FRANKLIN TELECOMMUNICATIONS CORP, S-1/A, 1997-11-07

FRANKLIN TELECOMMUNICATIONS CORP
S-1/A, 1997-11-07
COMPUTER COMMUNICATIONS EQUIPMENT

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997
REGISTRATION NO. 333-24791
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

FRANKLIN TELECOMMUNICATIONS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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CALIFORNIA 3670 95-3733534
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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733 LAKEFIELD ROAD, WESTLAKE VILLAGE, CALIFORNIA 91361 (805) 373-8688
(ADDRESS AND TELEPHONE NUMBER, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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FRANK W. PETERS
733 LAKEFIELD ROAD, WESTLAKE VILLAGE, CALIFORNIA 91361
(805) 373-8688
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)

COPY TO:

ROBERT J. ZEPFEL, ESQ.
PHILLIPS & HADDAN LLP
4675 MACARTHUR COURT, SUITE 710
NEWPORT BEACH, CALIFORNIA 92660
(714) 752-6100

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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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PROSPECTUS

3,103,750 SHARES

FRANKLIN TELECOMMUNICATIONS CORP.

COMMON STOCK

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All of the 3,103,750 shares of Common Stock offered hereby, including
2,055,000 shares issuable upon exercise of warrants held by certain investors
(the "Warrants"), are being sold by the Selling Shareholders. The Company will
not receive any of the proceeds from the sale of shares by the Selling
Shareholders; however, it may receive proceeds from the exercise of warrants
held by the Selling Shareholders, and an additional amount equal to 30% of the
net proceeds received by the Selling Shareholders from the sale of the shares,
to the extent such net proceeds exceed $4.00 per share. See "Selling
Shareholders" and "Plan of Distribution." The Company's Common Stock is traded
on the OTC Bulletin Board under the symbol FTEL. The closing price of the
Company's Common Stock on November 5, 1997 was $5.81 per share.

The Company designs, manufactures and markets high speed communications
products and subsystems. The products are marketed through Original Equipment
Manufacturers ("OEMs") and distributors, as well as directly to end users. In
addition, through its majority-owned subsidiary, FNet, the Company is a
provider of Internet access and services to businesses and individuals.

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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND LIMITED
LIQUIDITY. SEE "RISK FACTORS" ON PAGE 5.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

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The date of this Prospectus is , 1997.
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The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm after
the end of each fiscal year. In addition, the Company will furnish to its
stockholders quarterly reports for the first three quarters of each fiscal
year containing unaudited financial and other information after the end of
each fiscal quarter, upon written request to the Secretary of the Company.

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PROSPECTUS SUMMARY

This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual events and results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary should be read in conjunction with, and is
qualified in its entirety by, the more detailed information and financial
statements and notes thereto appearing elsewhere in this Prospectus.

THE COMPANY

Franklin Telecommunications Corp. (the "Company") designs, manufactures and
markets high speed communications products and subsystems. The products are
marketed through Original Equipment Manufacturers ("OEMs") and distributors, as
well as directly to end users. In addition, through its majority-owned
subsidiary, FNet Corp. ("FNet"), the Company is a provider of Internet access
and services to businesses and individuals. The Company is a California
corporation formed in 1981. Its address is 733 Lakefield Road, Westlake
Village, California 91361 and its telephone number is (805) 373-8688.

THE OFFERING

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By Selling Shareholders............ 3,103,750 shares of the Company's Common
Stock, including 2,055,000 shares issuable
upon the exercise of warrants held by
certain investors (the "Warrants"),
611,750 shares previously issued upon the
exercise of warrants and stock options,
and 437,000 shares issued in connection
with certain acquisitions made by the
Company. The Company will not receive any
proceeds from the sale of these shares.
However, if the Selling Shareholders who
hold Warrants determine to exercise their
Warrants in order to sell shares
hereunder, the Company will receive the
net proceeds of the exercise of the
Warrants. If all of the Warrants were
exercised, the Company would receive
proceeds of $2,628,750, plus an additional
amount equal to 30% of the net proceeds of
the sale of the shares issued upon
exercise of the Warrants, to the extent
such net proceeds exceed $4.00 per share.
Common Stock Currently Outstanding. 16,082,686 shares, including the 2,055,000
shares issuable upon exercise of the
Warrants.
Risk Factors....................... The securities involve a high degree of
risk and limited liquidity. See "Risk
Factors."
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SELECTED FINANCIAL DATA

The following selected financial data has been derived from the Company's
audited consolidated financial statements included elsewhere herein.

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<CAPTION>
YEARS ENDED JUNE 30,
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1995 1996 1997
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STATEMENT OF OPERATIONS DATA (IN THOUSANDS,
EXCEPT PER SHARE DATA AND OUTSTANDING
SHARES):
Net sales.................................. $ 1,481 $ 430 1,735
Gross profit (loss)........................ 963 (160) 745
Loss from operations....................... (173) (1,497) (2,775)
Net loss................................... (160) (1,467) (2,824)
Net loss per common share.................. $ (0.02) $ (0.14) (.23)
Weighted average common shares outstanding. 6,475,984 10,279,281 12,267,991
</TABLE>

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<CAPTION>
JUNE 30,
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1995 1996 1997
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BALANCE SHEET DATA (IN THOUSANDS):
Total assets........................................ $ 998 $ 712 $ 3,514
Total liabilities................................... $ 1,384 $ 1,461 $ 1,939
Accumulated deficit................................. $(4,684) $(6,151) $(8,975)
</TABLE>

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RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should carefully be considered in evaluating an investment in the
shares of Common Stock offered hereby.

OPERATING LOSSES

The Company has incurred operating losses in each of its last three fiscal
years and has an accumulated deficit, as of June 30, 1997, of $8,975,000. The
Company's operating losses have resulted from a number of factors, including
reduced demand for the Company's legacy hardware products, increasing expenses
relating to the development of new hardware products, expenses related to
installing the infrastructure for the Internet services business of its
majority-owned subsidiary, FNet, and increasing sales and marketing expenses
to promote new products and services. During the year ended June 30, 1997, the
Company's subsidiary, FNet, raised approximately $2,059,000 in equity
financing. Additionally, in September and October 1997 the Company received
net proceeds of $5,957,500 from private financings. See "Business--Recent
Financings." The Company has been dependent on this equity financing to
sustain its ongoing operations. Consequently, an investment in the Company is
highly speculative and no assurance can be given that purchasers of the shares
of Common Stock offered hereby will realize any return on their investment or
that purchasers will not lose their entire investment.

ORGANIZATION OF SUBSIDIARY AND POTENTIAL CONFLICTS OF INTEREST; NEW BUSINESS
VENTURE

During 1996 the Company restructured its subsidiary, Franklin Datacom, Inc.
from a manufacturer of communications hardware into an Internet service
provider and changed its name to FNet. The Company has devoted significant
resources and management time to the organization and development of FNet. As
of June 30, 1997, the Company owned approximately 71% of the common stock of
FNet, with the balance owned by members of management, including the Company's
President, and certain investors. To the extent that FNet issues additional
securities, either for cash, in connection with acquisitions or upon the
exercise of options, the Company's percentage ownership will be reduced. As of
June 30, 1997 there were options to purchase 2,634,000 shares of FNet
outstanding, constituting approximately 11.9% of the outstanding shares. While
management believes that the growth of FNet will eventually inure to the
benefit of the Company through increased demand for its communications
hardware as well as the value of its interest in FNet, it may have an adverse
effect on the Company's principal business in the short term due to competing
demands on the Company's resources and management. Also, the fact that members
of the Company's management, including its President, hold a direct interest
in FNet may pose conflicts of interest over the long term. FNet is in the
nature of a new business venture, with no significant assets or revenues from
operation; accordingly, it can be expected that its future operating results
will be subject to many of the problems, expenses, delays and risks inherent
in the establishment of a new business enterprise, over many of which the
Company has no control. There can be no assurance, therefore, that FNet will
be able to achieve or sustain profitability in future periods or that the
Company's investment of time and resources into it will be repaid.

RESULTS FOR YEAR ENDED JUNE 30, 1997; DEPENDENCE ON A SINGLE CUSTOMER

While the Company's revenues for the year ended June 30, 1997 showed a
significant increase over the revenues for the prior period, 38% of the
increase was due to sales of the Company's Wide Area Network products to a
single customer, Revco Drug Stores. Such products are technologically dated,
and the demand for them during the period was due principally to expansion of
the business of the customer that already had a significant investment in a
wide area network utilizing the products. Accordingly, there can be no
assurance that revenues for subsequent periods will remain at these levels,
and it is unlikely that the Company will receive significant additional orders
for its Wide Area Network products from this customer or others.

DEPENDENCE ON MAJOR CUSTOMERS

Sales of the Company's communications products are concentrated in a
relatively small number of customers, who account for a significant portion of
revenues. During the fiscal year ended June 30, 1996, the

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customers accounting for over 10% of the Company's product sales were Hughes
Aircraft Company (18%), Citibank (17%), Vanstar (13%) and Revco Drug Stores
(12%). For the year ended June 30, 1997 the customers accounting for over 10%
of revenues, were Revco Drug Stores (29%) and Citibank (10%). The loss of any
of these major customers could have a material adverse effect on the Company.
The Company has no ongoing supply contracts with any of these customers.

GENERAL RISKS OF BUSINESS

Any future success that the Company might enjoy will depend upon many
factors, including factors which may be beyond the control of the Company or
which cannot be predicted at this time. These factors may include
technological advances or product obsolescence, increased levels of
competition, including the entry of additional competitors and increased
success by existing competitors, changes in general economic conditions,
increases in operating costs including costs of supplies, personnel, and
equipment, reduced margins caused by competitive pressures and other factors,
and changes in governmental regulation imposed under federal, state or local
laws.

RISKS ASSOCIATED WITH MANAGEMENT OF POTENTIAL GROWTH

The Company's growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational, financial and information
systems resources. To accommodate its current size and manage growth, the
Company must continue to implement and improve its operational, financial and
information systems, and expand, train and manage its employee base.
Additionally, expansion of the Company's information and network systems is
required to accommodate its growth. There can be no assurance that the Company
will be able to effectively manage the expansion of its operations, or that
the Company's facilities, systems, procedures or controls will be adequate to
support the Company's operations. The inability of the Company to manage
effectively its future growth would have a material adverse effect on the
Company. This problem may be exacerbated to the extent the Company continues
to acquire additional businesses, as each such business must then be
integrated into the Company's operations and systems.

Demand on the Company's network infrastructure, technical staff and
resources has grown rapidly with the Company's expanding customer base, and
the Company has occasionally experienced difficulties satisfying the demand
for its Internet services. If such difficulties were to become widespread, it
could adversely impact operations by causing subscribers or potential
subscribers to utilize competitive Internet service providers. There can be no
assurance that the Company's infrastructure, technical staff and resources
will be adequate to facilitate the Company's growth. The Company believes that
its ability to provide timely access for customers and adequate customer and
technical support largely will depend on its ability to attract, identify,
train, integrate and retain qualified personnel. Failure to provide adequate
customer and technical support services would adversely affect the Company's
ability to maintain and increase its customer base, and could therefore have a
material adverse effect on the Company. See "Dependence on Network
Infrastructure and Capacity; System Failure and Security Risks," "Dependence
on Key Personnel," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "Business."

NEED FOR ADDITIONAL CAPITAL

The proceeds of this offering will be received by the Selling Shareholders.
While the Company may receive cash from the exercise of warrants held by the
Selling Shareholders, there can be no assurance that the Company will derive
any specific amount of proceeds from this offering. Developments in the
Company's business and possible expansion into other markets could indicate
that the Company should expand its business at a faster rate than that
currently planned for. Moreover, there can be no assurance that the Company
will not encounter unforeseen difficulties that may deplete its capital
resources more rapidly than anticipated, which would require that the Company
seek additional funds through equity, debt or other external financing. In any
event, it is likely that the Company will attempt to raise additional capital
to meet its obligations and to accelerate its growth. There can be no
assurance that any additional capital resources which the Company may need
will be available to the Company if and when required, or on terms that will
be acceptable to the Company. If additional financing is required, or desired,
the Company may be required to forgo a substantial interest in its future
revenues or dilute the equity interests of existing shareholders, and a change
in control of the Company may result.

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QUARTERLY OPERATING RESULTS

The Company's operating results may vary significantly due to a variety of
factors, including the availability and cost of materials and components, the
introduction of new products by the Company or its competitors, the timing of
the Company's marketing efforts, pricing pressures, general economic and
industry conditions that affect customer demand, and other factors.

DEPENDENCE ON KEY PERSONNEL

The Company's success will depend to a significant extent upon the continued
service of its founder, Frank W. Peters, the Company's President and Chief
Executive Officer. The Company also will depend on its ability to attract,
retain and motivate such additional qualified personnel as may be needed. The
competition for such personnel is intense. There can be no assurance that the
Company will be successful in retaining its existing key employees or in
attracting and retaining any additional personnel it requires. The Company
does not maintain "key man" insurance on any of its employees.

COMPETITION; NEW PRODUCTS AND TECHNOLOGICAL CHANGES

The data communications industry is extremely competitive. The Company's
principal competitors in the manufacture of communications hardware are
Telematics, Micom, Memotech Data, Dynatech Corporation, Ascend Communications,
Cisco Systems and U.S. Robotics. Most of these companies have substantially
greater marketing, financial, technical and field support resources than the
Company. In addition, the Company could face strong competition from a number
of established computer and telecommunications firms which may enter the
market in the future. The field of data communications is also marked by rapid
changes in technology, which can cause products to become obsolete over very
short time frames.

The performance of the Company will depend on the success of its existing
hardware products and services as well as its ability to develop and market
new hardware products and services or enhance its existing hardware products
and services to meet changing technology, pricing considerations and other
market factors. The Company's business would be adversely affected if the
Company were to incur delays in developing new hardware products and services
or enhancements to existing hardware products and services or if such hardware
products and services or enhancements did not gain market acceptance. There
can be no assurance that the Company's existing or future hardware products
and services will be successful or profitable. In addition, there can be no
assurance that new hardware products and services developed by others will not
render the Company's hardware products and services noncompetitive or
obsolete.

The Internet services market in which the Company's FNet subsidiary operates
is extremely competitive, and the Company expects competition in this market
to intensify in the future. FNet's current and prospective competitors include
many large companies that have substantially greater market presence and
financial, technical, marketing and other resources than FNet. FNet competes
(or in the future is expected to compete) directly or indirectly with the
following categories of companies: (i) national and regional Internet Service
Providers such as IDT Corporation, MindSpring Enterprises, Inc., Netcom On-
line Communication Services, Inc., PSINet, Earthlink and UUNET; (ii)
established online services such as America Online, CompuServe, Prodigy and
the Microsoft Network; (iii) computer software and technology companies such
as Microsoft; (iv) national telecommunications companies such as AT&T Corp.,
MCI Communications Corporation and Sprint Corporation; (v) regional Bell
operating companies ("RBOCs"); (vi) cable operators such as Comcast
Corporation, Tele-Communications, Inc. and Time Warner, Inc.; and (vii)
nonprofit or educational Internet Service Providers.

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industry may be able to provide customers with reduced communications costs in
connection with their Internet access services, reducing the overall cost of
Internet access and significantly increasing pricing pressures on FNet. For
example, AT&T has recently expanded its Internet services offerings. The
Company believes that AT&T's expansion has substantially increased pricing
pressure in the industry. In addition, certain of FNet's online competitors,
including America Online, the Microsoft Network and Prodigy, have recently
introduced unlimited access to the Internet and their proprietary content at
flat rates that are generally equivalent to FNet's monthly flat rate, and do
not require a set-up fee. Certain of the RBOCs have also introduced
competitive flat-rate pricing for unlimited access (without a set-up fee for
at least some period of time). As a result, competition for active users of
Internet services has intensified. There can be no assurance that FNet will be
able to offset the adverse effect on revenues of any necessary price
reductions resulting from competitive pricing pressures by increasing the
number of its customers, by generating higher revenue from enhanced services,
by reducing costs or otherwise.

Competition is also expected to focus increasingly on overseas markets, in
which Internet services are just beginning to be introduced. Although the
Company has established sales of its data communications hardware products
overseas, FNet is not presently seeking to penetrate overseas markets for
Internet services. To the extent that the ability to provide Internet services
overseas becomes a competitive advantage in the Internet services industry,
the failure of FNet to penetrate overseas markets may result in FNet being at
a competitive disadvantage relative to other Internet access providers.

DEPENDENCE ON NETWORK INFRASTRUCTURE AND CAPACITY; SYSTEM FAILURE AND SECURITY
RISKS

The future success of FNet's business will depend on the capacity,
reliability and security of its network infrastructure. FNet will be required
to expand and improve this infrastructure as the number of customers and the
amount and type of information its customers communicate over the Internet
increases, and the means by which customers connect to the Internet evolve.
Such expansion and improvement may require substantial financial, operational
and managerial resources. There can be no assurance that the Company will be
able to expand or improve its network infrastructure to meet any additional
demand or changing customer requirements on a timely basis or at a
commercially reasonable cost, if at all.

Capacity constraints have occurred at many Internet Service Providers, both
at the level of particular "points of presence" ("POPs") (affecting only
customers attempting to use that particular POP) and in connection with system
wide services (such as e-mail and news services, which can affect all
customers). From time to time, FNet has experienced delayed delivery from
suppliers of new telephone lines, modems, servers and other equipment used by
FNet in providing its services. Any severe shortage of new telephone lines,
modems, servers or other equipment could result in incoming access lines
becoming full during peak times, causing busy signals for customers who are
trying to connect to the Internet. Similar problems may occur if FNet is
unable to expand the capacity of its various network, e-mail, World Wide Web
and other servers quickly enough to keep pace with demand from the Company's
expanding customer base. If the capacity of such servers is exceeded,
customers will experience delays when trying to use a particular service.
Further, if FNet does not maintain sufficient capacity in its network
connections, customers will experience a general slowdown of all services on
the Internet. Any of these events could cause customers to terminate use of
FNet's services. Accordingly, any failure of FNet to expand or enhance its
network infrastructure on a timely basis, or to adapt it to an expanding
customer base, changing customer requirements or evolving industry standards,
could have a material adverse effect on the Company.

FNet's operations are dependent on its ability to protect its
telecommunications and computer equipment against damage from fire,
earthquake, power loss, telecommunication failure and similar events. The
occurrence of a natural disaster or another unanticipated problem at the
Company's headquarters and network hub or at POPs through which customers
connect to the Internet could cause interruptions in the services provided by
FNet. In addition, failure of FNet's telecommunications providers to provide
the data communications capacity required by FNet as a result of a natural
disaster, operational disruption or for any other reason could cause
interruptions in the services provided by FNet, which could have a material
adverse effect on the Company.

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FNet's network infrastructure may be vulnerable to computer viruses and
other similar disruptive problems caused by its customers, other Internet
users or other third parties. Computer viruses and other problems could lead
to interruptions, delays in or cessation of service to FNet's customers, as
well as corruption of FNet's or its customers' computer systems. Inappropriate
use of the Internet by third parties could also potentially jeopardize the
security of confidential information stored in the computer systems of FNet or
those of its customers, which may cause losses to FNet or its customers, or
deter certain persons from using FNet's services. The Company expects that
FNet's customers may increasingly use the Internet for commercial transactions
in the future. Any network malfunction or security breach could cause these
transactions to be delayed, not completed or completed with compromised
security. Alleviating problems caused by computer viruses or other
inappropriate uses or security breaches may cause interruptions, delays or
cessation in service to FNet's customers, which could have a material adverse
effect on the Company. In addition, there can be no assurance that customers
or others will not assert claims of liability against FNet or the Company as a
result of these events.

FNet does not presently maintain redundant or backup Internet services or
backbone facilities or other redundant computing and telecommunications
facilities. Any accident, incident or system failure that causes interruptions
in FNet's operations could have a material adverse effect on its ability to
provide Internet services to its customers, and, in turn, on the Company.

PROPRIETARY TECHNOLOGY

The Company's success will depend in part on protecting its proprietary
technology. While the Company has patents covering certain of its products,
its relies principally on trade secret law, confidentiality agreements and its
technical abilities and responsiveness to the demands of customers to protect
its proprietary rights. See "Business--Patents and Trademarks." There can be
no assurance that the Company's technology will not be subject to
misappropriation or independent third-party development of similar technology.

REGULATORY MATTERS

Regulations of the Federal Communications Commission (the "FCC") affect
various products of the Company. Certain regulations require that products
which reside on a customer's premises and interconnect the public switched
network meet certain standards to prevent harm to the network. Other
regulations limit the levels of electromagnetic radiation which may emanate
from an electronic device located on a customer's premises. The Company
currently complies with these regulations and foresees no problem in complying
with these regulations in the future. Changes in existing laws and regulations
which govern the telecommunications industry could affect the business of the
Company.

FNet provides Internet services, in part, through data transmissions over
public telephone lines. These transmissions are governed by regulatory
policies establishing charges and terms for wire line communications. FNet is
not currently subject to direct regulation by the FCC or any other
governmental agency, other than regulations applicable to businesses
generally. However, in the future FNet could become subject to regulation by
the FCC or another regulatory agency as a provider of basic telecommunications
services. Several long distance telephone carriers have filed a petition with
the FCC seeking a declaration that Internet telephone service is a
"telecommunications service" subject to common carrier regulation. Such a
declaration, if enacted, would create substantial barriers to FNet's entry
into the Internet telephone market. Also, a number of local telephone
companies have asked the FCC to levy access charges on "enhanced service
providers," which may be deemed to include Internet Service Providers.
Although the Chairman of the FCC has indicated his opposition to levying
service charges against Internet Service Providers, local interconnection
charges could be levied in the future. Moreover, the public service
commissions of certain states are exploring the adoption of regulations that
might subject Internet Service Providers to state regulation.

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such as AT&T to offer local telephone service and allows RBOCs to provide
electronic publishing of information and databases. Competition from these
companies could have a material adverse effect on the Company. See "Business--
Government Regulation."

POTENTIAL LIABILITIES ASSOCIATED WITH OPERATING AN INTERNET SERVICE PROVIDER

The law relating to the liability of Internet Service Providers and online
service companies for information carried on or disseminated through their
networks has not yet been definitively established. Several private lawsuits
seeking to impose such liability upon Internet Service Providers and online
services companies are currently pending. Although no such claims have been
asserted against FNet to date, there can be no assurance that such claims will
not be asserted in the future, or if asserted, will not be successful. The
Telecommunications Act imposes fines on any entity that knowingly (i) uses any
interactive computer service or telecommunications device to send obscene or
indecent material to minors; (ii) makes obscene or indecent material available
to minors via an interactive computer service; or (iii) permits any
telecommunications facility under such entity's control to be used for the
purposes detailed above. As the law in this area develops, the potential
imposition of liability upon FNet for information carried on and disseminated
through its network could require it to implement measures to reduce its
exposure to such liability. The implementation of such measures could require
the expenditure of substantial resources or the discontinuation of certain
service offerings. Any costs that are incurred as a result of such
expenditure, contesting any such asserted claims or the imposition of
liability could have a material adverse effect on FNet.

Due to the increasing use of the Internet, it is possible that additional
laws and regulations may be adopted with respect to the Internet covering
issues such as content, user privacy, pricing, libel, intellectual property
protection and infringement and technology export and other controls. Changes
in the regulatory environment relating to the Internet services industry,
including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition,
could have a material adverse effect on the Company.

DEPENDENCE ON TELECOMMUNICATIONS CARRIERS

FNet relies on local telephone companies and other companies to provide data
communications capacity via local telecommunications lines and leased long
distance lines for its Internet service. As such, FNet is subject to potential
disruptions in these telecommunications services and may have no means of
replacing these services, on a timely basis or at all, in the event of such
disruption. Any such disruptions could have a material adverse effect on FNet.

DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET; NEW AND UNCERTAIN
MARKET; CUSTOMER RETENTION

FNet's future success is substantially dependent on continued growth in the
use of the Internet. Rapid growth in the use of, and interest in, the
Internet, and in particular the World Wide Web, is a recent phenomenon and
there can be no assurance that Internet usage will become more widespread,
that extensive Internet content will continue to be developed or that
extensive Internet content will continue to be accessible at no or nominal
cost. The Internet may not prove to be viable for a number of reasons,
including potentially inadequate development of the necessary infrastructure
or of performance improvements. If use of the Internet does not continue to
grow, FNet would be materially and adversely affected. Conversely, to the
extent that the Internet continues to experience significant growth in the
number of users and level of use, there can be no assurance that the Internet
infrastructure will be able to support the demands placed on it by such
potential growth. See "Risks Associated with Management of Potential Growth."

The sales, marketing and other costs to FNet of acquiring new customers are
substantial relative to the monthly fee derived from such customers.
Accordingly, FNet's long-term success largely depends on its ability to retain
its existing customers, while continuing to attract new customers. FNet
continues to invest significant

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resources in its infrastructure and customer and technical support
capabilities. However, there can be no assurance that such investment will
improve customer retention. Because the Internet services market is new and
the variety of available services is not well understood by new and potential
customers, it is difficult, if not impossible, for FNet to predict future
customer retention rates. Moreover, intense competition from competitors, some
of whom offer many free hours of services for new customers, have most likely
caused, and may continue to cause, some of FNet's customers to switch to a
competitor's service. In addition, a certain number of new Internet users
experience the Internet only as a novelty and do not become consistent users
of Internet services. These factors could adversely affect FNet's customer
retention rates. Any decline in customer retention rates would have a material
adverse effect on FNet.

LIMITED MARKET FOR THE COMMON STOCK

The Company's Common Stock is traded on the OTC Bulletin Board, but is not
listed on any stock exchange or on NASDAQ. Trading volume in the Common Stock
has fluctuated considerably in the recent past. The Company has filed for the
registration of the entire class of its Common Stock under Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in order
to make the Company a "reporting company" in that it will be required to file
all of the reports, proxy statements and other information required to be
filed with the Securities and Exchange Commission (the "Commission") under the
Exchange Act.

