Fonix Corporation, incorporated in 1985, is a communications and technology company that provides integrated telecommunications services through Fonix Telecom, Inc. and LecStar Telecom, Inc., and value-added speech technologies through the Fonix Speech Group. The combination of interactive speech technology and integrated telecommunications services allows Fonix to provide customers with solutions to enhance and expand their communications needs. The Company serves markets that are adopting speech-enabled interfaces, solutions and applications. On February 24, 2004, the Company completed its acquisition of all of the capital stock of LTEL Holdings Corporation (LTEL) and its wholly owned subsidiaries, LecStar Telecom, Inc. and LecStar DataNet, Inc. (collectively, LecStar). LecStar, an Atlanta-based competitive local exchange carrier (CLEC), offers wire line voice, data, long distance and Internet services to business and residential customers throughout BellSouth's southeastern United States operating territory. Telecommunications Services On August 17, 2004 LecStar field tested with Duke Power delivery of broadband over power lines (BPL) and voice over Internet protocol (VoIP) via power lines. On December 20, 2004, the trial was expanded from 10,000 to 15,000 homes in Duke Power's service area in North and South Carolina from the original 500-home trial. On October 4, 2004 Fonix launched VoIP services for small to medium-sized business customers in the southeastern United States through LecStar. VoIP service provides customers with an alternative to private branch exchange (PBX) or central office exchange (Centrex) services with Internet protocol (IP). On January 13, 2005, Fonix announced the official formation of Fonix Telecom, Inc., a wholly owned subsidiary. Fonix Telecom will begin offering new telecommunications products and services, including VoIP, as well as next-generation technologies, such as BPL through specialized sales and product groups. The Fonix IP phone service, known as Fonix Fonesm, offers VoIP to business customers. It provides all Class 5 switching features, including E911, a 911 service with abilities to locate mobile customers, conference calling, unified messaging, find me follow me (virtual call forwarding) and a user portal. The service works over the customer's existing broadband connection. LecStar's BPL service allows users to turn any electrical outlet in their home into a gateway to the Internet by plugging in their computer and BPL modem. LecStar Telecom, a wholly owned subsidiary of Fonix, provides wireline voice, data, long distance and Internet telephone services utilizing traditional lines. LecStar serves small to medium-sized businesses and residential customers with focus on high-density metropolitan areas and under-served smaller communities. LecStar Telecom's provisioning systems are electronically bonded with BellSouth, enabling the efficient ordering of services in real time. LecStar Telecom has entered into interconnection agreements with incumbent carriers throughout the southeastern United States. Interconnection and resale agreements have been entered with BellSouth, Qwest, US LEC and Global Crossings for access to other network and wholesale access services. LecStar has entered into partnerships with local electric utilities in several parts of the southeastern United States to market co-branded voice and data services to residential and business customers. LecStar has also developed marketing partnerships with interconnect companies and value-added agents that market more complex telecommunication services to medium and large businesses. Fonix competes with BellSouth, Verizon, US LEC, ITC Deltacom, TalkAmerica and Z-Tel. Value-added Speech Technologies The Fonix Speech Group, an operating division of Fonix, provides speech technology development tools and solutions for mobile/wireless devices, interactive videogames, toys and appliances, computer telephony systems and the assistive market. The speech interfaces are value-added solutions

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