ended December 31, 2000.

  In December 1999, the Company entered into professional services agreements
  with two consulting firms. In connection with these agreements, the Company
  issued 1,000,000 shares of Class A common stock. The stock was valued at
  $375,000 using the fair value of the Class A common stock on the date each
  contract commenced which amount was recorded as deferred consulting expense
  and amortized as general and administrative expense over the period of service
  in 2000 and 1999.

  In December 1999, the Company issued warrants to purchase 1,000,000 shares of
  Class A common stock to professional advisors and consultants. The warrants
  were valued at $0.26 per share using the Black-Scholes option pricing model
  assuming a risk-free interest rate of 6.33 percent, expected dividend yield of
  0 percent; expected exercise life of five years, and expected volatility of
  130 percent. The resulting amount was recorded as deferred consulting expense
  and amortized as general and administrative expense over the period of service
  in 2000.

  Babel Infovox AB ("Infovox") is a Swedish telecommunications company that has
  developed multiple language capability for integration into TTS applications.
  In October 2000, the Company entered into a revenue sharing arrangement with
  Infovox that provides that Fonix will pay a percentage of revenue to Infovox
  for Fonix licenses of TTS technology that include languages other than
  American English provided by Infovox. In connection with

                                      F-29

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  this agreement, the Company has made prepayments of $20,000, against which
  payment due to Infovox are credited. Through December 31, 2001, the Company
  had credited $2,898 against this prepayment.

  Operating Lease Agreements - The Company leases certain facilities and
  equipment used in its operations. The amount of commitments for non-cancelable
  operating leases in effect at December 31, 2001, were as follows:


         Year ending December 31,
                    2002                            $    881,224
                    2003                                 517,379
                    2004                                 294,652
                                                   -------------
                                                    $  1,693,255

  The Company incurred rental expense, net of subleases, of $627,304, $413,382
  and $764,930 during 2001, 2000 and 1999, respectively, related to these
  leases.

  Effective May 14, 1999, the Company entered into an agreement to sublease
  10,224 square feet of its Draper, Utah facility to an unrelated third party.
  The agreement required the sublessee to pay $13,961 per month, or
  approximately 40 percent of the Company's monthly obligation under the primary
  lease agreement. The sublease agreement expired December 31, 2000.

  Effective May 25, 1999, the Company entered into an agreement to sublease its
  Cupertino, California facility to an unrelated third party. The agreement
  requires the sublessee to pay $35,432 per month through May 31, 2003.

  Forgiveness of Trade Payables and Accrued Interest - The Company negotiated
  reductions in amounts due various trade vendors amounting to $78,864 in 2000
  and $526,697 in 1999. Additionally, the Company negotiated reductions in
  accrued interest owed to certain note holders amounting to $229,055 in 1999.
  These amounts have been accounted for as an extraordinary item in the
  accompanying consolidated statements of operations.

  17. LITIGATION

  Oregon Graduate  Institute - On July 28, 1999,  Oregon  Graduate  Institute
  ("OGI")  filed a notice of  default,  demand for  mediation  and demand for
  arbitration with the American Arbitration  Association.  In its demand, OGI
  asserted  that the Company was in default under three  separate  agreements
  between the Company and OGI in the total  amount of  $175,000.  In December
  2000, a settlement  was reached that required the Company to pay $27,500 in
  cash and issue 260,145 shares of Class A common stock, valued at $81,295 at
  the date of settlement,  and required that OGI return equipment  previously
  loaned by Fonix.

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


                                      F-30

<PAGE>


                                Fonix Corporation
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Other - The Company is involved in various claims and proceedings arising in
  the ordinary course of business. Management believes, after consultation with
  legal counsel, that the ultimate disposition of these matters will not
  materially impact the consolidated financial position, liquidity or results of
  operations of the Company.

  18.  EMPLOYEE PROFIT SHARING PLAN

  The Company has a 401(k) profit sharing plan covering essentially all of its
  full-time employees. Under the plan, employees may reduce their salaries, in
  amounts allowed by law, and contribute the salary reduction amount to the plan
  on a pretax basis. The plan also allows the Company to make matching and
  profit sharing contributions as determined by the board of directors. To date,
  no matching or profit sharing contributions have been made by the Company.

  19.  SIGNIFICANT CUSTOMERS

  Of the Company's revenue for 2001, $593,371 was from sources in the United
  States and $14,273 from South Korea. All of the Company's revenues for 2000
  and 1999 were sourced from the United States. In 2001, no single customer
  generated more than 10 percent of the Company's total revenue. Of the $656,853
  of revenues in 2000, $125,000 was from Motorola, and $87,250 was from
  NuvoMedia, Inc. Of the $439,507 of revenues in 1999, $209,401 was from one
  customer, General Magic. No other customer accounted for more than 10 percent
  of the Company's total revenues for the years presented.

  20.  SUBSEQUENT EVENT

  Stock Options - Subsequent to December 31, 2001, through February 26, 2002,
  the Company granted 5,042,000 options to employees, officers and directors
  under Company option plans. The options were granted at the quoted market
  price on the date of the grant and have exercise prices ranging from $0.05 to
  $0.11 per share. Of the options granted, 1,000,000 vest immediately and the
  balance vest over three years.

                                      F-31