POSSIBLE VOLATILITY OF STOCK PRICES; PENNY STOCK RULES

The over-the-counter markets for securities such as the Company's Common
Stock historically have experienced extreme price and volume fluctuations
during certain periods. These broad market fluctuations and other factors,
such as new product developments and general trends in the investment markets,
as well as general economic conditions and quarterly variations in the
Company's results of operations, may adversely affect the market price of the
Company's Common Stock. Moreover, unless and until it is approved for
quotation on NASDAQ, the Company's Common Stock could become subject to rules
adopted by the Commission regulating broker-dealer practices in connection
with transactions in "penny stocks." Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities registered
on certain national securities exchanges or quoted on NASDAQ, provided that
current price and volume information with respect to transactions in such
securities is provided by the exchange or the NASDAQ system). Unless an
exemption from the definition of a "penny stock" were available, any broker
engaging in a transaction in the Company's Common Stock would be required to
provide any customer with a risk disclosure document, disclosure of market
conditions, if any, disclosure of the compensation of the broker-dealer and
its salesperson in the transaction, and monthly accounts showing the market
values of the Company's Common Stock held in the customer's account. The bid
and offer quotation and compensation information must be provided prior to
effecting the transaction and must be contained on the customer's
confirmation. It may be anticipated that a number of brokers may be unwilling
to engage in transactions in the Company's Common Stock because of the need to
comply with the "penny stock" rules, thereby making it more difficult for
purchasers of Common Stock offered hereby to dispose of their shares. The
Company's Common Stock is covered by a Securities and Exchange Commission rule
that imposes additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by
the rule, the broker-dealer must make a special suitability determination for
the purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. Consequently, the rule may affect the ability of broker-
dealers to sell the Company's securities and also may affect the ability of
purchasers in this offering to sell their shares in the secondary market.

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<PAGE>

DIVIDEND POLICY

The Company has never paid any cash dividends on its Common Stock and does
not anticipate that it will pay dividends in the foreseeable future. Instead,
the Company intends to apply any earnings to the development and expansion of
its business.

USE OF PROCEEDS

The Company will not receive the proceeds of sales of shares by the Selling
Shareholders. However, if the Selling Shareholders who hold Warrants determine
to exercise their Warrants in order to sell shares hereunder, the Company will
receive the proceeds of the exercise of the Warrants. If all of the Warrants
were exercised, the Company would receive net proceeds of a minimum of
$2,628,750, plus an additional amount equal to 30% of the net proceeds of the
sale of the shares issued upon exercise of the Warrants, to the extent such
proceeds exceed $4.00 per share. See "The Warrants." The Company plans to use
any such net proceeds for expanded advertising and marketing, payment of trade
accounts payable, and as working capital. The amounts actually expended for
each such use, if any, are at the discretion of the Company and may vary
significantly depending upon a number of factors, including the amount of such
proceeds, future revenue growth and the amount of cash generated by the
Company's operations. To the extent such proceeds are not utilized
immediately, they will be invested in United States government or governmental
agency securities or short-term insured certificates of deposit.

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<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

Franklin Telecommunications Corp. (the "Company") designs, manufactures and
markets high speed communications products and subsystems. The products are
marketed through original equipment manufacturers ("OEMs") and distributors,
as well as directly to end users. In addition, through its majority-owned
subsidiary, FNet, the Company is a provider of Internet access and services to
businesses and individuals. The Company is a California corporation formed in
1981.

Forward-looking statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations--including statements regarding
the Company's entrance into the Internet business, newly introduced products,
development of "telephone-to-telephone" service capabilities over the
Internet, net sales, gross profit, operating expenses, other income and
expenses, liquidity and cash needs and the Company's plans and strategies--are
all based on current expectations, and the Company assumes no obligation to
update this information. Numerous factors could cause actual results to differ
from those described in the forward-looking statements. See "Risk Factors."

The Company has recently re-focused its business from manufacturing
primarily LAN and WAN products to providing telecommunications and Internet
products and services. Beginning in the year ended June 30, 1997, the Company
has begun to generate revenues from these new business lines. Sales had been
declining for the Company's existing hardware products during the previous
fiscal year, while the newly developed hardware products and Internet services
were not yet ready for market. Initial demand for the Company's newly
introduced D-Mark Channel Bank hardware product line appears promising, the
interest primarily coming from Fortune 500 communication companies. The
Company is also currently developing a new line of hardware products to
complement the D-Mark's capabilities. The newly developed Cyclone, a D-Mark
with integrated modems, is currently in Beta testing. FNet's Internet service
business is beginning to grow, and management anticipates that rapid growth
will result from the introduction of planned "Telephone to Telephone"
capabilities over the Internet, which are currently under development.

FNet is in the nature of a new business venture; accordingly, it can be
expected that its future operating results will be subject to many of the
risks inherent in establishing a new business enterprise. There can be no
assurance, therefore, that FNet will be able to achieve or sustain
profitability in future periods or that the Company's investment of resources
into it will be repaid.

The Company's D-Mark Channel Bank terminates a digital T1 telephone line
from the local telephone company and channelizes it into 24 analog data/voice
lines for either modems, faxes, or telephones. With the declining cost of T1
digital lines, the Company believes that the D-Mark Channel Bank provides an
effective, cost saving solution for companies using 10 or more phones or
modems. The Cyclone is an evolution of the D-Mark and includes modems
integrated into the PC cards, thus eliminating the need to add external modems
for those applications requiring them.

Other products under development include the Tornado, which is a further
evolution of the Cyclone by providing terminal server function. The Tornado is
targeted to become the Company's point of presence "POP in a box" solution for
ISPs or a corporation's data center. This would permit a new or existing
Internet Service Provider or corporation to install all of the hardware
required to provide an Internet service connection. The Data Voice Server, or
DVS, is a further evolution of the Tornado, which adds the capability of
transmitting voice traffic over the Internet and Frame relay circuits.

Other features of the D-Mark series under development include FXO and Ground
Start capabilities for the voice card integrated in the D-Mark systems. FXO
will allow the D-Mark to extend the functions of a PBX telephone system.
Ground Start will allow access to devices (PBX trunk lines, telephones, fax
machines, etc.)

13
<PAGE>

that operate in this environment, thus expanding the types of devices that the
D-Mark systems can utilize. The T-1 card in the D-Mark system is also being
improved to add a MVIP interface. The MVIP interface is an open architecture
standard interface, which would permit users to customize applications and
directly connect third party hardware to the D-Mark systems.

In designing the D-Mark Channel Bank, the Company's primary target market
was Internet Service Providers. With the growth of the Internet, the Company
believes that the D-Mark Channel Bank can satisfy the requirements of Internet
Service Providers for providing analog lines for modem banks to provide
service for their dial-up accounts.

Companies such as U.S. Robotics, Texas Instruments and Cirrus Logic have
purchased the D-Mark Channel Bank for testing and engineering of the latest
56K (X2) modem technology. The Company is currently working with engineers
from AT&T on a project integrating the D-Mark Channel Bank for use by its
field engineers, in order to take calls in from the analog ports and send them
back through to the digital T-1 port.

These applications were not originally considered by the Company, but were
discovered by and in conjunction with purchasers of the product. Due to the
rapidly changing pace of the telecommunications industry, management believes
that the D-Mark Channel Bank will continue to be a leading edge product
because of its upgradability and flexibility. The Company also manufactures D4
T-1 Channel Banks, which are capable of terminating a telephone company T1
line which contains 24 voice and or data circuits. This termination takes the
T-1 serial port and turns it into 24 central office type telephone outlets
which will accept 24 desk phones or a PBX. The Company also has under
development an ISA bus computer card which combines a V.34 Modem and the
functions of the channel bank into one 8 port card, thus lowering the cost of
data, not voice, for Internet Service Providers to accept a large number of
analog modem subscribers. As part of the channel bank the Company also offers
an 8 port station analog card (ICV-8) for the CTI market.

As with any new line of business, there can be no assurance that the D-Mark
Channel Bank and other newly developed communications products will gain
widespread market acceptance or be profitable. In addition, there can be no
assurance that new hardware products and services developed by others will not
render the Company's hardware products and services noncompetitive or
obsolete.

The recent acquisition of Internet Passport has complemented FNet's
capabilities, allowing FNet to offer an Internet format for requesting high-
speed satellite transmission of volume data. Internet Passport is an Internet
Service Provider that has obtained contractual arrangements with satellite
transmission providers.

RESULTS OF OPERATIONS

Fiscal Year Ended June 30, 1997 Compared To Fiscal Year Ended June 30, 1996

Net Sales. Net sales increased by $1,305,000, or 303%, from $430,000 in the
year ended June 30, 1996 to $1,735,000 in the year ended June 30, 1997. The
overall increase is due to resurgence in demand for wide area network
products, initial demand for newly introduced hardware products, and
introduction of Internet services. Seven customers constituted 60% of total
sales for the year ended June 30, 1997. The increase in sales of wide area
network products related to shipments of the ACP 186, an existing
communication board used by a significant customer that significantly expanded
its operations during the period. Sales of the ACP 186 for the year ended June
30, 1997 were $436,000. The revenue mix for the year ended June 30, 1997
consisted of 68% wide area network products, including repair services, 9%
newly introduced D-Mark hardware products, and 23% Internet services.

Gross Profit (Loss). Gross profit increased as a percentage of net sales to
43% for the year ended June 30, 1997, from a gross loss of 37% of net sales
for the corresponding period of 1996. The gross profit percentage increase can
be attributed to increased sales of higher margin products and a spreading of
fixed manufacturing overhead costs over a larger sales base.

14
<PAGE>

Operating Expenses. Operating expenses increased by $2,183,000, or 163%,
from $1,337,000 in the year ended June 30, 1996 to $3,520,000 in the year
ended June 30, 1997. Approximately 70% of the increase is attributable to a
one-time write-off of goodwill. The balance is attributable to increased
product development costs for the recently introduced hardware products, costs
in developing the Internet services infrastructure, increased sales and
marketing efforts, and costs in enhancing the general and administrative
infrastructure to support higher sales volumes.

Other Income (Expense). Interest expense increased by $15,000, or 58%, from
$26,000 in the year ended June 30, 1996 to $41,000 in the year ended June 30,
1997, due primarily to an increase in loans from an officer of the Company and
assumed lease debt from Internet Passport. Other expense increased by $1,000,
or 20%, from $5,000 in the year ended June 30, 1996 to $6,000 in the year
ended June 30, 1997, due to various non-operating items.

Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995

Net Sales. Net Sales decreased by $1,051,000, or 71%, from $1,481,000 in the
year ended June 30, 1995 to $430,000 in the year ended June 30, 1996. The
decrease was due to reduced demand for the Company's legacy wide area network
products. The new products introduced in the six months ended December 31,
1996 were under continuing development during the year ended June 30, 1996,
and therefore were not available for sale. In addition, the Internet services
offered by the Company's subsidiary, FNet, were still in development, and
therefore were not yet available.

Gross Profit (Loss). The Company experienced a decrease in gross margin that
resulted in a gross loss as a percentage of net sales of 37% for the year
ended June 30, 1996, from 65% gross profit on net sales for the corresponding
period of 1995. The gross margin percentage decrease can be attributed to a
$226,000 write down of inventory valuation to reserve for obsolete and slow
moving inventory and a spreading of fixed manufacturing overhead costs over a
smaller sales base.

Operating Expenses. Operating expenses increased by $201,000, or 18%, from
$1,136,000 in the year ended June 30, 1995 to $1,337,000 in the year ended
June 30, 1996. The increase is attributable to increased product development
costs for the recently introduced hardware products, costs in developing the
Internet services infrastructure, increased sales and marketing efforts, and
costs in expanding administrative capabilities to support higher sales
volumes.

Other Income (Expense). Interest expense increased by $16,000, or 160%, from
$10,000 in the year ended June 30, 1995 to $26,000 in the year ended June 30,
1996, due primarily to an increase in loans from an officer of the Company.
Other income decreased by $30,000, or 120%, from $25,000 in the year ended
June 30, 1995 to an expense of $5,000 in the year ended December 31, 1996, due
to various non-operating items.

Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1994

Net Sales. Net sales increased by $240,000, or 19%, from $1,241,000 in the
year ended June 30, 1994 to $1,481,000 in the year ended June 30, 1995. The
increase was due to greater demand for the Company's wide area network
products.

Gross Profit. Gross profit increased as a percentage of net sales to 65% for
the year ended June 30, 1995, from 58% gross profit on net sales for the
corresponding period of 1994. The gross margin percentage increase can be
attributed to increased sales of higher margin products.

Operating Expenses. Operating expenses decreased by $62,000, or 5%, from
$1,198,000 in the year ended June 30, 1994 to $1,136,000 in the year ended
June 30, 1995. The decrease is attributable to reduced spending on product
development costs. Costs for sales, marketing and general and administrative
expenses remained similar for both periods.

15
<PAGE>

Other Income (Expense). Interest expense decreased by $4,000, or 29%, from
$14,000 in the year ended June 30, 1994 to $10,000 in the year ended June 30,
1995, due primarily to the reduction of debt. Other income increased by
$21,000, or 525%, from $4,000 in the year ended June 30, 1994 to $25,000 in
the year ended December 31, 1995, due to various non-operating items.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and net working capital totaled $1,464,000 and
$809,000, respectively, as of June 30, 1997. The primary source of cash was
net proceeds generated from equity financing. The Company has relied on sales
of new shares and the exercise of warrants and options to fund operations for
an extended period of time. The Company received $114,000, $1,007,000 and
$1,129,000 in equity financing, for the years ended June 30, 1995, 1996, and
1997, respectively. Its subsidiary, FNet, raised $1,950,000 for the year ended
June 30, 1997. FNet has continued to experience losses, due to the growth
nature of the Internet services business.

In addition to the equity financing described above, the Company's President
has deferred portions of his compensation, and has on occasion, converted debt
to equity, in order to preserve the Company's cash.

The Company anticipates that its primary uses of working capital in future
periods will be for acquisitions, increases in product development, expansion
of its marketing plan, development of new branch offices and funding of
increases in accounts receivable. Development of new branch offices may be
achievable through acquisitions. Although the Company seeks to use its Common
Stock to make acquisitions to the extent possible, many acquisition candidates
may require that all or a significant portion of the purchase price be paid in
cash.

The Company believes that existing cash and cash equivalents, cash flow from
operations, and cash being raised through private placements of securities
will be sufficient to meet the Company's presently anticipated working capital
needs for at least the next 13 months. The Company regularly evaluates various
potential acquisitions, which could require a substantial portion of the net
proceeds from the exercise of the Warrants. To the extent the Company uses its
cash resources for acquisitions, the Company may be required to obtain
additional funds, if available, through borrowings or equity financings. There
can be no assurance that such capital will be available on acceptable terms.
If the Company is unable to obtain sufficient financing, it may be unable to
fully implement its growth strategy.

16
<PAGE>

SELECTED FINANCIAL DATA

The selected financial data set forth below for the fiscal years ended June
30, 1995, 1996 and 1997 have been derived from the Company's consolidated
financial statements, audited by Singer, Lewak, Greenbaum & Goldstein LLP
(1997) and Corbin & Wertz (1996 and 1995), respectively, included elsewhere in
this Prospectus, and should be read in conjunction with those consolidated
financial statements (including the notes thereto). The selected financial
data set forth below for the fiscal years ended June 30, 1993 and 1994 have
been derived from the Company's consolidated financial statements, audited by
Corbin & Wertz, but which are not included in this Prospectus.

STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales................... $ 2,512 $ 1,241 $ 1,481 $ 430 $ 1,735
Cost of sales........... 778 516 518 590 990
--------- --------- --------- ---------- ----------
Gross profit (loss)... 1,734 725 963 (160) 745
--------- --------- --------- ---------- ----------
Operating expenses:
Research and
development expenses. 519 327 308 320 480
Selling, general and
administrative
expenses............. 1,088 871 828 1,017 1,508
Write-off of goodwill. -- -- -- -- 1,532
--------- --------- --------- ---------- ----------
Total operating
expenses........... 1,607 1,198 1,136 1,337 3,520
--------- --------- --------- ---------- ----------
Income (loss) from
operations............. 127 (473) (173) (1,497) (2,775)
--------- --------- --------- ---------- ----------
Other income (expense):
Interest expense...... (21) (14) (10) (26) (41)
Gain on settlement of
accounts payable..... 108
Loss on settlement of
litigation........... (82)
Other................. 1 4 25 (5) (6)
--------- --------- --------- ---------- ----------
Total other income
(expense).......... 6 (10) 15 (31) (47)
--------- --------- --------- ---------- ----------
Income (loss) before
minority interest and
income taxes........... 133 (483) (158) (1,528) (2,822)
Minority interest in
loss of subsidiary..... -- -- -- 63 --
--------- --------- --------- ---------- ----------
Income (loss) before
income taxes........... 133 (483) (158) (1,465) (2,822)
Provision for income
taxes.................. (13) 2 2 2 2
--------- --------- --------- ---------- ----------
Net income (loss)....... $ 120 $ (485) $ (160) $ (1,467) $ (2,824)
========= ========= ========= ========== ==========
Net income (loss) per
common share........... $ 0.02 $ (0.08) $ (0.02) $ (0.14) $ (.23)
========= ========= ========= ========== ==========
Weighted average number
of shares outstanding.. 5,736,512 5,753,589 6,475,984 10,279,281 12,267,991

BALANCE SHEET DATA (IN THOUSANDS):
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash.................... $ 492 $ 98 $ 135 $ 166 $ 1,464
Working capital
(deficit).............. 452 (15) 98 (206) 809
Total assets............ 1,220 769 998 712 3,514
Long-Term Debt.......... 120 50 161 238 360
Other liabilities....... 537 543 508 503 183
Stockholder's equity
(deficiency)........... (75) (549) (386) (749) 1,575
</TABLE>
- --------
During the year ended June 30, 1994, the Company declared a 1-for-10 reverse
stock split. Accordingly, all share and per share information has been
retroactively restated to reflect the reverse split. The Company has not
declared dividends since its inception.

17
<PAGE>

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol FTEL. The following table sets forth the range of high and low bid
quotation per share for the Common Stock as reported by the OTC Bulletin Board
during the calendar years indicated. The bid price reflects inter-dealer
prices and does not include retail mark-up, markdown, or commission.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
First Quarter............................................... $ .39 $ .32
Second Quarter.............................................. 2.25 .98
Third Quarter............................................... 1.69 .74
Fourth Quarter.............................................. .75 .38
1996
First Quarter............................................... .81 .66
Second Quarter.............................................. 1.53 .72
Third Quarter............................................... 2.88 .97
Fourth Quarter.............................................. 2.25 1.25
1997
First Quarter............................................... 5.50 1.81
Second Quarter ............................................. 3.75 2.25
Third Quarter .............................................. 3.25 1.56
Fourth Quarter (through 11/5/97)............................ 9.93 3.44
</TABLE>

The Company has never declared or paid a cash dividend on its Common Stock
and does not expect to pay any cash dividends in the foreseeable future.

18
<PAGE>

BUSINESS

GENERAL

Franklin Telecommunications Corp. (the "Company") designs, manufactures and
markets high speed communications products and subsystems, including wide area
networks ("WAN"), Local Area Networks ("LAN") and telecommunications
equipment. The products are marketed through Original Equipment Manufacturers
(OEMs) and distributors, as well as directly to end users. In addition,
through its majority-owned subsidiary, FNet, the Company is a provider of
Internet access and services to businesses and individuals. FNet also
distributes the equipment manufactured by the Company to corporations,
including Internet Service Providers.

INDUSTRY BACKGROUND--COMMUNICATIONS PRODUCTS

The demand for products that connect and control electronic data processing
devices, such as point of sale equipment, personal computers and bank
automated teller machines, has increased rapidly due to reductions in the cost
of high speed digital communications. The Company's products are designed to
address the need of geographically dispersed communications networks such as
Wide Area Networks (WAN) and Local Area Networks (LAN), for which the Company
provides proprietary hardware and software.

The WAN and LAN connectivity segments of the communications industry
continue to experience rapid growth. Corporations and governmental
organizations are increasing the flow of information among their
geographically separate facilities. Intelligent workstations (e.g., personal
computer and departmental systems) are replacing character oriented
(asynchronous) "dumb terminals" as the principal users of the device. These
newer devices communicate on a record oriented basis (synchronous mode) which
can utilize much faster transmission rates and thus take advantage of modern,
high speed telecommunications facilities. The greater popularity of
intelligent workstations has increased the demand for flexible and manageable
networks that support devices from multiple vendors.

COMMUNICATIONS PRODUCTS

Wide Area Network Connectivity Products. The Company manufactures three
principal connectivity products for wide area networks. The Franklin Branch
Node is a fully integrated small T-1 packet/circuit switch/multiplexes with
LAN bridge/routing; it is designed for relatively small offices and supports
interconnection of data, voice, image LAN and video applications.

The Multi-Protocol Switching PAD is used to connect host computers and user
systems through one international standard X.25 packet switching protocol, and
provides sophisticated, real time management using simple, menu-oriented
operator functions contained in a Network Control Center ("NCC"). The Company
offers a product line of programmable high performance data communication
processor circuit boards that support both synchronous and asynchronous modes
for a variety of computer architectures. These cards are used in a variety of
applications, including network system products, terminal emulators,
programmable machine tools, voice response systems, protocol test devices, and
load generation tools.

Local Area Network Connectivity Products. The Franklin UltraFast
Hurricane/155 Fast Ethernet Network Card offers high-speed and low-cost
connectivity for LAN applications. Also, the Company manufactures the only
155Mbps Fast Ethernet daisy-chainable network card. As the majority of
networks today send data packets at 10Mbps or 100Mbps, they require a hub
(costing approximately $800) to connect the computers together via their
network cards. The UltraFast Hurricane/155 network cards use a patented
technology which allows packet sizes of 155Mps to be passed through. The
Company believes that competing products, such as Intels 100Mbps cards, are
substantially more expensive or provide inferior performance.

The Hurricane/155 also does not require an expensive hub to network
computers together because it is daisy-chainable. This feature can proves to
be a significant cost savings for small networks and/or peer-to-peer
environments. For applications such as Computer Aided Design or graphic
environments, the Hurricane/155 can function on its own segment of an existing
network and not interferes with the performance of the LAN. For

19
<PAGE>

those environments with large network needs (more than 15 users), the Company
also manufactures 8 and 22 port hubs. The cards come in industry standard
architectures (ISA, EISA, VESA, and PCI) and easily install into any PC.

Telephone Interface Equipment & Computer Telephone Integration ("CTI"). The
Company's D-Mark Channel Bank terminates a digital T1 telephone line from the
local telephone company and channelizes it into 24 analog data/voice lines for
either modems, faxes, or telephones. With reductions in the cost of T1 digital
lines from the telephone companies, the D-Mark Channel Bank can be an
effective method of utilizing analog lines for companies using 16 or more
phones or modems. The product offers easy installation, automatic disaster
recovery, remote manageability, and high reliability.

INDUSTRY BACKGROUND--INTERNET SERVICES

The Internet is a collection of computer networks linking millions of public
and private computers around the world. Historically, the Internet was used by
government agencies and academic institutions to exchange information, publish
research and transfer email. A number of factors, including the proliferation
of communication-enabled personal computers, the availability of intuitive
graphical user interface software and the wide accessibility of an
increasingly robust network infrastructure, have combined to allow users to
easily access the Internet and, in turn, have produced rapid growth in the
number of Internet users.

The emergence of the World Wide Web, the graphical, multimedia environment
of the Internet, has resulted in the development of the Internet as a new mass
communications medium. The ease and speed of publishing, distributing and
communicating text, graphics, audio and video over the Internet has led to a
proliferation of Internet-based services, including chat, online magazines,
news feeds, interactive games and a wealth of educational and entertainment
information, as well as to the development of online communities. In addition,
the reduced cost of executing transactions over the Internet provides
individuals and organizations with a new means to conduct business.

FNET STRATEGY

Through its subsidiary, FNet, the Company plans to offer international
voice, fax, data and video exchange services over the Internet. The Company
has installed and is operating Internet access and related services through an
advanced TCP/IP based and ISDN and SMDS compatible T-1 and frame relay
network. The services offered cover one spectrum of low-cost dial-up services
to high performance continuous high speed access. In

20
<PAGE>

addition to acting as an Internet Service Provider, the Company operates a
World Wide Web design and hosting service. Also, the Company has entered into
a joint venture arrangement to establish an advanced Internet file server.

Through FNet, the Company also plans to offer Internet services to
individuals without computers, allowing them to deliver voice and fax messages
over the Internet by use of a telephone only. Also, FNet plans to provide
voice communication over the Internet from telephone and telephone, without
any PC required, with voice quality comparable to current telephone company
communications.

FNet believes that the introduction of additional service offerings can
serve not only to expand and maintain its customer base, but also, in certain
instances, to enhance revenues. Accordingly, the Company has introduced a
variety of services for business consumers, including business Web sites,
high-speed ISDN communications capability and frame relay connections, each of
which involve a monthly service charge plus set-up fees.

Each FNet customer is provided a mailbox, or address, from which to send and
receive email. Email functionality allows customers to exchange an unlimited
number of multimedia text, graphics, audio and video messages with other FNet
customers as well as with non-FNet Internet users.

FNet provides space on its Web server for commercial customers to publish
their own Web pages. Monthly fees for business Web sites range from $50 to
$100, plus one-time setup fees of $50 to $100, depending on whether the site
is unsecured or secure.

FNet offers high-speed ISDN Internet access communication lines on a
nationwide basis. ISDN provides a faster, more efficient method for
communicating digital data over telephone lines. ISDN speeds are significantly
faster than conventional modem speeds (up to 128 Kbps versus up to the current
maximum of 33.6 Kbps). The monthly ISDN service charge ranges from $110 to
$350, depending on speed and service options. A one-time setup fee ranging
from $110 to $350 is also charged.

FNet also offers frame relay capability. Frame relay enables direct, high-
speed continuous connection of an organization's internal local area network
to the Internet using dedicated circuits at speeds ranging from 56 Kbps to
1,536 Kbps. This service enables businesses to connect an entire local area
network or high-end workstation to the Internet and provides the fastest data
transfer rate generally available. Frame relay service fees range from $250 to
$1,350 per month depending on access speeds, data throughput and other data
transfer metrics. A one-time setup fee ranging from $250 to $1,350 is also
charged.

In addition, FNet offers RF Wireless services. RF Wireless allows businesses
to utilize connections at 1,536 Kbps without contracting for T-1 service from
local telephone companies. The RF Wireless service connects to FNet via
antennas from the customer's site, thus utilizing FNet's high speed network.
RF Wireless service fees are $595 per month, with a one-time setup fee of $595
and equipment cost of $3,500.

Through the Company's acquisition of Internet Passport in February 1997,
FNet plans to offer an Internet format for requesting high-speed satellite
transmissions of volume data. Internet Passport is an Internet Service
Provider that has obtained contractual arrangements with satellite
transmission providers.

MARKETING AND DISTRIBUTION OF COMMUNICATIONS PRODUCTS

The Company maintains a small direct sales force for the marketing of its
communications products. It maintains a home page on the World Wide Web and a
headquarters-based sales and service offices. It also markets its products
through direct mail, participation in trade shows, telemarketing, and
advertising in trade and technical publications. The Company has expanded the
sales and marketing operation through acquisitions and the opening of field
offices as well as employing manufactures representatives.

The growth of the Internet has spawned a new industry, consisting of the
building of infrastructure for Internet Service Providers and offering
connections to corporate America as well as private individuals. The

21
<PAGE>

Company designs and manufactures products which are basic to the operation of
an Internet Service Provider. In addition, these same products are required in
the expansion of corporate based private Intranets. Sales to large corporate
clients are handled one at a time through telemarketing with in person follow-
up sales calls, whereas sales to Internet Service Providers and the
communication of the product lines are through advertising in trade journals.

MARKETING OF INTERNET SERVICES

The market for Internet products and services is varied, including both
hardware and software products and related services. Most companies in the
industry provide either hardware, software or services. FNet offers both
hardware and software specifically designed to provide enhanced Internet
accessibility and usage.

Internet users generally fall into one of two specific market segments, the
individual user and the business user. Management of the Company believes that
the individual user segment will continue to show rapid growth, with the
principal uses being information services, on-line shopping and personal
communications. The advent and increasing popularity of home shopping via
television programming may also extend to the Internet. The Internet can
provide consumers with vastly wider choices from a much greater base of
vendors. Many catalogue and mail order companies now utilize electronic
catalogues accessible through the Internet.

The other significant market is the business user. At present, electronic
mail is the most common application, utilizing computer-based LAN or WAN
communication. The trend for companies with multiple, remote site locations is
to link existing WANs utilizing the Internet, in order to minimize direct
telephone company charges; this market segment is usually referred to as the
Intranet. Internet access provides a fast, inexpensive method of achieving
this connectivity. Although currently available technology provides some
limited ability for voice communication over the Internet, the quality is poor
and communication is generally possible only if users at both ends have Pcs
with modems and identical software. It is possible that Intranet applications
could eventually eliminate the need for resident operating software and
massive on-site at a storage facilities for many businesses. Under this
scenario, a PC with resident software will no longer be necessary, with access
to any desired program available through an inexpensive workstation connected
to the Internet. Also, data storage could be centralized in a secure database
accessible through the Internet.

The Company currently markets its Internet services through press releases,
its home page on the World Wide Web, and other targeted marketing strategies.
The Company plans to commence advertising its Internet services in business
trade journals, national business publications, direct mail and local business
publications.

COMPETITION

The data communications industry is extremely competitive. The Company's
principal competitors in this market are: Telematics, Micom, Memotech Data,
Dynatech Corporation, Cisco Systems, Ascend Communications and U.S. Robotics.
Most of these companies have substantially greater marketing, financial,
technical and field support resources than the Company. In addition, the
Company could face strong competition from a number of established computer
and telecommunications firms which may enter the market in the future.

The Internet services market in which FNet operates is extremely
competitive, and the Company expects competition in this market to intensify
in the future. The Company's current and prospective competitors include many
large companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. The Company
competes (or in the future is expected to compete) directly or indirectly with
the following categories of companies: (i) national and regional Internet
Service Providers, such as Earthlink, IDT, MindSpring, NETCOM, PSINet and
UUNET; (ii) established online services such as America Online, CompuServe,
Prodigy and the Microsoft Network; (iii) computer software and technology
companies such as Microsoft; (iv) national telecommunications companies, such
as AT&T, MCI and Sprint; (v) RBOCs; (vi) cable operators, such as Comcast, TCI
and Time Warner; and (vii) nonprofit or educational ISPs.

22
<PAGE>

The entry of new participants from these categories and the potential entry
of competitors from other categories (such as computer hardware manufacturers)
would result in substantially greater competition for the Company. The ability
of these competitors or others to bundle services and products with Internet
connectivity services could place the Company at a significant competitive
disadvantage. In addition, competitors in the telecommunications industry may
be able to provide customers with reduced communications costs in connection
with their Internet access services, reducing the overall cost of Internet
access and significantly increasing pricing pressures on the Company.
Moreover, certain of the Company's online competitors, including America
Online, the Microsoft Network and Prodigy, have recently introduced unlimited
access to the Internet and their proprietary content at flat rates that are
generally equivalent to the Company's flat rate, and do not require a set-up
fee. Certain of the RBOCs have also introduced competitive flat-rate pricing
for unlimited access (without a set-up fee) for at least some period of time.
As a result, competition for active users of Internet services has
intensified. There can be no assurance that the Company will be able to offset
the adverse effect on revenues of any necessary price reductions resulting
from competitive pricing pressures by increasing the number of its customers,
by generating higher revenue from enhanced services, by reducing costs or
otherwise. See "Risk Factors--Competition; New Products and Technological
Changes."

The Company believes that its ability to compete successfully in the
Internet services market depends on a number of factors, including market
presence; the adequacy of the Company's customer and technical support
services; the capacity, reliability and security of its network
infrastructure; the ease of access to and navigation of the Internet provided
by the Company's services; the pricing policies of the Company, its
competitors and its suppliers; the timing of introductions of new services by
the Company and its competitors; the Company's ability to support existing and
emerging industry standards; and industry and general economic trends. There
can be no assurance that the Company will have the financial resources,
technical expertise or marketing and support capabilities to compete
successfully. Also, the Company believes that it has a competitive advantage
over most Internet Service Providers because it manufactures much of the
equipment necessary to operate an Internet Service Provider, and is able to
react quickly to technological changes in the industry.

RECENT ACQUISITIONS AND TRANSACTIONS

During the fiscal year ended June 30, 1996, the Company acquired Alphalink,
an Internet Service Provider, for 50,000 shares of Common Stock of the Company
valued at $19,760, and Malibu Internet Services, an Internet Service Provider
and designer of "home pages" for the World Wide Web, for 60,000 shares of
Common Stock of the Company and 50,000 shares of the Common Stock of FNet,
valued, in the aggregate, at $55,020.

In December 1996 the Company acquired Number One Internet Service, a company
offering high speed wireless, frame relay and ATM Internet services. The
services offered by Number One Internet Service have been integrated with the
services of FNet, and are offered to FNet customers seeking high speed
Internet service and sophisticated applications. In connection with the
acquisition, the owners of Number One Internet Service received 40,000 shares
of the Company's Common Stock and options to purchase an additional 10,000
shares at an exercise price of $1.25 per share, exercisable in January 1998.
In addition, they received 20,000 newly-issued shares of FNet and options to
purchase an additional 80,000 shares of FNet, exercisable over a four year
period. The securities issued were valued at $89,780.

In February 1997 the Company acquired Internet Passport, a company offering
high end Internet services for business customers, including a system for
alternate delivery Internet service using satellite technology for transfer of
large files. Internet Passport was organized in 1996, and has had limited
operations to date. In connection with the acquisition, the Company issued
600,000 shares of its Common Stock, and assumed certain obligations, with a
net value of $1,700,789.

In February 1997 the Company acquired the shares of CPR Computer Repair,
Inc., a service company specializing in the repair of computers and printers,
for 25,000 shares of the Company's Common Stock and assumption of certain
obligations, valued at $69,425. The Company sold the shares of CPR Computer
Repair Inc. in June of 1997, in exchange for a royalty, based on the gross
profits of CPR Computer Repair, Inc., up to a maximum of $100,000.

23
<PAGE>

In March 1997 the Company's subsidiary, Internet Passport, entered into a
Memorandum of Understanding with DigitalXPress LLC ("DigitalXPress"), a
purveyor of video and data network satellite services. Under the terms of the
agreement, Internet Passport and DigitalXpress will jointly develop a product
line, to be called "XPressNet," to furnish Internet connectivity to the
products currently marketed by DigitalXPress, and to combine marketing efforts
for certain customers, applications and products.

In May 1997 the Company's subsidiary, FNet, entered into a licensing and
joint development agreement with Peak Technologies, Inc. ("Peak"), by which
Peak granted FNet a license to use Peak's Java-based PeakJet Internet browser
accelerator in FNet's Internet service. In addition, FNet is to provide a
customized version of the PeakJet technology as a component in the Franklin
XPress satellite product line offered in conjunction with DigitalXPress. Under
the agreement, FNet is to issue 50,000 shares of its Common Stock to Peak.

ASSEMBLY AND MANUFACTURING OPERATIONS

The Company's manufacturing facility is located in Westlake Village,
California. Assembly of the Company's products is ordinarily contracted out to
local circuit board assembly contractors, with final systems tests completed
at the Company's facility. The Company's manufacturing operations consist
primarily of procurement, inspection and testing of components, final assembly
of subsystems, and extensive testing of finished products. The Company
procures substantially all of its parts from outside suppliers. The Company is
currently able to obtain parts without difficulty and at competitive prices.
However, in common with others in the electronics industry, the Company has in
the past paid premium prices to obtain components that are in short supply.
There can be no assurance that shortages will not occur in the future which
could significantly increase the cost or delay the shipment of the Company's
products. This could adversely affect its sales or profitability.

FACILITIES

The Company occupies two leased facilities in Westlake Village, California.
One of the facilities houses sales, engineering, administrative and Internet
services. The facility is 5,000 square feet, with a lease rate of $5,355 per
month, expiring in September 1998. The lease for this facility is renewable on
a year-to-year basis at the option of the Company. The other facility houses
the manufacturing and inventory warehouse. This facility is 4,000 square feet,
with a lease rate of $3,767 per month, expiring in March, 1998. This facility
has a two year option on renewal.

The Company also leases a 1,688 square foot office in Atlanta, Georgia for
its Internet Passport operation. The current lease rate is $1,477 per month,
with annual rate increases, providing for a lease rate of $1,617 per month by
the end of the lease term. The lease expires in March 2000.

PATENTS AND TRADEMARKS

The Company has been granted two U.S. patents for hardware designs in the
LAN field, one of which expires in 2009 and the other expires in 2006. The
Company also has copyrighted over 300 software programs and 20 hardware
designs. While the Company vigorously defends its patents and other
intellectual property, it protects its proprietary technology through the
filing of patent applications and copyright notifications, and by seeking
employee and business nondisclosure agreements. The Company believes that the
success of its business depends primarily on its technical innovations,
marketing abilities and responsiveness to customer requirements, rather than
on patents, trade secrets, copyrights and other intellectual property rights.
The Company enters into confidentiality agreements with its key employees. In
addition, all suppliers, distributors, licensees, and other business contacts
who have access to the Company's proprietary technology are required to sign
confidentiality agreements. However, there can be no assurance that the
Company's efforts to protect its proprietary rights will be successful in
preventing misappropriation or that those rights will provide the Company with
a competitive advantage. There can be no assurance that others will not
develop products or technology that are equivalent or superior to those of the
Company, or that the confidentiality agreements and internal safeguards upon
which the

24
<PAGE>

Company relies will be adequate to protect its interests. Nevertheless, the
Company has a policy of seeking to protect its intellectual property through
patents, confidential disclosure agreements and trade secrets.

The laws of some foreign countries in which the Company sells or may sell
its products do not protect the Company's proprietary rights in its products
to the same extent as do the laws of the United States.

BACKLOG

At June 30, 1997, the Company's backlog of orders was $481, all of which are
expected to be filled within the current fiscal year. This compares with a
backlog of zero at June 30, 1996. Since the Company ordinarily fills orders
for its communications products in less than 30 days, backlog is not a
significant factor in the Company's business.

RESEARCH AND DEVELOPMENT

The Company is engaged in ongoing efforts to develop and improve its
products, adapt its products for new applications and design and engineer new
products. During the fiscal years ended June 30, 1997 and 1996, the Company's
research and product development expenses were approximately $480,000 and
$320,000, respectively. The Company expects that its ability to compete
effectively in the communications products marketplace will depend
substantially upon achieving greater speed and flexibility in the Company's
products and upon reducing the cost of the Company's systems. There can be no
assurance that the Company will be able to do so or that the Company's
competitors will not develop products that are less expensive or otherwise
superior to those of the Company.

The Company's internal research and product development efforts are focused
primarily on improving the performance and cost-effectiveness of the Company's
systems through better configurations of system components and developing new
product applications. The Company also has depended upon certain key suppliers
to provide product components in accordance with the Company's specifications.
The Company continues to be engaged with certain of its component suppliers,
independent consultants and other third parties in seeking improvements in the
Company's products.

GOVERNMENT REGULATION

Regulations of the Federal Communications Commission affect various products
of the Company. Certain regulations require that products which reside on a
customer's premises and interconnect the public switched network meet certain
standards to prevent harm to the network. Other regulations limit the levels
of electromagnetic radiation which may emanate from an electronic device
located on a customer's premise. The Company currently complies with these
regulations and foresees no difficulties in complying with these regulations
in the future. Changes in existing laws and regulations which govern the
telecommunication industry could affect the business of the Company.

25
<PAGE>

The Telecommunications Act of 1996 (the "Telecommunications Act") contains
certain provisions that lift, or establish procedures for lifting, certain
restrictions relating to the RBOCs' ability to engage directly in the Internet
access business. The Telecommunications Act also makes it easier for national
long distance carriers such as AT&T to offer local telephone service and
allows RBOCs to provide electronic publishing of information and databases.
Competition from these companies could have a material adverse effect on the
Company.

LEGAL PROCEEDINGS

On July 28, 1997 the Company was named as a defendant in an action brought
by AT&T Corp. ("AT&T") against Connect America, a reseller of "800" number
service, its officers and affiliates, and several Internet Service Providers,
including the Company. The action was brought in the U.S. District Court for
the Central District of California. In general, the complaint alleges that
Connect America and its officers fraudulently acquired 800 numbers from AT&T,
failed to pay for them, and resold them to the Company and the other Internet
Service Providers on a "flat rate" basis, notwithstanding the fact that AT&T's
charges for 800 service are typically based on time utilized. The claims
against the Company and the other Internet Service Providers are based on
unjust enrichment, on the theory that the Company and the other Internet
Service Providers knew or should have known that flat rate 800 service was
unavailable. In addition to injunctive relief against Connect America and its
officers, the complaint seeks damages of $7.4 million, punitive damages and
attorneys' fees. The Company has filed an answer to the complaint denying the
material allegations thereof, and plans to vigorously contest the action.
There can be no assurance that the Company will be successful in its defense
of the action. Because of the large amount sought in the complaint, an adverse
outcome would have a material adverse effect on the Company's financial
condition.

EMPLOYEES

As of June 30, 1997, the Company had 29 full time employees. The Company's
employees have never been covered by a collective bargaining agreement. The
Company has never experienced any work stoppages, slowdowns, or other serious
labor problems and considers its relations with its employees to be excellent.

RECENT FINANCINGS

During September and October of 1997 the Company completed private
financings with net proceeds of $5,957,000. The financings included the
issuance by the Company of 333,333 shares of Common Stock and warrants to
purchase an additional 333,333 shares of Common Stock, at an exercise price of
$5.00 per share. In addition, the Company issued 540 shares of Series A
Preferred Stock at a purchase price of $10,000 per share, which shares are
convertible into shares of Common Stock at a conversion price of $5.00 per
share, subject to certain adjustments relating to the market price of the
underlying Common Stock. In connection with the issuance of the Series A
Preferred Stock, the Company also issued warrants which are exercisable to
purchase shares of Common Stock of the Company's subsidiary, FNet, and which
may, under certain circumstances, be exercisable to acquire shares of Common
Stock of the Company at the conversion price of the Series A Preferred Stock.

26
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Frank W. Peters......... 59 President, Chief Executive Officer and Chairman of the Board
Peter S. Buswell........ 48 Director
Robert S. Harp.......... 59 Director
Thomas Russell.......... 45 Chief Financial Officer and a Director
Sparrow Marcioni........ 39 Vice President of Marketing
</TABLE>

Mr. Peters has been President of the Company since its organization in 1981.
Between 1975 and 1984 he was also President of Franklin Data Systems and
Franklin Systems Corporation, predecessors to the Company. From 1973 to 1975,
he was Vice President of Jacquard Systems Corporation, a computer hardware and
word processing software development marketer. Between 1965 and 1973 he held
various marketing and sales positions with IBM.

Mr. Buswell has been the Vice President of Marketing and Business
Development for Xantel, since 1996. Previously, he was Chief Marketing Officer
for TAA, a software developer engaged in the development of enterprise wide
mixed media messaging systems. During the 1980s he was manager of Strategic
Planning for the Communications Systems Group of Exxon Enterprises, the
venture capital unit of Exxon. He has also served as Director of Product Line
Management at ITT and as Manager of Program Development at Datapoint.
Mr. Buswell has been a director of the Company since 1996. He also served as a
Vice President of the Company during the 1980's.

Dr. Harp has been Chairman of Quesant Instruments, a manufacturer of
scanning probe microscopes, since 1992. Between 1987 and 1992, he was Chairman
of Vertek, a manufacturer of PC peripheral devices. He is also a founder of
Vector Graphic, Inc. Dr. Harp has been a director of the Company since 1996.

Mr. Russell has been the Chief Financial Officer and a director of the
Company since 1996. He also served as its Chief Financial Officer between 1988
and 1990. Between 1990 and 1996 Mr. Russell owned and operated Russell
Industries, a manufacturer's representative and distribution firm. Prior to
that time Mr. Russell was a partner at Sorenson, Russell & Company, a public
accounting firm, and was employed by Peat Marwick. Mr. Russell is a certified
public accountant.

Ms. Marcioni has been Vice President of Marketing of the Company since
February, 1997. She is the founder and since 1995 was President of Internet
Passport, a company which offered direct link satellite technology to the
Internet industry, and which was acquired by the Company in February 1997.
From 1988 to 1995, she served as president of The Omni Group, a marketing and
promotion company based in Atlanta.

27
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth certain compensation paid or accrued by the
Company during the years ended June 30, 1996 and June 30, 1997 to its
President and its Chief Financial Officer (the "Named Executive Officers").

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Frank W. Peters, President......... 1996 $275,056(1) $100,000 -0-
1997 $291,556(1) $100,000 -0-
Thomas Russell, Chief Financial
Officer(2)........................ 1996 -0- -0- -0-
1997 $ 60,208 $ 10,000 -0-
</TABLE>
- --------
(1) Portions of these amounts were deferred. See "Transactions with
Management," below.

(2) Mr. Russell was employed by the Company beginning in October 1996.

Except as disclosed above, no compensation characterized as long-term
compensation, including restricted stock awards issued at a price below fair
market value or long-term incentive plan payouts, were paid by the Company
during the years ended June 30, 1996 and 1997 to any of the Named Executive
Officers.

STOCK OPTIONS

The Company's 1986 Stock Option Plan, as amended (the "1986 Plan"),
authorizes the granting of options to employees that are intended to qualify
as "incentive stock options" under the Internal Revenue Code of 1986
("Incentive Stock Options"), as well as stock options that are not intended to
so qualify ("Nonstatutory Options"), which may be granted to officers,
directors, employees, consultants, and others expected to provide significant
services to the Company or its subsidiaries. The 1986 Plan, which is
administered by the Board of Directors, currently covers an aggregate of
700,000 shares. The maximum term of a stock option granted under the 1986 Plan
is ten years, but if the optionee at the time of grant has voting power over
more than 10% of the Company's stock, the maximum term is five years. If an
option granted expires or terminates, the shares subject to the unexercised
portion of that option will become available for the grant of future options
under the 1986 Plan. If an optionee terminates his or her service to the
Company, the optionee may exercise only those option shares vested as of the
date of termination and must effect such exercise within three months,
although the Board of Directors may set a longer period for exercise of stock
options. The 1986 Plan may be amended at any time by the Board of Directors,
although certain amendments would require shareholder approval.

The exercise price of Incentive Stock Options granted under the 1986 Plan
must be at least equal to the fair market value of the stock subject to the
option on the date of grant, except that the exercise price of an Incentive
Stock Option granted to an optionee who owns stock possessing more than 10% of
the voting power of the Company's outstanding capital stock must equal at
least 110% of the fair market value of the stock subject to the option on the
date of grant. The exercise price of Nonstatutory Stock Options granted under
the 1986 Plan must be at least equal to 85% of the fair market value of the
stock subject to the option on the date of the grant. Payment of the exercise
price may be made in cash, promissory notes or other consideration as
determined by the Board of Directors.

The Company has also adopted a 1988 Stock Option Plan on substantially
similar terms as the 1986 Plan. The 1988 Plan covers 300,000 shares. In 1994
the Company adopted an Incentive Stock Option Plan, providing for the grant of
incentive stock options to purchase up to 600,000 shares on substantially the
same terms as the incentive stock options under the 1986 Plan. In 1995 the
Company adopted its 1994 Nonstatutory Stock Option Plan, which provides for
the grant of nonstatutory options to purchase up to 1,400,000 shares on
substantially the same terms as the Nonstatutory Options under the 1986 Plan.

28
<PAGE>

The following table sets forth information with respect to ownership of
options and option values as of June 30, 1997 with respect to the Named
Executive Officers. No options were exercised by the Named Executive Officers
in the fiscal year ended June 30, 1997. The Company has no outstanding stock
appreciation rights, either freestanding or in tandem with options.

<TABLE>
<CAPTION>
OPTION VALUES AS OF JUNE 30, 1997
---------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JUNE 30, 1997 JUNE 30, 1997 (1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Frank W. Peters....... 3,008,695(2)/175,000 $6,620,477(2)/$273,000
Thomas Russell........ 100,000 /150,000 $ 103,000 /$247,000
</TABLE>
- --------
(1) Assumes that a share of Common Stock was valued at $2.34 per share on June
30, 1997. Amounts reflected are based on this assumed price minus the
exercise price and do not indicate that shares were sold.

(2) Does not include shares issuable upon conversion of convertible notes. See
"Transactions with Management," below.

Option Grants During the Years Ended June 30, 1996 and 1997. The following
table sets forth certain information regarding stock options granted to the
Named Executive Officers during the twelve months ended June 30, 1995 and
1996:
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES
OPTIONS IN FISCAL EXERCISE
NAME YEAR GRANTED YEAR PRICE EXERCISE DATE
---- ---- ---------- ---------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Frank W. Peters..... 1996 350,000 39% $ .78 3/15/97-3/15/98
Frank W. Peters..... 1997 500,000 40% $1.31 12/13/96
Thomas Russell...... 1996 200,000 22% $ .69 5/11/97-5/11/2000
Thomas Russell...... 1997 100,000 8% $1.31 12/13/96
</TABLE>

Employment Arrangements. The Company's President is employed pursuant to an
Employment Agreement expiring on December 31, 1997. The Employment Agreement
provides for monthly compensation at the rate of $20,000, with annual
increases of 6%. The Company's Board of Directors has approved a new six year
Employment Agreement for the Company's President, effective January 1, 1998.
The new Employment Agreement provides for compensation at the rate of $27,000
per month, with annual increases of 6%.

TRANSACTIONS WITH MANAGEMENT

During the year ended June 30, 1995, the Company issued notes for an
aggregate of $217,000 payable to its President, Frank W. Peters, in lieu of
compensation, included in the table above. These notes bear interest at the
rate of 9% per annum and are due and payable as follows: $12,000 due on August
20, 1995, $65,000 due on August 20, 1997, and $140,000 due on January 5, 1999.
Mr. Peters has waived any defaults or penalties with respect to the unpaid
portions of these notes. The $140,000 note is convertible into shares of the
Company's Common Stock at a conversion price of $.10 per share.

During the year ended June 30, 1995, the Company issued 2,000,000 shares to
its President, Frank W. Peters, upon exercise of options previously granted.
The exercise price was paid by the cancellation of notes in the amount of
$92,000 and accrued interest in the amount of $42,000.

During the year ended June 30, 1996, the Company transferred 4,200,000 of
its shares of FNet to its President, Frank W. Peters, and to Colin Patterson,
who was a director of the Company at the time, in cancellation of notes
payable and for consulting services. Management of the Company valued the FNet
shares at $.015 per share, based upon the book value of FNet at the time of
the transaction. The issuance of these shares caused the Company's ownership
percentage of FNet to decrease from 100% to 79% as of June 30, 1996.

During the year ended June 30, 1996, the Company deferred payment of
$117,000 in compensation, included in the table above, to its President, Frank
W. Peters, with his permission, for an undetermined time period.

29
<PAGE>

On September 20, 1995, the Company issued a promissory note for $100,000,
bearing interest at the rate of 8%, to its President, in lieu of bonus
compensation, included in the table above, for attaining certain corporate
objectives. The note is payable in twenty four equal monthly installments of
$4,523. No payments have been made to date on this Note, and the President has
waived the default provisions.

On September 20, 1996, the Company issued a $100,000 promissory note to its
President in exchange for services rendered in fiscal 1997. No compensation
expense was recorded in fiscal 1996 relating to this note. Bonus compensation
expense of $100,000 will be recorded in connection therewith in fiscal 1997.
The note bears interest at 8% per annum, and is payable in thirty-six equal
monthly installments of $3,134.

On December 13, 1996, the Company granted an option to purchase 1,000,000
shares of its Common Stock at an exercise price of $1.31 per share, the market
price as of December 13, 1996. The options were granted to key management
employees for achievement of certain goals. The options are all currently
exercisable. Of the options, 500,000 were granted to the Company's President,
Frank W. Peters, and 100,000 were granted to its Chief Financial Officer,
Thomas Russell.

During the year ended June 30, 1997, the Company deferred payment of
$112,000 in compensation, included in the table above, to its President, with
his permission, for an undetermined time period.

As of June 30, 1997, the deferred compensation of $117,000 and $112,000 was
converted into two promissory notes. One half of the principal balance of the
notes is convertible into shares of the Company's Common Stock at a conversion
rate of 50% of the fair market value of the Common Stock at the date of
conversion.

30
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1997 by each director
and executive officer of the Company, each person known to the Company to be
the beneficial owner of more than 5% of the outstanding Common Stock, and all
directors and executive officers of the Company as a group. Except as
otherwise indicated below, each person has sole voting and investment power
with respect to the shares owned, subject to applicable community property
laws.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
(INCLUDES EXERCISABLE OPTIONS)
-------------------------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- ------------------ ---------------
<S> <C> <C>
Frank W. Peters .................... 5,147,719(1) 39%
733 Lakefield Road
Westlake Village, CA 91361
Peter S. Buswell ................... 105,000 1%
733 Lakefield Road
Westlake Village, CA 91361
Robert S. Harp ..................... -0- -0-
733 Lakefield Road
Westlake Village, CA 91361
Thomas Russell...................... 150,000 1%
733 Lakefield Road
Westlake Village, CA 91361
Sparrow Marcioni ................... 600,000 5%
733 Lakefield Road
Westlake Village, CA 91361
All directors and executive officers
of the Company as a group (5
persons)........................... 6,002,719 45%
</TABLE>
- --------
(1) Does not include shares issuable upon conversion of 50% of the balance of
notes totalling $229,000 into shares at 50% of market value.

31
<PAGE>

SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1997 by each Selling
Shareholder, the number of shares to be sold by each, and the percentage
ownership of each Selling Shareholder after the sale of the Shares included in
this Registration Statement (including exercise of all warrants underlying
shares included in this table).

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AFTER
SHARES BENEFICIALLY OWNED SHARES OFFERING
---------------------------- TO BE ---------------
NAME NUMBER PERCENT SOLD NUMBER PERCENT
- ---- -------------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
M. H. Meyerson & Co., 595,000 3.9% 595,000 -0- -0-
Inc......................
Wilson Davis.............. 30,000 0.2% 30,000 -0- -0-
Sam Wilson................ 50,000 0.3% 50,000 -0- -0-
Paul Davis................ 60,000 0.4% 50,000 10,000 .1%
Lyle Davis................ 120,000 0.8% 60,000 60,000 .4%
Byron Barkley............. 40,000 0.3% 40,000 -0- -0-
Bollard Investment Co..... 80,000 0.5% 40,000 40,000 .3%
Bruce Whaley.............. 40,000 0.4% 40,000 -0- -0-
E. Bryan Bagley........... 40,000 0.3% 40,000 -0- -0-
Joe Fisher................ 132,000 0.9% 110,000 22,000 .1%
Gary Nelson............... 128,000 0.8% 64,000 64,000 .4%
Gary Nelson
Transcorp C/F............. 11,000 0.1% 11,000 -0- -0-
Raleigh Baughman.......... 87,300 .6% 50,000 37,300 .2%
Blair Holder.............. 135,000 .9% 50,000 85,000 .6%
Vince Clements............ 100,000 .6% 50,000 50,000 .3%
Terry Widner.............. 135,175 .9% 50,000 85,175 .6%
Mike Peters............... 498,568 3.3% 190,000 308,568 2.0%
Delaware Charter Guaranty
& Trust Co., FBO
Ronald Heller............ 303,000 2.0% 303,000 -0- -0-
Delaware Charter Guaranty
& Trust Co., FBO
David Nagelberg.......... 303,000 2.0% 303,000 -0- -0-
Martin & Co............... 146,000 1.0% 146,000 -0- -0-
Michael and Linda 28,000 0.2% 28,000 -0- -0-
Silvestri................
Jeffrey Barber............ 14,000 0.1% 14,000 -0- -0-
Joel Marcus............... 12,000 0.1% 12,000 -0- -0-
Rocco Vezza............... 12,000 0.1% 12,000 -0- -0-
Joanne Gioia.............. 12,000 0.1% 12,000 -0- -0-
Joseph Schmidt............ 10,000 0.1% 10,000 -0- -0-
Eileen Rouse.............. 60,000 0.4% 10,000 50,000 .3%
Kevin Charos.............. 10,000 0.1% 10,000 -0- -0-
Marcia Joedicker.......... 20,000 0.1% 20,000 -0- -0-
Frederick I. Camerer...... 161,647 1.1% 17,500 144,147 .9%
Paul Sper................. 60,000 0.4% 60,000 -0- -0-
Sparrow Marcioni.......... 600,000 4.0% 300,000 300,000 2.0%
Mark Milhollan............ 12,000 0.1% 12,000 -0- -0-
Neil Wyenn................ 25,000 0.2% 25,000 -0- -0-
</TABLE>

32
<PAGE>

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED AFTER
SHARES BENEFICIALLY OWNED SHARES OFFERING
----------------------------- TO BE -----------------
NAME NUMBER PERCENT SOLD NUMBER PERCENT
- ---- --------------- ------------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Dianne Oliver......... 10,000 0.1% 8,000 2,000 -0-
Peter Buswell......... 30,000 0.2% 30,000 -0- -0-
John Calderwood....... 6,250 0.0% 6,250 -0- -0-
Kristin Peters........ 138,127 0.9% 10,000 128,127 .8%
Terry Lee............. 20,000 0.1% 20,000 -0- -0-
Steve Sullivan........ 20,000 0.1% 20,000 -0- -0-
Garry Fredericksen.... 190,000 1.3% 190,000 -0- -0-
Larry Kupferberg...... 2,500 0.0% 2,500 -0- -0-
Jacqueline Knapp...... 2,500 0.0% 2,500 -0- -0-
--------------- --------- --------- ---
Total................. 4,490,067 29.3% 3,103,750 1,386,317 9.1%
=============== ========== ========= ========= ===
</TABLE>

33
<PAGE>

PLAN OF DISTRIBUTION

THE WARRANTS

Of the shares covered by this Prospectus, 2,055,000 are issuable upon the
exercise of certain warrants to purchase Common Stock of the Company (the
"Warrants"). The Warrants were issued in connection with a private placement
of shares and warrants by the Company that occurred between May 1995 and
February 1996. The initial exercise prices of the Warrants were between $1.25
and $1.35 per share.

In consideration for the filing of the Registration Statement of which this
Prospectus is a part, the holders of the Warrants have agreed to pay the
Company an additional exercise price equal to 30% of the net proceeds of the
sale of the shares issued upon exercise of the Warrants, to the extent such
net proceeds exceed $4.00 per share. Also, the largest Warrant holder, M.H.
Meyerson & Co., Inc., has agreed to reimburse the Company for up to $70,000 in
legal and accounting fees incurred in connection with the Registration
Statement of which this Prospectus is a part.

SALES BY SELLING SHAREHOLDERS

The Selling Shareholders have informed the Company that they intend to sell
the shares of Common Stock offered by them hereby, from time to time in
transactions (which may include block transactions), in the over-the-counter
market, in negotiated transactions, or a combination of such methods of sale,
at fixed prices which may be changed, at market prices prevailing at the time
of sale, or at negotiated prices. The Selling Shareholders may effect such
transactions by selling their shares directly to purchasers or to or through
broker-dealers, which may act as agents or principals. Each Selling
Stockholder will bear all expenses with respect to the offering of shares by
him, except that the Company will pay the costs associated with registering
the shares under the Act and preparing this Prospectus, subject to
reimbursement of up to $70,000 of such costs by M. H. Meyerson & Co., Inc. All
sales by Selling Shareholders will be effected through delivery of a copy of
this Prospectus as it may be amended or supplemented from time to time in
accordance with the provisions of the Securities Act of 1933 (the "Act") and
the rules and regulations promulgated by the Commission thereunder. If
necessary, the Prospectus will be amended by the filing of a supplement or
post-effective amendment to describe any material changes in the stated plan
of distribution. The Selling Shareholders, and any intermediaries, including
broker-dealers through whom their shares are sold, may be deemed
"underwriters" within the meaning of the Act of the shares to be sold by them
in connection with this offering. The Selling Shareholders may agree to
indemnify any agent, dealer, or broker-dealer that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Act.

34
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The Company is authorized to issue up to 90,000,000 shares of Common Stock,
without par value, of which 14,027,686 shares of Common Stock have been issued
and are outstanding. Holders of the Common Stock are entitled to one vote per
share on all matters to be voted upon by the shareholders, and to cumulate
votes in the election of directors. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." Upon
the liquidation, dissolution, or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights.

The Company is authorized to issue 10,000,000 shares of Preferred Stock,
issuable in one or more series, each with such designations, preferences,
rights, and restrictions as the Board of Directors may determine. In
accordance with such authorization, the Board of Directors has designated
1,000 shares as Series A Preferred Stock, of which 540 shares are issued and
outstanding. The Series A Preferred Stock is not redeemable, and has no
dividend preference. Each share of Series A Preferred Stock has a liquidation
preference of $10,000 per share, and accrues a premium at the rate of 8% per
annum. The Series A Preferred Stock has no voting rights, except as required
by law, and is convertible into Common Stock commencing in March 1998 at a
conversion price equal to the lesser of $5.00 per share or between 80% and 85%
of the fair market value of the Common Stock, based on closing prices during a
measuring period prior to conversion, with a minimum of $1.00 per share. The
Series A Preferred Stock is automatically converted into Common Stock in
October of 1998.

LEGAL MATTERS

Certain legal matters with respect to the legality under California law of
the shares of Common Stock offered hereby will be passed upon for the copy by
Phillips & Haddan LLP, Newport Beach, California.

EXPERTS

The consolidated financial statements of the Company as of June 30, 1995 and
1996, and for the two years ended June 30, 1996, included in this Prospectus,
have been audited by Corbin & Wertz, independent certified public accountants,
to the extent and for the periods indicated in their report appearing
elsewhere herein. The consolidated financial statements of the Company as of
June 30, 1997, and for the year then ended, included in this Prospectus, have
been audited by Singer Lewak Greenbaum & Goldstein LLP, independent certified
public accountants, to the extent and for the period indicated in their report
appearing elsewhere herein. The financial statements of Internet Passport, LLC
as of June 30, 1996 and for the period from February 16, 1996 to June 30, 1996
have been audited by Corbin & Wertz, independent certified public accountants,
to the extent and for the period indicated in their report appearing elsewhere
herein. The consolidated financial statements included herein are included in
reliance upon the reports of Corbin & Wertz and Singer Lewak Greenbaum &
Goldstein LLP, given upon the authority of such firms as experts in auditing
and accounting.

CHANGE IN ACCOUNTANTS

On August 15, 1997 the Company engaged Singer Lewak Greenbaum & Goldstein
LLP ("SLGG") as the Company's independent accountants to report on the
Company's balance sheet as of June 30, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year
then ended. The decision to appoint SLGG was approved by the Company's Board
of Directors.

Corbin & Wertz ("C&W") was dismissed by the Company on August 15, 1997. C&W
had acted as the Company's independent accountants since 1992. The independent
auditors' reports issued by C&W on the Company's consolidated financial
statements for the years ended June 30, 1996 and 1995 did not contain an
adverse opinion or disclaimer of opinion, and such reports were not modified
for any departure from generally

35
<PAGE>

accepted accounting principles or for any limitation of audit scope. C&W's
independent auditors' report, dated September 20, 1996, on the consolidated
financial statements of the Company for the years ended June 30, 1996 and 1995
was modified as to the uncertainty of the Company to continue as a going
concern. There were no disagreements with C&W, resolved or unresolved, on any
matter of accounting principles or practices, financial disclosure, or
auditing scope or procedure, which, if not resolved to C&W's satisfaction,
would have caused it to make reference to the subject matter of the
disagreement in connection with its reports. C&W was not retained to report on
the Company's 1997 financial statements.

The Company has requested C&W to review the disclosure contained herein and
has provided C&W the opportunity to furnish the Company with a letter
addressed to the Commission containing any new information, clarification of
the Company's expression of C&W's views or the respects in which C&W does not
agree with the statements contained herein. C&W has reviewed the disclosure
contained herein and has advised the Company that it does not intend to
deliver such a letter to the Company.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act of 1933, as
amended, with respect to the securities offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including the
exhibits and financial statements filed therewith. Statements contained in
this Prospectus as to the contents of any contract or other documents are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in its entirety by such reference.
All of these documents may be obtained upon payment of the prescribed fees or
examined without charge at the office of the Securities and Exchange
Commission, 450 Fifth Street, N. W., Washington, D. C. 20549, or by way of the
Commission's Internet address, http://www.sec.gov.

36
<PAGE>

INDEX TO FINANCIAL STATEMENTS

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants........................ F-2
Independent Auditors' Report.............................................. F-3
Financial Statements
Consolidated Balance Sheets............................................. F-4
Consolidated Statements of Operations................................... F-5
Consolidated Statements of Shareholders' Equity (Deficit)............... F-6
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-9

INTERNET PASSPORT, LLC

Report of Independent Public Accountants.................................. F-26
Balance Sheet as of June 30, 1996......................................... F-27
Statements of Operations for the Eight-Month Period Ended February 28,
1997 and the period ended June 30, 1996.................................. F-28
Statements of Member's Deficit............................................ F-29
Statements of Cash Flows for the Eight-Month Period Ended February 28,
1997 and the Period Ended June 30, 1996.................................. F-30
Notes to Financial Statements............................................. F-31
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
Franklin Telecommunications Corp.

We have audited the accompanying consolidated balance sheet of Franklin
Telecommunications Corp. and subsidiaries as of June 30, 1997, and the related
consolidated statements of operations, shareholders' equity (deficit), and
cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Franklin
Telecommunications Corp. and subsidiaries as of June 30, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with generally accepted accounting
principles.

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California

September 17, 1997
(except for Note 14,
as to which the date
is October 31, 1997)

F-2
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Franklin Telecommunications Corp.

We have audited the consolidated balance sheet of Franklin
Telecommunications Corp. and subsidiaries (the "Company") as of June 30, 1996
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the years in the two-year period ended
June 30, 1996. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 Franklin Telecommunications Corp., and subsidiaries as of June 30, 1996,
and the results of their operations and their cash flows for each of the years
in the two-year period ended June 30, 1996 in conformity with generally
accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As disclosed in
Note 1 to the consolidated financial statements, the Company's recurring
losses from operations through June 30, 1996, and its working capital deficit
at June 30, 1996, raise substantial doubt about the entity's ability to
continue as a going concern. Management's plans in regard to these matters are
further described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.

CORBIN & WERTZ

Irvine, California
September 20, 1996

F-3
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------
1997 1996
----------- -----------
ASSETS (NOTE 4)
---------------
<S> <C> <C>
Current assets:
Cash............................................... $ 1,464,000 $ 166,000
Accounts receivable, less allowance for doubtful
accounts of $34,000 and $8,000, respectively...... 80,000 86,000
Other receivables.................................. 199,000 --
Inventories (Note 2)............................... 394,000 257,000
Prepaid expenses................................... 68,000 5,000
----------- -----------
Total current assets............................. 2,205,000 514,000
----------- -----------
Property and equipment (Notes 4 and 8):
Machinery and equipment............................ 163,000 215,000
Furniture and fixtures............................. 97,000 46,000
Computers and software............................. 713,000 280,000
----------- -----------
973,000 541,000
Less accumulated depreciation...................... 406,000 456,000
----------- -----------
Total property and equipment..................... 567,000 85,000
----------- -----------
Excess of cost over fair value of net assets of
companies acquired, net of accumulated amortization
of $40,000 and $32,000, respectively................ 591,000 62,000
Other assets......................................... 151,000 51,000
----------- -----------
Total assets..................................... $ 3,514,000 $ 712,000
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of obligations under capital lease
obligations (Note 8).............................. $ 361,000 $ --
Current portion of long-term debt (majority due to
a related party) (Note 4)......................... 301,000 94,000
Accounts payable................................... 175,000 143,000
Accrued liabilities (Note 3)....................... 559,000 483,000
----------- -----------
Total current liabilities........................ 1,396,000 720,000
Long-term debt, (majority due to a related party)
less current portion (Note 4)....................... 360,000 238,000
Other liabilities (Note 9)........................... 183,000 503,000
----------- -----------
Total liabilities................................ 1,939,000 1,461,000
----------- -----------
Minority Interest.................................... -- --
Commitments and contingencies (Note 8)
Shareholders' equity (deficit) (Note 5):
Preferred stock, no par value; 10,000,000 shares
authorized; no shares issued and outstanding...... --
Common stock, no par value; 90,000,000 shares
authorized; 13,191,223 and 10,868,786 shares
issued and outstanding............................ 9,971,000 5,372,000
Common stock committed, no par value; 296,066 and
48,350 shares committed but not yet issued........ 579,000 30,000
Accumulated deficit................................ (8,975,000) (6,151,000)
----------- -----------
Total shareholders' equity (deficit)............. 1,575,000 (749,000)
----------- -----------
Total liabilities and shareholders' equity
(deficit)....................................... $ 3,514,000 $ 712,000
=========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Sales:
Product................................ $ 1,337,000 $ 397,000 $1,481,000
Internet services...................... 398,000 33,000 --
----------- ----------- ----------
Total sales.......................... 1,735,000 430,000 1,481,000
----------- ----------- ----------
Cost of sales:
Product................................ 681,000 549,000 518,000
Internet services...................... 309,000 41,000 --
----------- ----------- ----------
Total cost of sales.................. 990,000 590,000 518,000
----------- ----------- ----------
Gross profit (loss).................. 745,000 (160,000) 963,000
----------- ----------- ----------
Operating expenses:
Research and development expenses...... 480,000 320,000 308,000
Selling, general, and administrative
expenses.............................. 1,456,000 947,000 828,000
Write-down of goodwill................. 1,584,000 70,000 --
----------- ----------- ----------
Total operating expenses............. 3,520,000 1,337,000 1,136,000
----------- ----------- ----------
Loss from operations..................... (2,775,000) (1,497,000) (173,000)
----------- ----------- ----------
Other income (expense):
Interest expense....................... (41,000) (26,000) (10,000)
Other income (expense)................. (6,000) (5,000) 25,000
----------- ----------- ----------
Total other income (expense)......... (47,000) (31,000) 15,000
----------- ----------- ----------
Loss before minority interest and
provision for income taxes.............. (2,822,000) (1,528,000) (158,000)
Minority interest in loss of subsidiary.. -- 63,000 --
----------- ----------- ----------
Loss before provision for income taxes... (2,822,000) (1,465,000) (158,000)
Provision for income taxes............... 2,000 2,000 2,000
----------- ----------- ----------
Net loss................................. $(2,824,000) $(1,467,000) $ (160,000)
=========== =========== ==========
Net loss per common share................ $ (.23) $ (.14) $ (.02)
=========== =========== ==========
Weighted average common shares
outstanding............................. 12,267,991 10,279,281 6,475,984
=========== =========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK COMMITTED
--------------------- ----------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
---------- ---------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994.. 5,847,512 $3,975,000 -- $ -- $(4,524,000) $ (549,000)
Common stock issued for
cash................... 220,000 110,000 110,000
Business acquisition.... 326,497 47,000 47,000
Stock options/warrants.. 304,280 30,000 30,000
Compensation............ 22,000 2,000 2,000
Notes payable and
accrued interest....... 2,000,000 134,000 134,000
Net loss................ (160,000) (160,000)
---------- ---------- ------- -------- ----------- -----------
Balance, June 30, 1995.. 8,720,289 4,298,000 -- -- (4,684,000) (386,000)
Correction of error..... 23,031 --
Common stock issued for
cash................... 1,808,572 910,000 23,350 20,000 930,000
Business acquisition.... 85,000 65,000 25,000 10,000 75,000
Stock options/warrants.. 189,500 77,000 77,000
Compensation............ 34,839 11,000 11,000
Accounts payable........ 7,555 11,000 11,000
Net loss................ (1,467,000) (1,467,000)
---------- ---------- ------- -------- ----------- -----------
Balance, June 30, 1996.. 10,868,786 5,372,000 48,350 30,000 (6,151,000) (749,000)
Common stock issued for
cash................... 880,200 888,000 20,000 25,000 913,000
Issuance for notes re-
ceivable............... 243,250 -- --
Issuance of committed
shares................. 48,350 30,000 (48,350) (30,000) --
Business acquisition.... 708,887 1,458,000 232,066 525,000 1,983,000
Services rendered....... 77,000 44,000 29,000 106,000
Stock options/warrants.. 441,750 196,000 196,000
Proceeds received from
the sale of subsidiar-
ies' common stock...... 1,950,000 1,950,000
Net loss................ (2,824,000) (2,824,000)
---------- ---------- ------- -------- ----------- -----------
Balance, June 30, 1997.. 13,191,223 $9,971,000 296,066 $579,000 $(8,975,000) $ 1,575,000
========== ========== ======= ======== =========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-----------------------------------
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(2,824,000) $(1,467,000) $(160,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization......... 110,000 45,000 29,000
Provision for loss on obsolete
inventory............................ -- 226,000 4,000
Provision for loss on doubtful
accounts............................. -- (2,000) (24,000)
Write-down of goodwill................ 1,584,000 70,000 --
Notes payable for services rendered... 329,000 -- 217,000
Stock issued for services rendered.... 106,000 11,000 28,000
Loss on disposal of property.......... 37,000 1,000 --
(Increase) decrease in:
Accounts receivable................... 14,000 (34,000) 130,000
Inventories........................... (132,000) 131,000 (117,000)
Prepaid expenses...................... (63,000) 9,000 (8,000)
Increase (decrease) in:
Accounts payable...................... (96,000) (97,000) 40,000
Accrued liabilities................... 71,000 175,000 (38,000)
Accrued other liabilities............. -- (24,000) (92,000)
Other liabilities..................... (310,000) -- --
----------- ----------- ---------
Net cash provided by (used in) operating
activities............................... (1,174,000) (956,000) 9,000
----------- ----------- ---------
Cash flows from investing activities:
Purchases of property and equipment..... (324,000) (58,000) (8,000)
Cash received (paid) in connection with
business acquisitions.................. 4,000 3,000 (8,000)
Issuance of notes receivable............ (100,000) -- --
Proceeds from notes receivable.......... 32,000 -- --
Other assets............................ (100,000) 1,000 1,000
Other liabilities....................... (38,000) -- --
----------- ----------- ---------
Net cash used in investing activities..... (526,000) (54,000) (15,000)
----------- ----------- ---------
Cash flows from financing activities:
Payments on other liabilities........... (10,000) (5,000) (35,000)
Proceeds from sale of Company stock..... 1,109,000 1,007,000 114,000
Proceeds from sale of minority stock in
consolidated subsidiary................ 1,950,000 -- --
Issuance of long-term debt.............. -- 102,000 --
Payments on long-term debt.............. (63,000) (36,000)
Payments on capital lease obligation.... (51,000) -- --
----------- ----------- ---------
Net cash provided by financing activities. 2,998,000 1,041,000 43,000
----------- ----------- ---------
Net increase in cash...................... $ 1,298,000 $ 31,000 $ 37,000
Cash, beginning of year................... 166,000 135,000 98,000
----------- ----------- ---------
Cash, end of year......................... $ 1,464,000 $ 166,000 $ 135,000
=========== =========== =========
Supplemental disclosures of cash flow
information:
Interest paid........................... $ -- $ 12,000 $ 4,000
=========== =========== =========
Income taxes paid....................... $ 2,000 $ 2,000 $ 2,000
=========== =========== =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-7
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED

Supplemental schedule of non-cash investing and financing activities:

During the years ended June 30, 1997 and 1996, the Company completed certain
acquisitions as described in Note 1. In conjunction with these acquisitions,
aggregate liabilities assumed were as follows:

<TABLE>
<CAPTION>
1997 1996
----------- --------
<S> <C> <C>
Fair value of the assets acquired, net of cash and
including intangibles............................... $ 2,371,000 $ 72,000
Value of Company and subsidiary common stock issued
and committed for consideration..................... (1,983,000) (75,000)
Cash received in connection with the acquisition..... 4,000 3,000
----------- --------
Aggregate liabilities assumed........................ $ 392,000 $ --
=========== ========
</TABLE>

See Notes 1 and 5 for additional non-cash investing and financing
activities.

The accompanying notes are an integral part of these financial statements.

F-8
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

NOTE 1--GENERAL AND SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Business and Organization

Franklin Telecommunications Corp. ("Franklin") and its subsidiaries
(collectively the "Company") manufacture and distribute data communications
and access and connectivity products for T-1 and X.25 wide-area networks and
provide Internet services through its majority-owned subsidiary, FNet Corp.
("FNet"). FNet has had limited operations to date. The Company's customers are
located predominantly in the United States, Canada, Australia, and parts of
Europe in a wide range of industries including financial services, government,
and manufacturing.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplate the
Company as a going concern.

As reflected in the accompanying consolidated statements of operations, the
Company has had net losses for each of the years ended June 30, 1997, 1996,
and 1995. As shown in the accompanying consolidated statements of cash flows
for the years ended June 30, 1997, 1996, and 1995 the Company has raised funds
from sales of its common stock and the common stock of its majority-owned
subsidiary, FNet, to fund its operating losses. In previous years, the Company
has had fluctuating sales. With the introduction of the Company's new products
and services, sales may or may not continue to fluctuate.

In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to continue to
raise capital and generate positive cash flows from operations. The
consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue its existence.

Management plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in existence:

. The Company plans to utilize the cash on hand at June 30, 1997 to fund
operations.

. The Company plans to issue stock under Regulation D. Management believes
that this private placement will raise approximately $1,000,000.

. The Company has entered into a letter of agreement with an investment
banker which management believes will raise $2,000,000 to $5,000,000
through the private placement of convertible preferred stock (see Note
14).

Management of the Company believes that the cash on hand as of June 30,
1997, plus anticipated future equity sales, will sustain the Company's
operations for at least one year.

Acquisitions

Effective December 9, 1994, the Company acquired all of the outstanding
common stock of Lan Performance Labs, Inc. ("LPL") in exchange for 300,002
shares of its common stock. In conjunction with the acquisition, 26,495 shares
of Franklin's common stock were issued to certain creditors of LPL in exchange
for payables totaling $26,495. This reduction in payables was considered in
the allocation of fair market value of the assets acquired and liabilities
assumed for purposes of allocating the purchase price. On December 2, 1996

F-9
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

and July 31, 1997, the Company issued an additional 60,987 and 207,066 shares,
respectively, of its common stock to resolve a dispute in the final purchase
price of LPL. The value of the shares issued of $85,000 and $453,000 was
recorded to goodwill. The 207,066 shares issued on July 31, 1997 have been
recorded as common stock committed in the accompanying balance sheet as of
June 30, 1997.

The acquisition of LPL was accounted for by the Company using the purchase
method of accounting. The excess of approximately $637,000 (as adjusted for
the $85,000 and $453,000 as mentioned above) of the total acquisition cost
over the net assets acquired and liabilities assumed was allocated to
goodwill. The results of operations from December 9, 1994 to June 30, 1995 are
included in the accompanying consolidated statement of operations for the year
ended June 30, 1995. Fiscal 1995 pro forma presentation as if LPL had been
acquired July 1, 1994 is not presented because the effect on operations would
be immaterial.

During the year ended June 30, 1996, the Company completed two acquisitions
whereby the Company acquired all of the outstanding common stock of AlphaLink
("Alpha") and Malibu Internet Services ("MIS") in exchange for an aggregate of
110,000 shares of Franklin's common stock and 50,000 shares of FNet common
stock.

The acquisitions of Alpha and MIS were accounted for by using the purchase
method of accounting with the excess of approximately $65,000 of the total
acquisition cost over the net assets acquired and liabilities assumed being
allocated to goodwill. The results of operations from January 1, 1996 to June
30, 1996 for Alpha and June 1, 1996 to June 30, 1996 for MIS, respectively,
are included in the accompanying consolidated statement of operations for the
year ended June 30, 1996. Fiscal 1996 pro forma presentation as if these two
acquisitions had been acquired as of the beginning of the 1996 fiscal year and
fiscal 1995 pro forma presentation is not presented because the effect on
operations would be immaterial.

On December 13, 1996, the Company acquired the assets of No. 1 Internet
Services ("No. 1") in exchange for 40,000 shares of Franklin's common stock
and options to purchase 10,000 shares of Franklin's common stock at $1.25,
which was the fair market value on December 2, 1996, exercisable January 1,
1998. In addition, FNet issued 20,000 shares of its Common Stock valued at
$20,000 and granted options to purchase 80,000 shares of FNet common stock,
exercisable at the rate of 20,000 shares per year at $1.00 per share in each
of the four years beginning January 1, 1998. The acquisition was accounted for
as a purchase with the excess of approximately $74,000 of the total
acquisition cost over the net assets acquired and liabilities assumed being
allocated to goodwill. Pro forma results for the year ended June 30, 1997, as
if the acquisition had taken place as of the beginning of the 1997 fiscal
year, is not presented because the effect on operations would be immaterial.

On February 26, 1997, the Company agreed to acquire all of the outstanding
common stock of CPR Computer Repair ("CPR") in exchange for 25,000 shares of
Franklin's common stock. As part of the agreement, CPR's shareholder committed
to pay all of the outstanding obligations of CPR as of February 26, 1997 (the
"Commitment"). The Commitment is secured by a promissory note of $117,000. The
acquisition was accounted for using the purchase method of accounting with
excess of approximately $61,000 of the total acquisition costs over the net
assets acquired and liabilities assumed being allocated to goodwill. Pro forma
results for the year ended June 30, 1997, as if the acquisition had taken
place as of the beginning of the 1997 fiscal year, is not presented because
the effect on operations would be immaterial.

On June 30, 1997, the Company sold CPR for future royalties to be paid by
the buyer to the Company as defined in the purchase agreement. The Company
wrote-off the remaining goodwill of approximately $61,000 related to the
acquisition of CPR due to the uncertainty of the royalty stream.

On February 28, 1997, the Company agreed to acquire Internet Passport, LLC,
a limited liability company, ("Passport") in exchange for 600,000 shares of
Franklin's common stock. The agreement also provided for the

F-10
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

assumption of certain debts totaling $411,000, including the issuance of an
additional 7,900 shares of Franklin's common stock valued at $1.73 to satisfy
certain obligations of Passport. Passport is a start-up company incorporated
in August 1996 that provides Internet services pursuant to contractual
arrangements with satellite transmission providers. The acquisition was
accounted for using the purchase method of accounting with the excess of
approximately $1,478,000 of the total acquisition costs over the net assets
acquired and liabilities assumed being allocated to goodwill. Pro forma net
loss and net loss per share of the year ended June 30, 1997 and 1996, as if
the transaction had occurred at the beginning of those years, would have been
$(2,160,000) ($(.17) per share) and $1,533,000 ($(0.15) per share),
respectively, as presented in Note 11.

Joint Venture

In May 1996, the Company and a modem manufacturer formed Franklin Modem
Corp. (the "Venture"), a joint venture to design and manufacture a V.34 modem
to function with the Company's newly introduced D-Mark Channel Bank hardware.
The Company has a 70% ownership interest in the venture with the remaining
interest being owned by the modem manufacturer. As of May 16, 1997, this joint
venture agreement was replaced with a mutual supply agreement between the two
parties that provides for the Company to purchase 70% of certain boards
manufactured by the modem manufacturer.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Franklin Telecommunications Corp. and its wholly-owned or majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.

Concentrations of Credit Risk

At times, the Company holds cash with financial institutions in excess of
amounts insured by federal agencies.

The Company sells its products throughout the United States, Canada,
Australia, and parts of Europe and extends credit to its customers and
performs ongoing credit evaluations of such customers. The Company does not
obtain collateral to secure its accounts receivable. The Company evaluates its
accounts receivable on a regular basis for collectability and provides for an
allowance for potential credit losses as deemed necessary.

Two customers accounted for 29% and 10%, respectively, of the Company's
product sales for the year ended June 30, 1997. Four customers accounted for
18%, 17%, 13% and 12%, respectively, of the Company's product sales for the
year ended June 30, 1996. Two customers accounted for 28% and 15%,
respectively, of the Company's product sales for the year ended June 30, 1995.
At June 30, 1997, amounts due from two customers amounted to 20% and 10%,
respectively, of accounts receivable. At June 30, 1996, amounts due from three
customers amounted to 60%, 20% and 16%, respectively, of accounts receivable.
One customer, a related party, accounted for 5%, 1%, and 9% of product sales
for the years ended June 30, 1997, 1996, and 1995, respectively, and comprised
0% and 3% of accounts receivable at June 30, 1997 and 1996, respectively.

Export sales, primarily to Canada, Australia, Poland, and England,
represented 6%, 15%, and 19% of net sales for the years ended June 30, 1997,
1996, and 1995, respectively.

Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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. Such estimates affect the reported amounts of revenues and
expenses during the reported period. Actual results could materially differ
from these estimates.

F-11
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Fair Value of Financial Instruments

The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's
financial instruments including cash, accounts receivable, and accounts
payable and accrued expenses, the carrying amounts approximate fair value due
to their short maturities. The amounts shown for notes payable and capital
lease obligations also approximate fair value because current interest rates
and terms offered to the Company for similar notes and lease agreements are
substantially the same.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three months
or less to be cash equivalents.

Inventories

Inventories are stated at the lower of cost or market (estimated net
realizable value). Cost is determined using the average cost method, which
approximates the first-in, first-out ("FIFO") method. Net realizable value is
based on forecasts for sales of the Company's products in the ensuing years.
The industry in which the Company operates is characterized by rapid
technological advancement and change. Should demand for the Company's products
prove to be significantly less than anticipated, the ultimate realizable value
of the Company's inventories could be substantially less than the amount shown
on the accompanying consolidated balance sheets.

Property and Equipment

Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the estimated useful lives of
5 to 7 years as follows:

<TABLE>
<S> <C>
Machinery and equipment........................................... 7 years
Furniture and fixtures............................................ 7 years
Computers and software............................................ 5 years
</TABLE>

Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized. Gains or losses on
the sale of property and equipment are reflected in the statements of
operations.

Stock Options and Warrants

During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to
employees using the intrinsic method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting method of APB 25
must make pro forma disclosures of net income and earnings per share, as if
the fair value method of accounting defined in SFAS 123 had been applied. The
Company has elected to account for its stock-based compensation to employees
under APB 25.

Excess of Cost Over Fair Value of Net Assets of Companies Acquired (Goodwill)

Goodwill arising in connection with the aforementioned business acquisitions
is amortized using the straight-line method over five years. The Company
assesses the recoverability of these intangibles on a quarterly basis by
determining whether the amortization of the balance over its remaining life
can be recovered through

F-12
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

projected undiscounted future cash flows. The amount of goodwill impairment,
if any, is based on fair value as measured by future cash flows and charged to
operations in the period in which goodwill impairment is determined by
management. During the years ended June 30, 1997 and 1996, management of the
Company determined that $1,584,000 and $70,000, respectively, of goodwill had
been impaired and, accordingly, the Company charged these amounts to
operations. Amortization of goodwill for the years ended June 30, 1997, 1996
and 1995 amounted to $40,000, $22,000 and $10,000, respectively.

Patents

Included in other assets in the accompanying consolidated balance sheets is
$30,000 of capitalized patent costs, net of accumulated amortization of
$16,000 and $12,000 at June 30, 1997 and 1996, respectively. Patent costs are
amortized on a straight-line method over their respective lives not to exceed
17 years. Amortization of patent expense for the years ended June 30, 1997,
1996 and 1995 was $4,000, $4,000 and $2,000, respectively.

Minority Interest

Minority interest represents the minority shareholders' proportionate share
of the equity of FNet. During the year ended June 30, 1996, Franklin
transferred 4,200,000 shares of its ownership in FNet to two officers of the
Company as payments on notes payable and for consulting services and issued an
additional 50,000 shares to MIS as aforementioned. Management of the Company
valued the FNet shares at $.015 per share, based upon the book value of FNet
at the time of the transaction. The issuance of these shares caused Franklin's
ownership percentage of FNet to decrease from 100% to 79% as of June 30, 1996.

During the year ended June 30, 1997, FNet sold approximately 1,949,500
shares of its stock to outside investors at $1.00 per share and issued 20,000
shares to acquire No. 1 and 76,000 shares for services rendered. The shares
sold to investors were issued under a private offering circular pursuant to
the exemption from registration under the 1933 Act provided in Rule 505 of
Regulation D. After the issuance of these shares, Franklin's ownership
percentage decreased to 71% as of June 30, 1997.

FNet, on a stand-alone basis, had a shareholders' deficit. As a result,
Franklin's investment in FNet had a negative carrying value. The increase in
capitalization of FNet resulting from the sale of 1,949,500 shares of common
stock to outside investors benefited Franklin in that it reduced the negative
carrying value of Franklin's investment in FNet. Accordingly, Franklin has
accounted for the change in its proportionate share of FNet's equity resulting
from the issuance of stock to outside investors as an increase in
shareholders' equity and a reduction in minority interest liability in the
consolidated financial statements.

The accompanying consolidated financial statements do not reflect a minority
interest liability as of June 30, 1997 and 1996 as FNet, on a stand-alone
basis, had a shareholders' deficit as of such date. The accompanying
consolidated statement of operations for the year ended June 30, 1997 does not
reflect the minority interest's share of FNet's losses for said year as the
related accrual would result in the Company's recordation of a minority
interest receivable.

Revenue Recognition

Revenues are recognized upon shipment of the products to customers. The
Company does not allow the right of return on sales.

Warranties

The Company provides limited warranties of one year from the date of
purchase of its products. No accrual has been made for warranty liabilities
because they are not expected to be significant.

F-13
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Research and Development Costs

Research and development costs are expensed as incurred.

Advertising Costs

Advertising costs are expensed as incurred and have not been historically
material.

Net Loss Per Common Share

The computation of loss per common share is based on the weighted average
number of common and common equivalent shares outstanding during the years
ended June 30, 1997, 1996, and 1995. Common stock equivalents have been
excluded from the aforementioned computations as their effect would be anti-
dilutive.

Income Taxes

The Company accounts for income taxes under the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", (SFAS 109). SFAS 109 requires the asset and
liability method of accounting for income taxes. Under the asset and liability
method of SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
A valuation allowance is required when it is less likely than not that the
Company will be able to realize all or a portion of its deferred tax assets.

Reclassifications

Certain amounts in the 1996 and 1995 consolidated financial statements have
been reclassified to conform to the 1997 presentation.

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board issued SFAS 128, "Earnings Per
Share," which is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. SFAS 128 requires public
companies to present basic earnings per share and, if applicable, diluted
earnings per share instead of primary and fully-diluted earnings per share.
The Company does not believe that reporting earnings per share in accordance
with SFAS 128 will be materially different from the earnings per share
previously reported.

SFAS 130, "Reporting Comprehensive Income" issued by the Financial
Accounting Standards Board is effective for financial statements with fiscal
years beginning after December 15, 1997. Earlier application is permitted.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. The Company does not expect adoption of SFAS 130 to have a
material impact, if any, on its financial position or results of operations.

The Financial Accounting Standards Board issued SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997. SFAS 131 requires a company to report
certain information about its operating segments including factors used to
identify the reportable segments and types of products and services from which
each reportable segment derives its revenues. The Company does not anticipate
any material change in the manner that it reports its segment information
under this new pronouncement.

F-14
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2--INVENTORIES

Inventories at June 30 consisted of the following:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials.............................................. $155,000 $ 49,000
Work in process............................................ 152,000 44,000
Finished goods............................................. 87,000 164,000
-------- --------
Total.................................................... $394,000 $257,000
======== ========
</TABLE>

NOTE 3--ACCRUED LIABILITIES

Accrued liabilities at June 30 consisted of the following:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Salaries and related expenses.............................. $277,000 $309,000
Sales tax payable.......................................... -- 76,000
Accrued interest payable, primarily to related party....... 88,000 45,000
Accrued audit.............................................. 30,000 20,000
Other accrued liabilities.................................. 164,000 33,000
-------- --------
Total.................................................... $559,000 $483,000
======== ========
</TABLE>

NOTE 4--LONG-TERM DEBT

Long-term debt at June 30 consisted of the following:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Convertible notes payable to former vendors, bearing
interest at 12% per annum, unsecured and due in December
1999..................................................... $ 24,000 $ 24,000
Notes payable to the president and majority shareholder,
bearing interest from 8% to 9% per annum, secured by
substantially all of the Company's assets, with due dates
ranging through June 2000................................ 637,000 308,000
-------- --------
661,000 332,000
Less current portion...................................... 301,000 94,000
-------- --------
Long-term portion....................................... $360,000 $238,000
======== ========
</TABLE>

The Company is past due in certain of its payments under its notes payable
to its president and majority shareholder. The president and majority
shareholder has waived the default provisions of the past due notes payable
and does not intend to demand payment until after June 30, 1998.

Future principal payments required under such notes are summarized as
follows:

<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C>
1998.......................................................... $301,000
1999.......................................................... 267,000
2000.......................................................... 93,000
--------
Total....................................................... $661,000
========
</TABLE>

F-15
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Included in the $637,000 due to the Company's president is a note of
$140,000 which can be converted into shares of the Company's common stock at a
rate of $.10 per share and two notes in the amount of $117,000 and $112,000
which can be converted into $114,500 of the Company's common stock at a rate
of 50% of the fair value of the common stock at the date of conversion.

During fiscal 1995, the Company canceled notes payable in the amount of
$92,000 to the president and majority shareholder in exchange for the issuance
of common stock.

NOTE 5--SHAREHOLDERS' EQUITY (DEFICIT)

Stock Option Plans

The Company adopted an Incentive Stock Option Plan (Plan A) and Nonqualified
Stock Option Plan (Plan B) (the "1986 Plans"). Plan A provides for the
granting of options to purchase shares of common stock that are intended to
qualify as incentive stock options within the meaning of Section 422A of the
Internal Revenue Code, and Plan B provides for the granting of options to
purchase shares of common stock that are not intended to qualify. The 1986
Plans provide for the issuance of up to 700,000 shares in the aggregate at
fair market value.

During the year ended June 30, 1989, the Company adopted the 1988 Stock
Option Plan (the "1988 Plan"). Under the terms of the plan, options to
purchase 300,000 shares of the Company's common stock are available for
issuance to employees, officers and directors. Options granted may be either
incentive stock options or non-statutory options. The exercise price of the
incentive stock options and non-statutory options may not be greater or less
than 110% and 85%, respectively, of the fair market value of the Company's
common stock at the date of grant.

During the year ended June 30, 1994, the Company adopted the 1993 Stock
Option Plan (the "1993 Plan"). The 1993 Plan provides for the granting of
options to purchase up to 600,000 shares of common stock that are intended to
qualify as incentive stock options within the meaning of Section 422A of the
Internal Revenue Code.

During the year ended June 30, 1995, the Company adopted the 1994 Stock
Option Plan (the "1994 Plan"). The 1994 Plan provides for the granting of
options to purchase up to 1,400,000 shares of common stock. Such options will
be non-statutory.

Options granted under all four of the aforementioned plans vest in
accordance with the terms established by the Company's stock option committee.
All such options granted to date have vesting periods of between two to four
years and generally terminate at the earlier of the end of the option period
or termination of employment.

On December 13, 1996, the Company granted options to purchase 1,000,000
shares of the Company's common stock to key management employees which were
fully vested on the date of grant. The option price was set at $1.31 per
share, the fair value of the underlying shares. The options are not included
in the stock option plans below.

In addition, the Company has also issued options in connection with the
acquisition of No. 1 as discussed in Note 1.

F-16
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Activity for the 1986 Plans, 1988 Plan, 1993 Plan, and 1994 Plan is as
follows:

<TABLE>
<CAPTION>
GRANTED PRICE
SHARES PER SHARE
--------- -------------
<S> <C> <C>
Outstanding, June 30, 1994.......................... 1,220,000 $0.10
Granted........................................... 1,075,000 $0.10
Exercised......................................... (304,280) $0.10
Canceled.......................................... (25,720) $0.10
---------
Outstanding, June 30, 1995.......................... 1,965,000 $0.10
Granted........................................... 1,052,000 $0.15-1.18
Exercised......................................... (44,500) $0.10
Canceled.......................................... (225,000) $0.10
---------
Outstanding, June 30, 1996.......................... 2,747,500 $0.10-1.18
Granted........................................... 248,000 $1.18-2.12
Exercised......................................... (335,000) $0.10-0.90
Canceled.......................................... (150,000) $0.10
---------
Outstanding, June 30, 1997.......................... 2,510,500 $0.10-2.12
========= ==========
Exercisable at June 30, 1997........................ 1,563,500 $0.10-0.90
========= ==========
</TABLE>

The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting Principles
Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
restricted stock and options issued to outside third parties. If the Company
had elected to recognize compensation expense based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed by SFAS 123, the Company's net loss and loss per share would be
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net loss
As reported...................................... $(2,824,000) $(1,467,000)
Pro forma........................................ $(3,925,000) $(1,513,000)
Loss per common share
As reported...................................... $ (0.23) $ (0.14)
Pro forma........................................ $ (0.32) $ (0.15)
</TABLE>

Included in the year ended June 30, 1997, is the effect of the
aforementioned 1,000,000 options issued to key employees on December 13, 1996
to purchase the Company's common stock which were fully vested on the date of
grant. Compensation expense under SFAS 123 for the year ended June 30, 1997 of
$945,000 was charged to pro forma net loss for the entire estimated fair
market value of the 1,000,000 options awarded.

These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before June 30, 1996. The pro forma amounts take into account the
pro forma compensation expense of the FTEL and FNet options. The fair value of
the FTEL options described above was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended June 30, 1997 and 1996: dividend yields of 0%
and 0%, respectively; expected volatility of 100% and 100%, respectively;
risk-free interest rates of 6.2% and 6.3%, respectively; and expected lives of
4 and 2 to 4 years, respectively. The weighted-average fair value of options
granted during the year ended June 30, 1997 was $0.99, and the weighted-
average exercise price was $1.37.

F-17
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The fair value of the FNet options described below was estimated at the date
of grant using the minimum value method with the following weighted-average
assumptions for the year ended June 30, 1997: dividend yields of 0%; risk-free
interest rate of 6.2%; and expected life of 4 years. The weighted-average fair
value of options granted during the year ended June 30, 1997 was $0.22 and the
weighted-average exercise price was $1.00.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

The Company's majority-owned subsidiary, FNet, established a 1996 stock
option plan (the "FNet Plan"). The FNet Plan provides for the granting of
options to purchase up to 3,000,000 shares of FNet common stock that are
intended to qualify as incentive stock options within the meaning of Section
422A of the Internal Revenue Code. Such options will become exercisable in
accordance with the terms established by FNet's stock option committee. All
options granted to date vest between zero and four years and generally
terminate at the earlier of the end of the option period or termination of
employment. During the years ended June 30, 1997 and 1996, FNet granted
2,106,000 and 448,000, respectively, options to employees to acquire FNet
common stock at an exercise price of $1.00 and $1.00, respectively. Total FNet
options outstanding and exercisable at June 30, 1997 and 1996 were 2,634,000
and 1,174,000, respectively, and 448,000 and 0, respectively.

During 1995 and 1996, the Company granted to its president an option to
acquire 1,000,000 and 350,000 shares, respectively, of its common stock at an
exercise price of $.10 and $.78 per share. The options were both issued in the
year of grant and are exercisable over a two-year period.

On February 12, 1993, the Company entered into an option agreement with its
president whereby the Company granted options to purchase 2,000,000 shares of
the Company's common stock in exchange for the potential cancellation of debt
owed to the related party. Such options were exercisable over a two year
period at an exercise price of $.067 per share, the approximate fair value of
the common stock of the Company at the date of grant. These options were
exercised during the year ended June 30, 1995.

Warrants

In May 1995, in connection with the 1995 Private Placement, the Company
entered into an investment banking agreement with an unrelated entity whereby
the Company granted to the investment banker warrants to purchase 600,000
shares, as amended, of the Company's common stock at an exercise price of
$1.35 per share. The warrants vested over a twelve-month period and include
demand and piggy back registration rights after a period of 24 months from the
date of the agreement. The warrants and/or underlying shares may be exercised
anytime after two years and for a period of four years from the date of the
agreement. As of June 30, 1997 and 1996 none of these warrants had been
exercised.

In connection with the 1995 Private Placement, during the years ended June
30, 1996 and 1995 the Company issued 1,780,000 and 220,000 warrants,
respectively, to purchase shares of the Company's common stock. The exercise
price of the warrants was $0.50, as amended, if exercised on or before March
24, 1996 and $1.25 if exercised after March 24, 1996 but on or before
September 30, 1998 (the expiration date). There was no additional expense
recorded in connection with the issuance of the warrants as the exercise price
approximated

F-18
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

the fair value at the date of issuance, as determined by management of the
Company, of the underlying stock at the date of issuance. For the years ended
June 30, 1997 and 1996, 400,000 and 145,000 warrants were exercised leaving a
remaining balance of 1,455,000 unexercised as of June 30, 1997.

Stock Issuances

During the year ended June 30, 1995, The Company completed the following
significant common stock transactions of previously unissued common shares:

. Issued 2,000,000 shares of its common stock for the exercise of options
and canceled notes payable in the amount of $92,000 and accrued interest
in the amount of $42,000.

. Issued 259,280 shares of its common stock in connection with stock
options exercised at $.10 per share by employees for compensation of
$26,000.

. Issued 22,000 shares of its common stock to an employee for a bonus. The
stock was issued at $.10 per share in accordance with the bonus
agreement.

. Issued 220,000 shares of its common stock for $110,000 in connection with
the 1995 Private Placement. The Company paid no commissions or fees in
connection with this private placement.

. Issued 45,000 shares of its common stock in connection with stock
options, exercised at $.10 per share for cash of $4,500.

. Issued 326,497 shares of its common stock in connection with a business
acquisition.

During the year ended June 30, 1996, The Company completed the following
significant common stock transactions of previously unissued common shares:

. Issued 1,780,000 of its common stock for $890,000 in connection with the
1995 Private Placement. The Company paid no commissions or fees in
connection with this private placement.

. Issued or committed to issue 110,000 shares of its common stock valued at
$75,000 during fiscal 1996 in connection with two business acquisitions
(see Note 1).

. Issued 34,839 shares of its common stock to certain employees for
compensation. The stock was issued at prices ranging from $.25 to $.70
per share in accordance with the respective agreements.

. Issued 7,555 shares of its common stock to certain vendors as payment on
accounts payable of approximately $11,000.

. Issued 44,500 shares of its common stock in connection with stock
options, exercised at $.10 per share for cash of $4,000.

. In March and April 1996, the Company received cash of $73,000 and issued
145,000 shares of its common stock upon the conversion of warrants issued
in connection with the 1995 Private Placement.

. In June 1996, the Company issued 28,572 shares of its common stock for
cash of $20,000, the approximate fair value at the date of the issuance.

. Reflected in the accompanying 1996 consolidated statements of capital
deficiency the addition of 23,031 shares as outstanding to correct the
omission of such shares in previously issued consolidated financial
statements.

During the year ended June 30, 1997, The Company completed the following
significant common stock transactions of previously unissued common shares:

. Issued 880,200 shares of its common stock in connection with the 1996
Private Placement for cash of $888,000. The Company paid no commissions
or fees in connection with this private placement.

F-19
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

. In December 1996 and July 1997, the Company issued an additional 60,987
and 207,066 shares, respectively, of its common stock to former
shareholders of LPL (see Note 1) at a value of $85,000 and $453,000,
respectively.

. In connection with the acquisition of No. 1, issued 40,000 shares, valued
at $50,000, of its common stock and options to purchase 10,000 shares,
valued at $6,000, of the Company's common stock at $1.25, which was the
fair market value on December 2, 1996, exercisable on January 1, 1998. In
connection therewith, FNet issued 20,000 shares of its common stock
valued at $20,000 and granted options to purchase 80,000 shares of FNet
common stock valued at $13,000, exercisable at the rate of 20,000 shares
per year at $1.00 per share in each of the four years beginning January
1, 1998 (see Note 1).

. In connection with the acquisition of CPR, committed to issued 25,000
shares of common stock for a value of $65,000 (see Notes 1 and 12) and
assumed certain debt of $4,425.

. In connection with the acquisition of Passport, issued 600,000 shares of
common stock for a value of $1,275,000 and assumed certain liabilities of
$411,000. Also, on March 24, 1997, the Company issued an additional 7,900
shares of common stock, valued at $14,000, to satisfy certain obligations
of Passport (see Note 1).

. Issued 380,000 shares in connection with the exercise of warrants for
$190,000.

. Issued 335,000 shares in connection with the exercise of stock options.
243,250 shares were issued upon the exercise of options whereby the
option holders issued notes receivable in favor of the Company in the
amount of 129,000. 30,000 shares were issued upon the exercise of options
whereby the option holder performed services valued at $3,000. The
remaining 61,750 were issued for cash of $6,000.

Pursuant to state laws, the Company is currently restricted, and may be
restricted for the foreseeable future, from making dividends to its
shareholders as a result of its accumulated deficit as of June 30, 1997.

NOTE 6--INCOME TAXES

The tax effects of temporary differences that give rise to deferred taxes at
June 30, 1996 are as follows:

<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Deferred tax assets
Accounts receivable, principally due to allowance for
doubtful accounts................................... $ 13,000 $ 3,000
Compensated absences and deferred salaries,
principally due to accrual for financial reporting
purposes............................................ 87,000 112,000
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax
Reform Act of 1986 and allowance for inventory
obsolescence........................................ 128,000 191,000
General business tax credit carryforwards............ 335,000 345,000
Net operating loss carryforwards..................... 3,027,000 2,498,000
--------- ----------
Total gross deferred tax assets...................... 3,590,000 3,149,000
Less valuation allowance............................. 3,586,000 3,145,000
--------- ----------
Net deferred tax assets.............................. 4,000 4,000
Deferred tax liabilities
Plant and equipment, principally due to differences
in depreciation..................................... 4,000 4,000
--------- ----------
Net deferred tax liability......................... $ -- $ --
========= ==========
</TABLE>

F-20
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The valuation allowance increased by approximately $441,000 and $626,000
during the years ended June 30, 1997 and 1996, respectively. No provision for
income taxes for the years ended June 30, 1997, 1996 and 1995 is required,
except for minimum state taxes, since the Company incurred losses during such
years.

Income tax expense was $2,000 and differs from the amounts computed by
applying the U.S. federal income tax rate of 34 percent to loss before
minority interest and income taxes as a result of the following:

<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- --------
<S> <C> <C> <C>
Computed "expected" tax benefit........... $(1,450,000) $(520,000) $(54,000)
Increase in income taxes resulting from
Change in the beginning-of-the-year
balance of the valuation allowance for
deferred tax assets allocated to income
tax expense............................ 1,450,000 520,000 54,000
State income taxes...................... 2,000 2,000 2,000
----------- --------- --------
Total................................. $ 2,000 $ 2,000 $ 2,000
=========== ========= ========
</TABLE>

As of June 30, 1997 the Company had consolidated net operating loss
carryforwards of approximately $8,467,000 and $2,401,000 for Federal and state
income tax reporting purposes, respectively, which expire in varying amounts
through 2012. The Company also has general business tax credit carryforwards
of approximately $310,000 and $24,000 available to offset against future
Federal and state income taxes, respectively, which expire at various times
through 2012. Should a substantial change in the Company's ownership occur,
there could be an annual limitation on the amount of the net operating less
carryforwards available for use in the future.

NOTE 7--RELATED PARTY TRANSACTIONS

The Company recorded sales of approximately $82,000, $3,000, and $131,000 to
an entity affiliated with a shareholder of the Company during the years ended
June 30, 1997, 1996, and 1995, respectively.

On January 1, 1993, the Company entered into a five year employment
agreement with the president and shareholder which provides for annual salary
increases of six percent per annum. Compensation related to this agreement, a
portion of which is paid semi-monthly and a portion of which is deferred and
is therefore included in accrued salaries and related expenses in the
accompanying consolidated balance sheets, was $173,000, $275,000, and $259,000
for the years ended June 30, 1997, 1996, and 1995, respectively (see Note 12).

During the year ended June 30, 1997 and 1995, the Company issued notes
payable to the president and shareholder for $329,000 and $217,000,
respectively of accrued compensation.

NOTE 8--COMMITMENTS AND CONTINGENCIES

Operating Leases and Capital Lease Obligations

The Company leases its production, warehouse and administrative facilities
under non-cancelable operating leases that expire starting September 1998
through March 2000. In addition to the minimum annual rental commitments, the
lease provides for periodic cost of living increases in the base rent and
payment by the Company of common area costs. Rent expense related to the
operating lease was $88,000, $51,000, and $59,000 for the years ended June 30,
1997, 1996, and 1995, respectively.

In connection with the acquisition of Passport (see Note 1), the Company
assumed six capital leases that were assumed by Passport from two entities
owned by the previous sole member of Passport. All six capital

F-21
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

leases are technically in default because of provisions in the leases that
prohibit the assignment of the leases. In addition, the assets underlying four
of the six leases were sold by Passport for cash, which was not used to repay
the principal, prior to its acquisition by the Company. Such sales are also
prohibited under the terms of the leases and the lessors have not been
informed of such sales. The lessors technically have the right to accelerate
payment under all of the leases due to such defaults. Passport is continuing
to make the lease payments on all six leases pursuant to the lease terms.
Since the leases are in technical default, the Company has classified the full
lease liability as current.

Future minimum lease payments under non-cancelable operating and capital
leases with initial or remaining terms of one year or more at June 30, 1997
are as follows:

<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
JUNE 30, LEASES LEASES
----------- --------- --------
<S> <C> <C>
1998................................................. $122,000 $361,000
1999................................................. 35,000 --
2000................................................. 15,000 --
-------- --------
$172,000 $361,000
======== ========
</TABLE>

At June 30, leased capital assets included in property and equipment
consisted of the following:

<TABLE>
<S> <C>
Furniture and equipment.......................................... $222,000
Less accumulated depreciation.................................... 35,000
--------
Total.......................................................... $187,000
========
</TABLE>

The Company assumed capital lease arrangements totaling $316,000 in 1997.

Litigation

The Company is involved in certain legal proceedings and claims which arise
in the normal course of business. Management does not believe that the outcome
of these matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.

Dealer Agreement

In March 1996, FNet entered into a dealer agreement with an individual (the
"Dealer") whereby the Dealer would be granted the exclusive right by FNet to
market, sell or otherwise offer certain services and goods to customers within
the Dealer's territory, as defined. In connection with this agreement, the
Dealer paid $45,000 to FNet as consideration for the rights described above.
The Dealer was to receive commissions at rates ranging from 10% to 30% based
on certain terms and conditions. Commissions paid to the Dealer during fiscal
1996 were not material.

In September 1996, FNet and the Dealer entered into a mutual general release
whereby both parties were released from all claims pursuant to the agreement.
In connection therewith, the Company converted $20,000 of the monies paid by
the Dealer to FNet, as noted above, to 23,350 shares of the Company's common
stock as consideration for the mutual general release. Such shares are
considered to be committed as of June 30, 1996 and are therefore included as
such in the accompanying consolidated balance sheet.

F-22
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

LICENSE AGREEMENTS

Satellite Services

In March 1997 the Company's subsidiary, Internet Passport, entered into a
Memorandum of Understanding with DigitalXPress LLC ("DigitalXPress"), a
purveyor of video and data network satellite services. Under the terms of the
agreement, Internet Passport and DigitalXPress will jointly develop a product
line, to be called "XPressNet," to furnish Internet connectivity to the
products currently marketed by DigitalXPress, and to combine marketing efforts
for certain customers, applications and products.

800 Service Agreement

In December 1996, the Company entered into two agreements with an 800 number
supplier (the "Supplier") to service the FNet customer base, both internally
and for resale. The agreements provide the Company exclusive rights to 800
service in exchange for an incremental fee of $5,000 per month for each group
of 4,000 customers. The monthly fee has a minimum payment of $25,000 or up to
20,000 customers. The agreements calls for the Company to issue the Supplier
50,000 shares of the Company's stock, options to purchase 100,000 shares of
FNet stock at $1.00 per share and options to purchase 100,000 shares of
Franklin 800 Corp., a new wholly owned subsidiary of FNet, at a $1.00. The
supplier has failed to date to perform pursuant to the agreement. Accordingly,
the Company has withheld issuance of the aforementioned shares and options.

Private Placement Exemptions

The Company's and FNet's private placements of securities have been issued
in transactions intended to be exempt from registration under the Securities
Act of 1933 pursuant to the provisions of Regulation D promulgated thereunder.
These rules include factors pursuant to which one or more private placement
transactions may be integrated as part of other offerings and include rules
that limit the dollar amount that can be raised and the number of non-
accredited investors that can participate. In the event any of the Company's
private placement transactions, including private placement transactions
undertaken by the Company since the transactions referred to above, were
deemed to be integrated, it is possible that the exemption from the
registration requirements of the Securities Act of 1933 would not be available
for one or more of those offerings. In the event that one or more of such
transactions are determined not to have been exempt from such registration
requirements, the purchasers may have the right to seek recission of the sales
and/or seek money damages against the Company. Management believes that each
of the Company's private offerings were exempt from the registration
requirements of the Securities Act of 1933.

NOTE 9--OTHER LIABILITIES

On February 5, 1993, the Company modified the terms of a note payable to a
former supplier with a balance of $572,000 that required the payment of
$30,000 in cash and an agreement to pay the former supplier $10 per Franklin
manufactured board up to a total of $700,000. There is no expiration date on
the revised agreement. On November 29, 1994, the agreement was further
modified. The modified terms are $10 per Franklin board sold for $300 and $2
per board sold for $300 or less. The modified agreement was effective through
June 1995 and

F-23
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

no new modification has been entered into. At June 30, 1997, the Company
estimated its future obligation to this supplier to be $183,000 under the
modified agreement based on the number of boards expected to be sold.
Accordingly, this obligation has been reduced to $183,000, the amount expected
to be paid in the future. Amounts paid under these agreements totaled
approximately $10,000, $5,000, and $16,000 during the years ended June 30,
1997, 1996, and 1995, respectively.

NOTE 10--401(k) PLAN

The Company sponsors a 401(k) plan which includes a deferred feature under
section 401(k) of the Internal Revenue Code (the "Plan"). The Plan covers all
full-time employees of the Company. Contributions to the plan are at the
discretion of the Company's Board of Directors, but limited to the amounts
allowable for federal income tax purposes. Under the section 401(k) portion of
the Plan, employees may elect to contribute up to 20% of their compensation.
The Company did not make any contributions to the Plan during either of the
years ended June 30, 1997, 1996, or 1995.

NOTE 11--LINES OF BUSINESS

The Company operates in two major lines of business: the manufacture and
distribution of data communications and connectivity products ("Franklin") and
Internet services ("FNet"). Information concerning operations in these lines
of business is as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------
JUNE 30, JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
Net sales
Franklin........................................ $ 1,337,000 $ 397,000
FNet............................................ 398,000 33,000
----------- -----------
Total......................................... $ 1,735,000 $ 430,000
=========== ===========
Operating losses
Franklin........................................ $(1,867,000) $(1,318,000)
FNet............................................ (957,000) (149,000)
----------- -----------
Total......................................... $(2,824,000) $(1,467,000)
=========== ===========
Identifiable assets
Franklin........................................ $ 3,163,000 $ 575,000
FNet............................................ 351,000 137,000
----------- -----------
Total......................................... $ 3,514,000 $ 712,000
=========== ===========
Capital expenditures
Franklin........................................ $ 204,000 $ 25,000
FNet............................................ 120,000 33,000
----------- -----------
Total......................................... $ 324,000 $ 58,000
=========== ===========
Depreciation and amortization
Franklin........................................ $ 52,000 $ 42,000
FNet............................................ 58,000 3,000
----------- -----------
Total......................................... $ 110,000 $ 45,000
=========== ===========
</TABLE>

Segment information is not shown for any other periods because the Internet
business was not material to the operations of the Company.

F-24
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Pro Forma Information (unaudited)

The Company acquired Internet Passport, LLC ("Passport") on February 28,
1997. All other business acquisitions have been de minimis; therefore, the
"Passport" pro forma information has been reflected herein on a disaggregated
basis. The assets acquired and liabilities assumed are included in the
consolidated balance sheet of the Company as of June 30, 1997 included
elsewhere herein; therefore, no pro forma consolidated balance sheet has been
reflected below. The historical consolidated statements of operations for the
year ended June 30, 1996 are included elsewhere in this Prospectus. In the
opinion of management, there are no pro forma adjustments necessary to the
aforementioned historical statements of operations assuming that the
acquisition occurred at the beginning of each of those years, expect for
showing the effects of the addition of the goodwill and subsequent write-off.
Because of the one-time unusual nature of the goodwill write-off, management
believes that the pro forma statement of operations information is better
reflected exclusive of such write-off as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Historical net less........................... $ (2,824,000) $ (1,467,000)
Add goodwill write-down related to Passport... 835,000 --
------------- -------------
Adjusted historical net loss.................. (1,989,000) (1,467,000)
Add Passport losses prior to acquisition...... (171,000) (66,000)
------------- -------------
Pro forma net loss exclusive of goodwill.... $ (2,160,000) $ (1,533,000)
============= =============
Adjusted historical net loss per share
exclusive of goodwill write-down............. $ (.16) $ (.14)
Impact of Passport loss....................... (.01) (.01)
------------- -------------
Pro forma net loss per share exclusive of
goodwill................................... $ (.17) $ (.15)
============= =============
</TABLE>

NOTE 12--SUBSEQUENT EVENT (UNAUDITED)

The Company's President is employed pursuant to an Employment Agreement
expiring on December 31, 1997. The Employment Agreement provides for monthly
compensation at the rate of $20,000, with annual increases of 6%. The Company's
Board of Directors has approved a new six year Employment Agreement for the
Company's President, effective January 1, 1998. The new Employment Agreement
provides for compensation at the rate of $27,000 per month, with annual
increases of 6%.

NOTE 13--FOURTH QUARTER ADJUSTMENTS

In the fourth quarter of fiscal 1996, the Company recorded certain fourth
quarter adjustments that, in the aggregate, increased the Company's net loss by
approximately $777,000. The adjustments principally consisted of reductions of
inventory and increases in accrued expenses.

NOTE 14--RECENT SALE OF EQUITY SECURITIES

On September 22, 1997, the Company completed a Regulation D private placement
offering of 333,333 units for $1,000,000. Each unit consists of one share of
the Company's Common Stock and one Common Stock Warrant to purchase one share
of the Company's Common Stock for $5.00 per share. The net proceeds to the
Company were $1,000,000. In addition, on October 31, 1997, the Company
completed another Regulation D private placement offering of 540 units for
$5,400,000. Each unit in this offering consists of one share of the Company's
Series A Convertible Preferred Stock and one Series A Common Stock Warrant to
purchase one share of FNet's (the Company's majority-owned subsidiary) Common
Stock. The net proceeds to the Company were $4,957,500.

F-25
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
Internet Passport, LLC

We have audited the accompanying balance sheet of Internet Passport, LLC
(the "Company") as of June 30, 1996, and the related statements of operations,
member's deficit and cash flows for the period from February 16, 1996 (date
operations commenced) to June 30, 1996. 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 audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Internet Passport, LLC as
of June 30, 1996, and the results of its operations and its cash flows for the
period from February 16, 1996 (date operations commenced) to June 30, 1996 in
conformity with generally accepted accounting principles.

As more fully discussed in Note 1 to the accompanying financial statements,
as of February 28, 1997, the Company was sold and has ceased operations as a
stand-alone entity as of such date.

CORBIN & WERTZ

Irvine, California
June 6, 1997

F-26
<PAGE>

INTERNET PASSPORT, LLC

BALANCE SHEET

JUNE 30, 1996

ASSETS

<TABLE>
<S> <C>
Current assets:
Cash................................................................ $ 12,400
Loan receivable--employee........................................... 5,300
Loan receivable from related party.................................. 1,600
--------
Total current assets.............................................. 19,300
Property:
Machinery and equipment............................................. 19,100
Furniture and fixtures.............................................. 400
--------
19,500
Less accumulated depreciation....................................... (300)
--------
Property, net..................................................... 19,200
Other assets.......................................................... 5,100
--------
Total assets...................................................... $ 43,600
========

LIABILITIES AND MEMBER'S DEFICIT

Current liabilities:
Accounts payable.................................................... $ 1,300
Capital lease payable............................................... 73,500
--------
Total current liabilities......................................... 74,800
--------
Member's deficit:
Member's equity..................................................... 35,100
Accumulated deficit................................................. (66,300)
--------
Total member's deficit............................................ (31,200)
--------
Total liabilities and member's deficit............................ $ 43,600
========
</TABLE>

See independent auditors' report and
accompanying notes to financial statements

F-27
<PAGE>

INTERNET PASSPORT, LLC

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
EIGHT-MONTH
PERIOD ENDED PERIOD ENDED
FEBRUARY 28, JUNE 30,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Consulting revenues................................... $ 16,800 $ 9,000
Selling, general and administrative expenses.......... (117,500) (49,700)
--------- --------
Loss from operations.............................. (100,700) (40,700)
--------- --------
Other income (expense):
Provision for lease liability....................... (55,000) (26,000)
Interest expense.................................... (15,100) (2,200)
Loss on sale of assets.............................. -- (1,200)
Rental income....................................... -- 3,800
--------- --------
Total other income (expense)...................... (70,100) (25,600)
--------- --------
Net loss.............................................. $(170,800) $(66,300)
========= ========
</TABLE>

See independent auditors' report and
accompanying notes to financial statements

F-28
<PAGE>

INTERNET PASSPORT, LLC

STATEMENTS OF MEMBER'S DEFICIT

<TABLE>
<CAPTION>
TOTAL
MEMBER'S ACCUMULATED MEMBER'S
EQUITY DEFICIT DEFICIT
-------- ----------- ---------
<S> <C> <C> <C>
Member contribution at inception............... $10,100 $ -- $ 10,100
Contributed services........................... 25,000 -- 25,000
Net loss for period ended June 30, 1996........ -- (66,300) (66,300)
------- --------- ---------
Balance at June 30, 1996....................... 35,100 (66,300) (31,200)
Contributed services (unaudited)............... 40,000 -- 40,000
Net loss for eight months ended February 28,
1997 (unaudited).............................. -- (170,800) (170,800)
------- --------- ---------
Balance at February 28, 1997 (unaudited)....... $75,100 $(237,100) $(162,000)
======= ========= =========
</TABLE>

See independent auditors' report and
accompanying notes to financial statements

F-29
<PAGE>

INTERNET PASSPORT, LLC

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
EIGHT-MONTH
PERIOD ENDED PERIOD ENDED
FEBRUARY 28, JUNE 30,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flow from operating activities:
Net loss........................................... $(170,800) $(66,300)
Adjustment to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 1,600 300
Loss on sale of machinery and equipment.......... -- 1,200
Contributed services............................. 40,000 25,000
Provision for lease liability.................... 55,000 26,000
Change in operating assets and liabilities:
Accounts receivable............................ (300) --
Other assets................................... 100 (5,100)
Deferred revenue............................... 5,300 --
Accounts payable............................... 8,400 1,300
--------- --------
Net cash used in operating activities.............. (60,700) (17,600)
--------- --------
Cash flow from investing activities:
Loan receivable--employee.......................... (8,500) (5,300)
Loan receivable--related party..................... (5,200) (1,600)
Purchase of equipment.............................. (9,800) (400)
Proceeds from sale of leased equipment............. 59,800 31,000
Proceeds from sale of equipment.................... -- 2,000
--------- --------
Net cash provided by investing activities.......... 36,300 25,700
--------- --------
Cash flow from financing activities:
Principal payments on lease obligations............ (14,700) (2,600)
Debt proceeds...................................... 38,000 --
Cash provided from equity investment............... -- 6,900
--------- --------
Net cash provided by financing activities.......... 23,300 4,300
--------- --------
Net change in cash................................... (1,100) 12,400
Cash at beginning of period.......................... 12,400 --
--------- --------
Cash at end of period................................ $ 11,300 $ 12,400
========= ========
Supplemental disclosure of cash flow information--
Cash paid during the period for:
Interest......................................... $ 15,100 $ 2,200
========= ========
Income taxes..................................... $ -- $ --
========= ========
</TABLE>

Supplemental disclosure of non-cash investing activities--

During the period ended June 30, 1996, property in the amount of $3,200 was
acquired as part of the initial contributed capital. Such property was sold
during the period ended June 30, 1996 for a loss of $1,200. For the periods
ended February 28, 1997 and June 30, 1996, equipment in the amount of
$262,300 (unaudited) and $50,100, respectively, was acquired through
capital lease transactions.

See independent auditors' report and accompanying notes to financial statements

F-30
<PAGE>

INTERNET PASSPORT, LLC

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM FEBRUARY 16, 1996 (DATE OPERATIONS
COMMENCED) TO JUNE 30, 1996

NOTE 1--GENERAL AND BASIS OF PRESENTATION

General

Internet Passport, LLC (the "Company") was formed on February 16, 1996 as a
Georgia limited liability company. The Company operated as a start-up internet
access provider of custom internet services and related products.

Basis of Presentation

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles on a going concern basis. The Company
was acquired by Franklin Telecommunications Corp. ("Franklin") on February 28,
1997 and has ceased operations as a stand-alone entity as of such date.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Risks and Uncertainties

The Company is a start-up company in its first year of operations. The
Company is subject to the substantial business risks and uncertainties
inherent in a start-up operation, including the potential risk of business
failure.

The Company does not maintain general business liability insurance. As a
result, the Company is exposed to potential loss resulting from uninsured
future loss of or damage to the Company's property, damage to the property of
others, injury to others and/or interruption of the Company's business.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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. Such estimates also affect the reported amounts of revenues and
expenses during the reported period. Actual results could materially differ
from those estimates.

Fair Value of Financial Instruments

The accompanying consolidated balance sheets include financial instruments
whereby the fair market value of the financial instruments could be different
than that recorded on a historical basis. The Company's financial instruments
consist of its cash, receivables from an employee and a related party and
accounts payable. The carrying amounts of the Company's financial instruments
generally approximate their fair values at June 30, 1996. The fair value of
the receivables from an employee and a related party are not readily
determinable as market comparables were not available for such instruments.

Property

Property is recorded at cost and depreciated on a straight-line basis over
the estimated useful lives of the related assets, principally five years.
Repairs and maintenance are charged to expense. Betterments are capitalized.
Depreciation expense for the periods ended February 28, 1997 and June 30, 1996
was $1,600 (unaudited) and $300, respectively.

Revenue Recognition

Revenues are recognized in the month of service.

F-31
<PAGE>

INTERNET PASSPORT, LLC

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Advertising Costs

Advertising costs are expensed as incurred.

Income Taxes

The Company is taxed as a limited liability company under the provisions of
the Federal and state tax codes. Under Federal and state law, taxes based on
income of a limited liability company are payable by the member individually.
Accordingly, no provision for income taxes has been provided in the
accompanying financial statements.

NOTE 2--LOANS TO RELATED PARTIES

The loan receivable--employee of $5,300 at June 30, 1996 is non-interest
bearing and $2,800 (unaudited) of the balance was paid during the eight-month
period ended February 28, 1997.

As of June 30, 1996, the Company had a related party receivable totaling
$1,600 from the president and sole member. The loan is non-interest bearing
and has no due date.

During the eight-month period ended February 28, 1997, the Company advanced
approximately $7,000 to an affiliated company owned 100% by the sole member of
the Company. The advance is non-interest bearing and has no due date. During
the same period, the Company loaned an additional $10,000 to its president and
sole member. The loan is non-interest bearing and has no due date.

NOTE 4--CAPITAL LEASE OBLIGATIONS

The Company has assumed six capital leases since its inception from two
entities owned by the sole member of the Company. All six capital leases are
technically in default because of provisions in the leases that prohibit the
assignment of the leases. In addition, the assets underlying four of the six
leases were sold by the Company for cash. Such sales are also prohibited under
the terms of the leases and the lessors have not been informed of such sales.
The lessors technically have the right to accelerate payment under all of the
leases due to such defaults. The Company is continuing to make the lease
payments on all six leases pursuant to the lease terms. The Company recorded
additional provisions for lease liability for the eight-month period ended
February 28, 1997 and the period ended June 30, 1996 of $55,000 (unaudited)
and $26,000 to reflect the full, undiscounted, lease obligations as a result
of the defaults. In addition, the capital lease obligation at June 30, 1996
has been reflected as a current liability. A summary of the capital lease
activity follows:

<TABLE>
<CAPTION>
LEASE LEASED
OBLIGATION PROPERTY
---------- --------
<S> <C> <C>
Balance at inception.................................... $ -- $ --
Equipment acquired under capital leases................. 50,100 50,100
Lease principal payments................................ (2,600) --
Sale of property........................................ -- (31,000)
Provision for lease liability........................... 26,000 --
-------- --------
Balances at June 30, 1996............................. 73,500 19,100
Equipment acquired under capital leases (unaudited)..... 262,300 262,300
Lease principal payments (unaudited).................... (14,700) --
Sale of property (unaudited)............................ -- (59,800)
Provision for lease liability (unaudited)............... 55,000 --
-------- --------
Balances at February 28, 1997 (unaudited)............... $376,100 $221,600
======== ========
</TABLE>

F-32
<PAGE>

INTERNET PASSPORT, LLC

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5--AMOUNTS BORROWED FROM FRANKLIN

During the eight-month period ended February 28, 1997, the Company was
advanced $38,000 (unaudited) from Franklin. Such advances were non-interest
bearing and due on demand.

NOTE 6--CONTRIBUTED SERVICES

The sole member has provided services to the Company during the periods
presented without cash compensation. The Company has recorded $40,000
(unaudited) and $25,000 during the periods ended February 28, 1997 and June
30, 1996 as a member's equity contribution for the estimated fair value of the
services provided.

F-33
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE
SHARES OF THE COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON
STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Dividend Policy........................................................... 12
Use of Proceeds........................................................... 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 13
Selected Financial Data................................................... 17
Price Range of Common Stock............................................... 18
Business.................................................................. 19
Management................................................................ 27
Principal Shareholders.................................................... 31
Selling Shareholders...................................................... 32
Plan of Distribution...................................................... 34
Description of Capital Stock.............................................. 35
Legal Matters............................................................. 35
Experts................................................................... 35
Additional Information.................................................... 36
Index to Financial Statements............................................. F-1
</TABLE>

UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

3,103,750 SHARES

FRANKLIN TELECOMMUNICATIONS CORP.

COMMON STOCK

----------------

PROSPECTUS

----------------

, 1997

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The expenses incurred or to be incurred by the Company in connection with
the preparation and filing of this Registration Statement are estimated to be
as follows:

<TABLE>
<S> <C>
Printing and duplication expenses............................... $ 25,000
Registration fee................................................ 3,292
Legal fees and expenses......................................... 75,000
Accounting fees and expenses.................................... 108,000
Transfer Agent fees............................................. 2,000
Miscellaneous................................................... 6,708
--------
Total....................................................... $220,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company's Bylaws provide that the Company may indemnify its officers and
directors, and may indemnify its employees and other agents, to the fullest
extent permitted by California law. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to officers,
directors or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The following table sets forth a list of all unregistered securities issued
by the Company during the past three years. All securities were issued
pursuant to the exemptions provided for under Section 4(2) of the Securities
Act of 1933 and Regulation D and Rule 701 promulgated thereunder. The
securities were issued for cash, upon exercise of employee stock options and
in connection with certain acquisitions by the Company.

<TABLE>
<CAPTION>
SHARE
NAME DATE SHARES CONSIDERATION
---- -------- ------ -------------
<S> <C> <C> <C>
Triton Capital Investments, Ltd............... 10/31/97 35* $ 350,000
Banque Edouard Constant SA.................... 10/31/97 50* 500,000
Banque Franck S.A............................. 10/31/97 75* 750,000
Elara Ltd..................................... 10/31/97 150* 1,500,000
Ellis AG...................................... 10/31/97 10* 100,000
JMG Capital Partners, L.P..................... 10/31/97 35* 350,000
Lakeshore International, Ltd.................. 10/31/97 150* 1,500,000
The Matthew Fund, N.V......................... 10/31/97 35* 350,000
Vic Klimpl.................................... 9/22/97 22,000 66,000
Blair Holder ................................. 9/22/97 30,000 90,000
Raleigh Baughman.............................. 9/22/97 30,000 90,000
Mark Jenkins.................................. 9/22/97 11,000 33,000
Dale Berman................................... 9/22/97 10,000 30,000
Cindy Cannon ................................. 9/22/97 15,000 45,000
</TABLE>
- --------

* Series A Preferred

II-1
<PAGE>

<TABLE>
<CAPTION>
SHARE
NAME DATE SHARES CONSIDERATION
---- --------- ------- -------------
<S> <C> <C> <C>
Clay & Bobbie Lasiter........................ 9/22/97 10,000 $ 30,000
Scott Holder................................. 9/22/97 10,000 30,000
Terry Widner................................. 9/22/97 33,333 99,999
Roberto Alvarez.............................. 9/22/97 20,000 60,000
Mike & Marcia Marino......................... 9/22/97 7,000 21,000
George Willse................................ 9/22/97 10,000 30,000
Frank Culker................................. 9/22/97 7,000 21,000
Gary Nelson.................................. 9/22/97 16,000 48,000
Gary Nelson IRA acct......................... 9/22/97 45,000 135,000
Doug Best.................................... 9/22/97 7,000 21,000
Martin Smith................................. 9/22/97 7,000 21,000
Bob Zimdar................................... 9/22/97 10,000 30,000
Anthony Chan................................. 9/23/97 9,000 27,000
Tim LaFrance................................. 9/23/97 7,000 21,000
Marvin Mansky................................ 9/24/97 10,000 30,000
Richard & Lorna Valentine.................... 9/24/97 7,000 21,000
John Costello................................ 7/31/97 207,066 453,475
Thomas Russell............................... 6/13/97 50,000 34,500
Eileen Rouse................................. 6/13/97 50,000 45,000
Alan London.................................. 6/13/97 25,000 17,500
Dianne Oliver................................ 6/13/97 2,000 200
Helen West................................... 6/17/97 12,000 10,800
Alice Amanet................................. 6/24/97 6,250 4,375
1996 Private Placement....................... 8/1/96 890,595 737,500
28 Individuals
Len Bartz.................................... 6/30/96 23,350 20,000
Michael C. Peters............................ 3/1/96 380,000 190,000
Eileen Rouse................................. 3/1/96 10,000 5,000
Michael Parkhurst............................ 8/26/96 5,000 500
Patrick Klos................................. 10/1/96 15,000 1,500
Dianne Oliver................................ 10/8/96 8,000 800
Michael Klos................................. 10/10/96 5,000 500
Terry Lee.................................... 12/2/96 20,000 25,000
Steve Sullivan............................... 12/2/96 20,000 25,000
Millhollan/Ellis............................. 3/96-2/97 12,000 26,246
Charles & Barb Arledge....................... 12/4/96 5,808 8,131
Brew & Shirley Arms.......................... 12/4/96 5,808 8,131
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
SHARE EXERCISABLE
NAME DATE SHARES CONSIDERATION WARRANTS
---- ------- ------- ------------- -----------
<S> <C> <C> <C> <C>
Andrew & Joan Chitiea....... 12/4/96 5,808 $ 8,131
Daniel & Pat Derbes......... 12/4/96 11,617 16,264
Kenneth King................ 12/4/96 2,905 4,067
Herman & D. Krantz.......... 12/4/96 7,260 10,164
Dale & Monica Sheets........ 12/4/96 14,521 20,329
Robert & Erma Sheets........ 12/4/96 7,260 10,164
John Calderwood............. 1/7/97 5,000 625
Frederick I. Camerer........ 3/96 5,000 2,500
Edward D. Bagley............ 2/5/97 59,608 190,000
Marcia Marino............... 2/7/97 20,000 25,000
Peter Buswell............... 2/25/97 30,000 3,000
Kristin Peters.............. 2/26/97 10,000 1,000
Sparrow Marcioni............ 1/28/97 600,000 3,150,000
Neil Wyenn.................. 2/26/97 25,000 131,250
M.H. Meyerson & Co., Inc.... 5/11/95 600,000
Wilson Davis................ 10/1/95 30,000
Sam Wilson.................. 10/1/95 50,000
Paul Davis.................. 10/1/95 50,000
Lyle Davis.................. 10/1/95 60,000
Byron Barkley............... 3/96 20,000 10,000
Byron Barkley............... 10/1/95 20,000
Bryan B. Bagley PFT Sharing 3/1/96 20,000 10,000
............................
Bryan B. Bagley............. 3/1/96 20,000 10,000
Bollard Investment Co....... 10/1/95 40,000
Bruce Whaley................ 10/1/95 40,000
Joe Fisher.................. 3/96 70,000 35,000
10/1/95 40,000
Gary Nelson................. 10/1/95 64,000
Gary Nelson Transcorp C/F... 10/1/95 11,000
Gary Conrad................. 10/1/95 200,000
Ronald Heller............... 10/1/95 303,000
David Nagelberg............. 10/1/95 303,000
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
SHARE EXERCISABLE
NAME DATE SHARES CONSIDERATION WARRANTS
---- ------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Martin & Co............... 10/1/95 146,000
Michael and Linda 10/1/95 28,000
Silvestri.................
Jeffrey Barber............ 10/1/95 14,000
Joel Marcus............... 10/1/95 12,000
Rocco Vezza............... 10/1/95 12,000
Joanne Gioia.............. 10/1/95 12,000
Joseph Schmidt............ 10/1/95 10,000
Kevin Charos.............. 10/1/95 10,000
Frederick I. Camerer...... 5/11/94 30,000 $ 3,000
Michael C. Peters......... 5/12/94 30,000 3,000
Frederick I. Camerer...... 5/31/94 50,000 5,000
Mark Peters............... 6/17/94 1,000 100
Kristen Peters............ Jan-95 10,000 1,000
John Costello............. Jan-95 199,806 61,141
Herman & D. Krantz........ Jan-95 7,260 2,222
Dale & Monica Sheets...... Jan-95 14,521 4,443
Robert & Erma Sheets...... Jan-95 7,260 2,222
Colin Patterson........... Jan-95 29,042 8,887
John Costello............. Jan-95 7,260 2,222
Added Value............... Jan-95 3,493 1,034
Robert & Erma Sheets...... Jan-95 1,529 453
Herman & D. Krantz........ Jan-95 1,529 453
Colin Patterson........... Jan-95 6,087 1,802
Photo Vision.............. Jan-95 405 120
Added Value............... Feb-95 389 121
Micropolus................ Feb-95 489 153
Future Elect.............. Feb-95 2,043 637
Charles Arledge........... Feb-95 1,159 362
Brew Arms................. Feb-95 1,159 362
Andew Chitiea............. Feb-95 1,160 362
Dan Derbes................ Feb-95 2,319 724
Kenneth King.............. Feb-95 580 181
Frederick I. Camerer...... Apr-95 25,000 2,500
Kristen Peters............ Apr-95 10,000 1,000
UPS....................... Apr-95 1,084 1,642
Frank Peters.............. Apr-95 2,000,000 134,000
Dale & Monica Sheets...... May-95 3,070 2,398
Michelle Nisbet........... May-95 4,280 783
Frank Dragun.............. May-95 22,000 2,200
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
SHARE EXERCISABLE
NAME DATE SHARES CONSIDERATION WARRANTS
---- ---------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Charles & Barb Arledge.. May-95 5,808 $ 1,626
Brew & Shirley Arms..... May-95 5,808 1,626
Andrew & Joan Chitiea... May-95 5,808 1,626
Daniel & Pat Derbes..... May-95 11,617 3,253
Kenneth King............ May-95 2,905 813
Michael C. Peters....... 6/30/95 255,000 25,500
Kristen Peters.......... Jul-95 10,000 1,000
Frank Jones............. Aug-95 5,000 500
Michael Parkhurst....... Aug-95 15,000 1,500
Wyle.................... Aug-95 7,555 10,388
Bill Woods.............. Aug-95 4,000 2,800
Kristen Peters.......... Aug-95 8,127 2,032
Frederick I. Camerer.... Sep-95 9,147 2,287
Michael Peters.......... Sep-95 13,565 3,391
1995 Reg. D. Private
Placement.............. 6/95-10/95 2,000,000 1,000,000
Richard Parkhurst....... Dec-95 25,000 9,835
Frederick I. Camerer.... Feb-96 12,500 1,250
Michael & Marcia Marino. 6/30/96 28,572 $ 20,000
</TABLE>

II-5
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.

The following exhibits are filed with this Registration Statement:

<TABLE>
<C> <S>
3.1 Restated Articles of Incorporation of Franklin Telecommunications
Corp.
3.2* Bylaws of Franklin Telecommunications Corp.
3.3 Certificate of Determination of Preferences of Series A Preferred
Stock.
5.1* Opinion of Phillips & Haddan LLP
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters
10.2* Confidential Agreement dated June 3, 1996 between Malibu Internet
Services and Franklin Telecommunications Corp.
10.3* Joint Venture Agreement dated May 23, 1996 between StarComm Products
Inc. and Franklin Telecommunications Corp.
10.4* Letter Agreement dated February 28, 1997 between Internet Passport
LLC and Franklin Telecommunications Corp.
10.5* Subscriber Agreement dated January 2, 1997 between LaserVend, Inc and
Franklin Telecommunications Corp.
10.6* Subscriber Agreement dated January 28, 1997 between A-Online
Information Services, Inc. and Franklin Telecommunications Corp.
10.7* Subscriber Agreement dated January 17, 1997 between WebTV Networks,
Inc. and Franklin Telecommunications Corp.
10.8* Letter Agreement dated February 26, 1997 between CPR Computer Repair,
Inc. and Franklin Telecommunications Corp.
10.9* Letter Agreement dated December 2, 1996 between Number 1 Internet
Services and Franklin Telecommunications Corp.
10.10* Warrant Agreement dated May 18, 1995 between M. H. Myerson & Co. and
Franklin Telecommunications Corp.
10.11* Form of Letter Agreement dated March 17, 1997 between M. H. Myerson &
Co. and Franklin Telecommunications Corp.
10.12* Form of Indemnity Agreement for all Directors of Franklin
Telecommunications Corp.
10.13* Memorandum of Understanding, dated March 13, 1997, between Internet
Passport and DigitalXPress LLC.
10.14* Agreement, dated May 16, 1997, between StarComm and Franklin
Telecommunications Corp.
10.15* Agreement, dated May 15, 1997, between Peak Technologies, Inc. and
Franklin Telecommunications Corp.
10.16 Form of Regulation D Subscription Agreement, dated October 31, 1997
between Franklin Telecommunications Corp. and certain investors.
10.17 Form of Registration Rights Agreement, dated October 31, 1997 between
Franklin Telecommunications Corp. and certain investors.
10.18 Form of Warrant issued to purchasers of the Series A Preferred Stock
16.1* Letter from Corbin & Wertz, Certified Public Accountants
23.1* Consent of Corbin & Wertz, Certified Public Accountants
23.2* Consent of Phillips & Haddan LLP (included as part of Exhibit 5.1)
23.3 Consent of Singer, Lewak, Greenbaum & Goldstein LLP
</TABLE>
- --------
*Previously filed

II-6
<PAGE>

ITEM 17. UNDERTAKINGS.

The undersigned Registrant undertakes as follows:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registation by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.

(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1993 (the "Act") may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expense incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.

II-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Westlake
Village, State of California, on November 6, 1997.

Franklin Telecommunications Corp.

By /s/ Frank W. Peters
___________________________________
Frank W. Peters
President

In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities
and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer

/s/ Frank W. Peters President and a Director November 6, 1997
____________________________________
Frank W. Peters

(2) Principal Financial and Accounting Officer

/s/ Thomas Russell Chief Financial Officer and November 6, 1997
____________________________________ a Director
Thomas Russell

(3) Directors

/s/ Peter S. Buswell* Director November 6, 1997
____________________________________
Peter S. Buswell

/s/ Robert S. Harp* Director November 6, 1997
____________________________________
Robert S. Harp
</TABLE>

*By Frank W. Peters, Attorney-in-Fact

II-8
<PAGE>

EXHIBIT INDEX

<TABLE>
<C> <S> <C>
EXHIBIT NO. DESCRIPTION SEQUENTIALLY
----------- ----------- NUMBERED PAGE
-------------
3.1 Restated Articles of Incorporation of Franklin Telecommunications Corp.
3.2* Bylaws of Franklin Telecommunications Corp.
3.3 Certificate of Determination of Preferences of Series A Preferred Stock.
5.1* Opinion of Phillips & Haddan LLP
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters
10.2* Confidential Agreement dated June 3, 1996 between Malibu Internet Services
and Franklin Telecommunications Corp.
10.3* Joint Venture Agreement dated May 23, 1996 between StarComm Products Inc.
and Franklin Telecommunications Corp.
10.4* Letter Agreement dated February 28, 1997 between Internet Passport LLC and
Franklin Telecommunications Corp.
10.5* Subscriber Agreement dated January 2, 1997 between LaserVend, Inc and
Franklin Telecommunications Corp.
10.6* Subscriber Agreement dated January 28, 1997 between A-Online Information
Services, Inc. and Franklin Telecommunications Corp.
10.7* Subscriber Agreement dated January 17, 1997 between WebTV Networks, Inc.
and Franklin Telecommunications Corp.
10.8* Letter Agreement dated February 26, 1997 between CPR Computer Repair, Inc.
and Franklin Telecommunications Corp.
10.9* Letter Agreement dated December 2, 1996 between Number 1 Internet Services
and Franklin Telecommunications Corp.
10.10* Warrant Agreement dated May 18, 1995 between M. H. Myerson & Co. and
Franklin Telecommunications Corp.
10.11* Form of Letter Agreement dated March 17, 1997 between M. H. Myerson & Co.
and Franklin Telecommunications Corp.
10.12* Form of Indemnity Agreement for all Directors of Franklin
Telecommunications Corp.
10.13* Memorandum of Understanding, dated March 13, 1997, between Internet
Passport and DigitalXPress LLC.
10.14* Agreement, dated May 16, 1997, between StarComm and Franklin
Telecommunications Corp.
10.15* Agreement, dated May 15, 1997, between Peak Technologies, Inc. and
Franklin Telecommunications Corp.
10.16 Form of Regulation D Subscription Agreement, dated October 31, 1997
between Franklin Telecommunications Corp. and certain investors.
10.17 Form of Registration Rights Agreement, dated October 31, 1997 between
Franklin Telecommunications Corp. and certain investors.
10.18 Form of Warrant issued to purchasers of the Series A Preferred Stock
16.1* Letter from Corbin & Wertz, Certified Public Accountants
23.1* Consent of Corbin & Wertz, Certified Public Accountants
23.2* Consent of Phillips & Haddan LLP (included as part of Exhibit 5.1)
23.3 Consent of Singer, Lewak, Greenbaum & Goldstein LLP
</TABLE>
- -------
*Previously filed

<PAGE>

EXHIBIT 3.1

Restated Articles of Incorporation
of
Franklin Telecommunications Corp.

Frank W. Peters and Helen West certify that:

1. They are the President and Secretary, respectively, of Franklin
Telecommunications Corp., a California corporation.

2. The Articles of Incorporation of this Corporation, as amended to the
date of filing of this certificate, including amendments set forth herein but
not separately filed (and with the omissions required by Section 910 of the
Corporations Code) are restated as set forth in Exhibit A hereto.

3. The amendment and restatement of the Articles of Incorporation has been
duly approved by the Board of Directors.

4. The amendments as included in the Restated Articles of Incorporation
(other than omissions required by Section 910 of the Corporations Code) have
been duly approved by the required vote of shareholders in accordance with
Section 902 of the California Corporations Code. The corporation has only one
class of shares outstanding and the total number of outstanding shares of the
Corporation is 14,359,516 shares of Common Stock. The total number of shares
voting in favor of the amendment equaled or exceeded the vote required. The
percentage vote required was more than fifty percent.

We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.

Dated: October 7, 1997

_______________________________
Frank W. Peters, President

_______________________________
Helen West, Secretary
<PAGE>

Exhibit A

Restated Articles of Incorporation
of
Franklin Telecommunications Corp.

The name of this corporation is:

Franklin Telecommunications Corp.

The purpose of the corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.

III

The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.

The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to the applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the corporation and its shareholders.

(a) The corporation is authorized to issue two classes of stock,
designated "Common Stock" and "Preferred Stock", respectively. The number of
shares of Common Stock authorized to be issued is Ninety Million (90,000,000),
and the number of shares of Preferred Stock authorized to be issued is Ten
Million (10,000,000).

(b) The Preferred Stock may be divided into such number of series as the
Board of Directors may determine. The Board of Directors is authorized to
determine and to alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock, and to
fix the number of shares of any series of Preferred Stock and the designation of
any such series of Preferred Stock. The Board of Directors, within the limits

-2-
<PAGE>

and restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, may
increase or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any series subsequent to the issue of
shares of that series.

-3-

<PAGE>

EXHIBIT 3.3

CERTIFICATE OF DETERMINATION OF
SERIES A PREFERRED STOCK

FRANKLIN TELECOMMUNICATIONS CORP.

Frank W. Peters and Helen West hereby certify that:

1. They are the President and Secretary, respectively, of Franklin
Telecommunications Corp., a California corporation (hereinafter called the
"Company").

2. The Restated Articles of Incorporation of the Company authorizes the
issuance of Ten million (10,000,000) shares of preferred stock, and expressly
vests in the Board of Directors of the Company the authority provided therein to
issue any or all of said shares in one (1) or more series and by resolution or
resolutions to establish the designation and number and to fix the relative
rights and preferences of each series to be issued.

3. The Board of Directors of the Company, pursuant to the authority
expressly vested in it as aforesaid, has adopted the following resolutions
creating a Series A issue of Preferred Stock:

RESOLVED, that One Thousand (1,000) of the Ten (10) million
(10,000,000) authorized shares of Preferred Stock of the Company shall be
designated Series A Preferred Stock, and shall possess the rights and
preferences set forth below:

Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as Series A Preferred Stock (the "Series A Preferred Stock") and the
number of shares constituting the Series A Preferred Stock shall be One Thousand
(1,000). The Series A Preferred Stock shall be offered at a purchase price of
Ten Thousand Dollars ($10,000) per share (the "Original Series A Issue Price"),
with an eight percent (8%) per annum accretion rate as set forth herein.

Section 2. Rank. The Series A Preferred Stock shall rank: (i) junior to
----
any other class or series of capital stock of the Company hereafter created
specifically ranking by its terms senior to the Series A Preferred Stock
(collectively, the "Senior Securities"); (ii) prior to all of the Company's
Common Stock ("Common Stock"); (iii) prior to any class or series of capital
stock of the Company hereafter created not specifically ranking by its terms
senior to or on parity with any Series A Preferred Stock of whatever subdivision
(collectively, with the Common Stock, "Junior Securities"); and (iv) on parity
with any class or series of capital stock of the Company hereafter created
specifically ranking by its terms on parity with the Series A Preferred Stock
("Parity Securities") in each case as to distributions of assets upon
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary (all such distributions being referred to collectively as
"Distributions").

Section 3. Dividends. The Series A Preferred Stock will bear no
---------
dividends, and the holders of the Series A Preferred Stock ("Holders") shall not
be entitled to receive dividends on the Series A Preferred Stock.

Section 4. Liquidation Preference.
----------------------
<PAGE>

(a) In the event of any liquidation, dissolution or winding up of the
Company ("Liquidation Event"), either voluntary or involuntary, the then Holders
of shares of Series A Preferred Stock shall be entitled to receive, immediately
after any distributions to Senior Securities required by the Company's Articles
of Incorporation or any certificate of determination, and prior in preference to
any distribution to Junior Securities but in parity with any distribution to
Parity Securities, an amount per share equal to the sum of (i) the Original
Series A Issue Price for each outstanding share of Series A Preferred Stock and
(ii) an amount equal to eight percent (8%) of the Original Series A Issue Price,
per annum, accruing daily, for the period that has passed since the Closing Date
(as defined in Section 5(a) below) for the purchase by Holder of such shares of
Series A Preferred Stock from the Company (such amount being referred to herein
as the "Premium"). If upon the occurrence of such event, and after payment in
full of the preferential amounts with respect to the Senior Securities, the
assets and funds available to be distributed among the Holders of the Series A
Preferred Stock and Parity Securities shall be insufficient to permit the
payment to such Holders of the full preferential amounts due to the Holders of
the Series A Preferred Stock and the Parity Securities, respectively, then the
entire assets and funds of the Company legally available for distribution shall
be distributed among the Holders of the Series A Preferred Stock and the Parity
Securities, pro rata, based on the respective liquidation amounts to which each
such series of stock is entitled by the Company's Articles of Incorporation and
any certificate(s) of determination relating thereto.

(b) Upon the completion of the distribution required by subsection
4(a), if assets remain in this Company, they shall be distributed to holders of
Junior Securities in accordance with the Company's Articles of Incorporation
including any duly adopted certificate(s) of determination.

(c) At each Holder's option, a sale, conveyance or disposition of all
or substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Company is disposed of shall be
deemed to be a Liquidation Event as defined in Section 4(a); provided further
that (i) a consolidation, merger, acquisition, or other business combination of
the Company with or into any other publicly traded company or companies shall
not be treated as a Liquidation Event as defined in Section 4(a) but instead
shall be treated pursuant to Section 5(d) hereof, and (ii) a consolidation,
merger, acquisition, or other business combination of the Company with or into
any other non-publicly traded company or companies where the surviving entity is
either a non-publicly traded company or an entity other than the Company, shall
be treated as a Liquidation Event as defined in Section 4(a). The Company shall
not consummate any transaction described in subsection 4(c)(ii) unless it first
gives thirty (30) days prior notice of such transaction (during which time the
Holder shall be entitled to immediately convert any or all of its shares of
Series A Preferred Stock into Common Stock at the Conversion Price, as defined
below, then in effect, which conversion shall not be subject to the conversion
restrictions set forth in Section 5(a); provided however, that, if such
conversion takes place prior to the end of the four (4) month holding period set
forth in Section 5(a), for purposes of calculating the Variable Conversion Price
(as defined in Section 5(a)), "X" shall equal eighty percent (80%)).

(d) In the event that, immediately prior to or concurrent with the
closing of a transaction described in Section 4(c) which would constitute a
Liquidation Event, the cash distributions required by Section 4(a) have not been
made, the Company shall either: (i) cause such closing to be postponed until
such cash distributions have been made, or (ii) cancel such transaction, in
which event the rights of the Holders of Series A Preferred Stock shall be the
same as existing immediately prior to

2
<PAGE>

such proposed transaction.

Section 5. Conversion. Subject to Section 4(c) herein, the record Holders
----------
of this Series A Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):

(a) Right to Convert. The record Holder of the Series A Preferred
Stock shall be entitled to convert, subject to the conversion restrictions
herein below, any or all the shares of the Series A Preferred Stock on or after
the date that is four (4) months after the Last Closing Date, as defined below,
at the office of the Company or its designated transfer agent (the "Transfer
Agent"), into that number of fully-paid and non-assessable shares of Common
Stock calculated in accordance with the following formula (the "Conversion
Rate"):

Number of shares of Common Stock issued upon conversion of one (1) share of
Series A Preferred Stock =

(.08) (N/365) (10,000) + 10,000
-------------------------------
Conversion Price

where,

. N = the number of days between (i) the Closing Date of the purchase by
Holder of the shares of Series A Preferred Stock from the Company, for
which conversion is being elected, and (ii) the applicable Date of
Conversion (as defined in Section 5(b)(iv) below) for the shares of Series
A Preferred Stock for which conversion is being elected, and

. Conversion Price = the lesser of (x) a "Fixed Conversion Price" equal to
the lesser of $5.00 or the average Closing Bid Price, as that term is
defined below, of the Company's Common Stock for the thirty (30) trading
days immediately following the Last Closing Date, as defined below,
provided that in no event shall the Fixed Conversion Price be less than
$4.00, or (y) a "Variable Conversion Price" equal to X% of the average
Closing Bid Price, as that term is defined below, of the Company's Common
Stock for the twenty (20) trading days immediately preceding the Date of
Conversion, as defined below, where X is determined as follows:

No. Months Between Last
Closing and Date of Conversion "X"
------------------------------ -----
4 months-6 months 85%
6 months and 1 day -12 months 80%

provided, that in no event shall the Variable Conversion Price be less than
$1.00, and provided, however, that, unless otherwise indicated herein, beginning
on the date that is four (4) months following the Last Closing Date, as defined
below, the right of the Holder to convert into Common Stock using the Variable
Conversion Price initially shall be limited to a maximum of twenty percent (20%)
of the aggregate principal amount of the Series A Preferred Stock issued to such
Holder, and for each one (1) month period which expires thereafter, the Holder
shall accrue the right to convert into Common Stock an additional twenty percent
(20%) of the aggregate principal amount of the Series A Preferred Stock issued
to such Holder, (the number of shares that may be converted at any given time
using the Variable

3
<PAGE>

Conversion Price, in the aggregate, is referred to hereinafter as the
"Conversion Quota"); and provided, further, in the event that the Holder elects
not to convert its full Conversion Quota during any one (1) month period, the
unconverted amount shall be carried forward and added to the Conversion Quota,
and thereafter the Holder may, from time to time, convert any portion of the
Conversion Quota at the Variable Conversion Price; and provided, further, that
subsequent to the date that is nine (9) months following the Last Closing Date,
there shall be no restrictions on the number of shares of Series A Preferred
Stock that may be converted into Common Stock using the Variable Conversion
Price; and provided, further, that a Holder can convert one hundred percent
(100%) of the Series A Preferred Stock, or any portion thereof, into Common
Stock using the Fixed Conversion Price on or after the date that is four (4)
months after the Last Closing Date whether or not the Fixed Conversion Price is
less than the Variable Conversion Price.

As used herein, a "Closing Date" shall mean the date of the closing of a
purchase and sale of Series A Preferred Stock that occurs pursuant to the
offering of the Series A Preferred Stock by the Company, and the "Last Closing
Date" shall be the date of the last such closing.

For purposes hereof, any Holder which acquires shares of Series A Preferred
Stock from another Holder (the "Transferor") and not upon original issuance from
the Company shall be entitled to exercise its conversion right as to the
percentages of such shares specified under Section 5(a) in such amounts and at
such times such that the number of shares eligible for conversion by such Holder
at any time shall be in the same proportion that the number of shares of Series
A Preferred Stock acquired by such Holder from its Transferor bears to the total
number of shares of Series A Preferred Stock originally issued by the Company to
such Transferor (or its predecessor Transferor).

For purposes hereof, the term "Closing Bid Price" shall mean the closing
bid price of the Company's Common Stock on the OTC Bulletin Board, or if no
longer traded on the OTC Bulletin Board, the closing bid price on the principal
national securities exchange or the over-the-counter on which the Common Stock
is so traded and if not available, the mean of the high and low prices on the
principal securities exchange on which the Common Stock is so traded.

(b) Mechanics of Conversion. In order to convert Series A Preferred
Stock into full shares of Common Stock, the Holder shall (i) send via facsimile,
on or prior to 11:59 p.m., New York City time (the "Conversion Notice Deadline")
on the Date of Conversion, a copy of the fully executed notice of conversion
("Notice of Conversion") to the Company at the office of the Company and to its
designated transfer agent (the "Transfer Agent") for the Series A Preferred
Stock stating that the Holder elects to convert, which notice shall specify the
Date of Conversion, the number of shares of Series A Preferred Stock to be
converted, the applicable Conversion Price and a calculation of the number of
shares of Common Stock issuable upon such conversion (together with a copy of
the front page of each certificate to be converted) and (ii) surrender to a
common courier for delivery to the office of the Company or the Transfer Agent,
the original certificates representing the Series A Preferred Stock being
converted (the "Preferred Stock Certificates"), duly endorsed for transfer;
provided, however, that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion unless
either the Preferred Stock Certificates are delivered to the Company or its
Transfer Agent as provided above, or the Holder notifies the Company or its
Transfer Agent that such certificates have been lost, stolen or destroyed
(subject to the requirements of subparagraph (i) below). Upon receipt by the
Company of a facsimile copy of a Notice of Conversion, the Company shall
immediately send, via facsimile, a confirmation of receipt of the Notice of
Conversion to Holder which

4
<PAGE>

shall specify that the Notice of Conversion has been received and the name and
telephone number of a contact person at the Company whom the Holder should
contact regarding information related to the Conversion. In the case of a
dispute as to the calculation of the Conversion Rate, the Company shall promptly
issue to the Holder the number of Shares that are not disputed and shall submit
the disputed calculations to its outside accountant via facsimile within three
(3) days of receipt of Holder's Notice of Conversion. The Company shall cause
the accountant to perform the calculations and notify the Company and Holder of
the results no later than two business days from the time it receives the
disputed calculations. Accountant's calculation shall be deemed conclusive
absent manifest error.

(i) Lost or Stolen Certificates. Upon receipt by the Company
of evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificates representing shares of Series A Preferred Stock, and (in the case
of loss, theft or destruction) of indemnity or security reasonably satisfactory
to the Company, and upon surrender and cancellation of the Preferred Stock
Certificate(s), if mutilated, the Company shall execute and deliver new
Preferred Stock Certificate(s) of like tenor and date. However, the Company
shall not be obligated to re-issue such lost or stolen Preferred Stock
Certificates if Holder contemporaneously requests the Company to convert such
Series A Preferred Stock into Common Stock.

(ii) Delivery of Common Stock Upon Conversion. The Company
shall or shall cause the Transfer Agent to, no later than the close of business
on the third (3rd) business day (the "Deadline") after receipt by the Company or
the Transfer Agent of a facsimile copy of a Notice of Conversion and receipt by
Company or the Transfer Agent of all necessary documentation duly executed and
in proper form required for conversion, including the original Preferred Stock
Certificates to be converted (or after provision for security or indemnification
in the case of lost or destroyed certificates, if required), issue and surrender
to a common courier for either overnight or (if delivery is outside the United
States) two (2) day delivery to the Holder at the address of the Holder as shown
on the stock records of the Company a certificate for the number of shares of
Common Stock to which the Holder shall be entitled as aforesaid.

(iii) No Fractional Shares. If any conversion of the Series A
Preferred Stock would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion,
in the aggregate, shall be the next higher number of shares.

(iv) Date of Conversion. The date on which conversion occurs
(the "Date of Conversion") shall be deemed to be the date set forth in such
Notice of Conversion, provided (i) that the advance copy of the Notice of
Conversion is sent via facsimile to the Company before 11:59 p.m., New York City
time, on the Date of Conversion, and (ii) that the original Preferred Stock
Certificates representing the shares of Series A Preferred Stock to be converted
are surrendered by depositing such certificates with a common courier, for
delivery to the Company or the Transfer Agent as provided above, as soon as
practicable after the Date of Conversion. The person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record Holder or Holders of such shares of
Common Stock on the Date of Conversion.

(c) Automatic Conversion. Each share of Series A Preferred Stock
outstanding on the date which is one (1) year after the Last Closing Date or, if
not a business day, the first business day thereafter ("Termination Date")
automatically shall be converted ("Automatic Conversion") into

5
<PAGE>

Common Stock on such date at the Conversion Rate then in effect (calculated in
accordance with the formula in Section 5(a) above), and the Termination Date
shall be deemed the Date of Conversion with respect to such conversion for
purposes of this Certificate of Determination. If an Automatic Conversion
occurs, the Company and the Holders shall follow the applicable conversion
procedures set forth in this Certificate of Determination; provided, however,
that the Holders are not required to send the Notice of Conversion contemplated
by Section 5(b).

(d) Adjustment to Conversion Rate.

(i) Adjustment to Fixed Conversion Price Due to Stock Split,
Stock Dividend, Etc. If, prior to the conversion of all of the Series A
Preferred Stock, the number of outstanding shares of Common Stock is increased
by a stock split, stock dividend, or other similar event, the Fixed Conversion
Price shall be proportionately reduced, or if the number of outstanding shares
of Common Stock is decreased by a combination or reclassification of shares, or
other similar event, the Fixed Conversion Price shall be proportionately
increased.

(ii) Adjustment to Variable Conversion Price. If, at any time
when any shares of the Series A Preferred Stock are issued and outstanding, the
number of outstanding shares of Common Stock is increased or decreased by a
stock split, stock dividend, or other similar event, which event shall have
taken place during the reference period for determination of the Conversion
Price for any conversion of the Series A Preferred Stock, then the Variable
Conversion Price shall be calculated giving appropriate effect to the stock
split, stock dividend, combination, reclassification or other similar event for
all five (5) trading days immediately preceding the Date of Conversion.

(iii) Adjustments.

(A) Adjustment Due to Merger, Consolidation, Etc. If,
prior to the conversion of all Series A Preferred Stock, there shall be any
merger, consolidation, exchange of shares, recapitalization, reorganization, or
other similar event, as a result of which shares of Common Stock of the Company
shall be changed into (or the shares of Common Stock become entitled to receive)
the same or a different number of shares of the same or another class or classes
of stock or securities of the Company or another entity or there is a sale of
all or substantially all the Company's assets or there is a change of control
transaction not deemed to be a liquidation pursuant to Section 4(c), then the
Holders of Series A Preferred Stock shall thereafter have the right to receive
upon conversion of Series A Preferred Stock, upon the basis and upon the terms
and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities and/or
other assets which the Holder would have been entitled to receive in such
transaction had the Series A Preferred Stock been converted immediately prior to
such transaction, and in any such case appropriate provisions shall be made with
respect to the rights and interests of the Holders of the Series A Preferred
Stock to the end that the provisions hereof (including, without limitation,
provisions for the adjustment of the Conversion Price and of the number of
shares issuable upon conversion of the Series A Preferred Stock) shall
thereafter be applicable, as nearly as may be practicable in relation to any
securities thereafter deliverable upon the exercise hereof. The Company shall
not effect any transaction described in this subsection 5(d)(iii) unless (a) it
first gives at least thirty (30) days prior notice of such merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event (during which time the Holder shall be entitled to convert its
shares of Series A Preferred Stock into Common Stock, which conversions shall
not be subject to the conversion restrictions set forth in Section

6
<PAGE>

5(a);) and (b) the resulting successor or acquiring entity (if not the Company)
assumes by written instrument the obligations of the Company under this
Certificate of Determination including this subsection 5(d)(iii).

(B) Adjustment Due to Distribution. If at any time after
------------------------------
the Last Closing Date, the Company shall declare or make any distribution of its
assets (or rights to acquire its assets) to Holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Company's shareholders in cash or shares (or
rights to acquire shares) of capital stock of any other public or private
company, including but not limited to a subsidiary or spin-off of the Company (a
"Distribution"), then the Holders of Series A Preferred Stock shall be entitled,
upon any conversion of shares of Series A Preferred Stock after the date of
record for determining shareholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the Holder with
respect to the shares of Common Stock issuable upon such conversion had such
Holder been the holder of such shares of Common Stock on the record date for
determination of shareholders entitled to such Distribution.

(iv) Issuance of Other Securities With Variable Conversion
Price. If, at any time after the Last Closing Date the Company shall issue any
securities which are convertible into or exchangeable for Common Stock
("Convertible Securities") either (i) at a conversion or exchange rate based on
a discount from the market price of the Common Stock at the time of conversion
or exercise or (ii) with a fixed conversion or exercise price less than the
Fixed Conversion Price, excluding employee stock options and options issued in
conjunction with an acquisition then, at the Holder's option: (x) in the case of
clause (i), the Variable Conversion Price in respect of any conversion of Series
A Preferred Stock after such issuance shall be calculated utilizing the greatest
discount applicable to any such Convertible Securities, and (y) in the case of
clause (ii), the Fixed Conversion Price shall be reduced to such lesser
conversion or exercise price.

(v) No Fractional Shares. If any adjustment under this
Section 5(d) would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion
shall be the next higher number of shares.

Section 6. [Intentionally Omitted]

Section 7. Voting Rights. The Holders of the Series A Preferred Stock
-------------
shall have no voting power whatsoever, except as otherwise provided by the
General Corporation Law of the State of California ("California Law"), and no
Holder of Series A Preferred Stock shall vote or otherwise participate in any
proceeding in which actions shall be taken by the Company or the shareholders
thereof or be entitled to notification as to any meeting of the shareholders.

Notwithstanding the above, the Company shall provide Holder with
notification of any meeting of the shareholders regarding any major corporate
events affecting the Company. In the event of any taking by the Company of a
record of its shareholders for the purpose of determining shareholders who are
entitled to receive payment of any dividend or other distribution, any right to
subscribe for, purchase or otherwise acquire any share of any class or any other
securities or property (including by way of merger, consolidation or
reorganization), or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all

7
<PAGE>

or substantially all of the assets of the Company, or any proposed liquidation,
dissolution or winding up of the Company, the Company shall mail a notice to
Holder, at least ten (10) days prior to the record date specified therein, of
the date on which any such record is to be taken for the purpose of such
dividend, distribution, right or other event, and a brief statement regarding
the amount and character of such dividend, distribution, right or other event to
the extent known at such time.

To the extent that under California Law the vote of the Holders of the
Series A Preferred Stock, voting separately as a class, is required to authorize
a given action of the Company, the affirmative vote or consent of the Holders of
at least a majority of the shares of the Series A Preferred Stock represented at
a duly held meeting at which a quorum is present or by written consent of a
majority of the shares of Series A Preferred Stock (except as otherwise may be
required under California Law) shall constitute the approval of such action by
the class. To the extent that under California Law the Holders of the Series A
Preferred Stock are entitled to vote on a matter with holders of Common Stock,
voting together as one (1) class, each share of Series A Preferred Stock shall
be entitled to a number of votes equal to the number of shares of Common Stock
into which it is then convertible using the record date for the taking of such
vote of stockholders as the date as of which the Conversion Price is calculated.
Holders of the Series A Preferred Stock also shall be entitled to notice of all
shareholder meetings or written consents with respect to which they would be
entitled to vote, which notice would be provided pursuant to the Company's by-
laws and applicable statutes.

Section 8. Protective Provision. So long as shares of Series A Preferred
--------------------
Stock are outstanding, the Company shall not without first obtaining the
approval (by vote or written consent, as provided by California Law) of the
Holders of at least seventy-five percent (75%) of the then outstanding shares of
Series A Preferred Stock:

(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock or any securities so as to affect adversely the Series
A Preferred Stock;

(b) create any new class or series of stock having a preference over
or on parity with the Series A Preferred Stock with respect to Distributions (as
defined in Section 2 above) or increase the size of the authorized number of
Series A Preferred; or

(c) do any act or thing not authorized or contemplated by this
Certificate of Determination which would result in taxation of the holders of
shares of the Series A Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).

In the event Holders of at least seventy-five percent (75%) of the then
outstanding shares of Series A Preferred Stock agree to allow the Company to
alter or change the rights, preferences or privileges of the shares of Series A
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series A
Preferred Stock, then the Company will deliver notice of such approved change to
the Holders of the Series A Preferred Stock that did not agree to such
alteration or change (the "Dissenting Holders") and Dissenting Holders shall
have the right for a period of thirty (30) days to convert pursuant to the terms
of this Certificate of Determination as they exist prior to such alteration or
change (provided that, for purposes of calculating the Variable Conversion
Price, as defined in Section 5(a), "X" shall equal eighty percent (80%), and
provided further that the holding requirements set forth in Section 5(a) hereof
are met), or continue to hold their shares of Series A Preferred Stock, as
amended.

8
<PAGE>

Section 9. Status of Converted Stock. In the event any shares of Series
-------------------------
A Preferred Stock shall be converted pursuant to Section 5 hereof, the shares so
converted shall be canceled, shall return to the status of authorized but
unissued Preferred Stock of no designated series, and shall not be issuable by
the Company as Series A Preferred Stock.

Section 10. Preference Rights. Nothing contained herein shall be
-----------------
construed to prevent the Board of Directors of the Company from issuing one (1)
or more series of Preferred Stock with dividend and/or liquidation preferences
junior to the dividend and liquidation preferences of the Series A Preferred
Stock.

Section 11. Authorization and Reservation of Shares of Common Stock.
-------------------------------------------------------

(a) Authorized and Reserved Amount. The Company shall have
authorized and reserved and keep available for issuance Four Million (4,000,000)
shares of Common Stock (the "Reserved Amount") solely for the purpose of
effecting the conversion of the Series A Preferred Stock, and exercise of the
warrants to acquire Common Stock (the "Common Warrants") issued or to be issued
to the Holders, which number shall not be reduced. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock a sufficient number of shares of Common Stock to provide for the
full conversion of all outstanding Series A Preferred Stock, and issuance of the
shares of Common Stock in connection therewith and the full exercise of the
Common Warrants and issuance of the shares of Common Stock in connection
therewith.

(b) Increases to Reserved Amount. Without limiting any other
provision of this Section 11, if the Reserved Amount for any three (3)
consecutive trading days (the last of such three (3) trading days being the
"Reservation Trigger Date") shall be less than one hundred twenty-five percent
(125%) of the number of shares of Common Stock issuable upon conversion of this
Series A Preferred Stock, and exercise of the Common Warrants on such trading
days (a "Share Authorization Failure"), the Company shall immediately notify all
Holders of such occurrence and shall take action as soon as possible, but in any
event within sixty (60) days after a Reservation Trigger Date (including, if
necessary, seeking shareholder approval to authorize the issuance of additional
shares of Common Stock) to increase the Reserved Amount to one hundred fifty
percent (150%) of the number of shares of Common Stock then issuable upon
conversion of the Series A Preferred Stock, and exercise of the Common Warrants.

(c) Reduction of Reserved Amount Under Certain Circumstances.
Prior to complete conversion of all Series A Preferred Stock the Company shall
not reduce the number of shares required to be reserved for issuance under this
Section 11 without the written consent of all Holders except for a reduction
proportionate to a reverse stock split effected for a business purpose other
than affecting the obligations of Company under this Section 11, which reverse
stock split affects all shares of Common Stock equally. Following complete
conversion of all the Series A Preferred Stock, the Company may, with fifteen
(15) days prior written notice to Holder, reduce the Reserved Amount to one
hundred twenty-five percent (125%) of the number of shares of Common Stock
issuable upon the full exercise of the Common Warrants; provided, however, that
the Reserved Amount shall continue to be subject to increase pursuant to Section
11 hereof.

(d) Allocation of Reserved Amount. Each increase to the Reserved
Amount shall be

9
<PAGE>

allocated pro rata among the Holders based on the number of shares of Series A
Preferred Stock, and Common Warrants held by each Holder at the time of the
establishment of or increase in the Reserved Amount. In the event a Holder shall
sell or otherwise transfer any of such Holder's Series A Preferred Stock, or
Common Warrants, each transferee shall be allocated a pro rata portion of such
transferor's Reserved Amount. Any portion of the Reserved Amount which remains
allocated to any person or entity which does not hold any Series A Preferred
Stock shall be allocated to the remaining Holders, pro rata based on the number
of Series A Preferred Stock, and Common Warrants then held by such Holders.

(e) Cap Amount. In the event that the Company becomes subject to
the Nasdaq 20% Rule (as defined below) during the term of the Series A Preferred
Stock, in no event shall the total number of shares of Common Stock issued upon
conversion of the Series A Preferred Stock exceed the maximum number of shares
of Common Stock (the "Cap Amount") that the Company can, without shareholder
approval, so issue pursuant to Nasdaq Rule 4460(i)(1)(d)(ii) (or any other
applicable Nasdaq Rules or any successor rule) (the "Nasdaq 20% Rule"). The
Cap Amount shall be allocated pro-rata to the holders of Series A Preferred
Stock as provided in subsection (f) below. In the event the Company is
prohibited from issuing shares of Common Stock as a result of the operation of
this subsection (e), the Company shall comply with subsection (g) below.

(f) Allocations of Cap Amount and Reserved Amount. The initial Cap
Amount and Reserved Amount shall be allocated pro rata among the Holders of
Series A Preferred Stock based on the number of the shares of Series A Preferred
Stock initially issued to each Holder. Each increase to the Cap Amount and
Reserved Amount shall be allocated pro rata among the Holders of Series A
Preferred Stock based on the number of the shares of Series A Preferred Stock
held by each Holder at the time of the increase in the Cap Amount or Reserved
Amount, as the case may be. In the event a holder shall sell or otherwise
transfer any of such Holder's shares of Series A Preferred Stock, each
transferee shall be allocated a pro rata portion of such transferor's Cap amount
and Reserved Amount. Any portion of the Cap Amount or Reserved Amount which
remains allocated to any person or entity which does not hold any Series A
Preferred Stock shall be allocated to the remaining holders of shares of Series
A Preferred Stock, pro rata based on the number of shares of Series A Preferred
Stock then held by such Holders.

(g) Inability to Convert due to Cap Amount.

(i) Obligation to Cure. If at any time the then unissued
portion of any Holder's Cap Amount is less than 125% of the number of shares of
Common Stock then issuable upon conversion of such Holder's shares of Series A
Preferred Stock (a "Trading Market Trigger Event"), the Company shall
immediately notify the Holders of Series A Preferred Stock of such occurrence
and shall immediately take all necessary action (including, if necessary,
approval of its shareholders to authorize the issuance of the full number of
shares of Common Stock which would be issuable upon the conversion of Series A
Preferred Stock but for the Cap Amount) to eliminate any prohibitions under
applicable law or the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Company or any of its securities on the Company's ability to issue shares of
Common Stock in excess of the Cap Amount. In the event the Company fails to
eliminate all such prohibitions within one hundred twenty (120) days after the
Trading Market Trigger Event (provided, however, that (A) the Company must file
preliminary proxy materials with the SEC within thirty (30) days of the Trading
Market Trigger Event and (B) officers and directors of the

10
<PAGE>

Company shall promptly upon the occasion of any such Trading Market Trigger
event enter into irrevocable agreements to vote all of their shares in favor of
eliminating such prohibitions), each Holder of Series A Preferred Stock shall
thereafter have the option, exercisable in whole or in part at any time and from
time to time by delivery of written notice ("Cap Redemption Notice") to the
Company, to require the Company, to purchase for cash, at an amount per share to
the Redemption Rate in effect on the date of the Cap Redemption Notice, a
portion of the Holder's Series A Preferred Stock such that, after giving effect
to such purchase, the holder's allocated portion of the Cap Amount exceeds 125%
of the total number of shares of Common Stock issuable to such holder upon
conversion of its Series A Preferred Stock on the date of such Cap Redemption
Notice. If the Company fails to redeem any of such shares within five (5)
business days after its receipt of a Cap Redemption Notice, then such Holder
shall be entitled to the remedies provided in Section 11(g)(ii) below.

(ii) Remedies. If the Company fails to eliminate the
applicable prohibitions within the one hundred twenty (120) day cure period
referred to in Section 11(g)(i) above and thereafter the Company is prohibited,
at any time, from issuing shares of Common Stock upon conversion of Series A
Preferred Stock to any holder because such issuance would exceed such holder's
allocated portion of the Cap Amount because of applicable law or the rules or
regulations of any stock exchange, interdealer quotation system or other self-
regulatory organization with jurisdiction over the Company or its securities,
any holder who is prohibited from converting its Series A Preferred Stock may:

(A) require, with the consent of Holders of at least
fifty percent (50%) of the outstanding shares of Series A Preferred Stock
(including any shares of Series A Preferred Stock held by the requesting
Holder), the Company to terminate the listing of its Common Stock and to cause
its Common Stock to be eligible for trading on the American Stock Exchange, or
another exchange or market which is not subject to the Nasdaq 20% Rule, at the
option of the requesting Holders; and, as a result thereof

(B) require the Company to issue shares of Common
Stock, resalable on such other exchange, in accordance with such Holder's Notice
of Conversion at a conversion price equal to the Conversion Price (without
regard to the Conversion Quota) in effect on the date of the holder's written
notice to the Company of its election to receive shares of Common Stock pursuant
to this subparagraph (B).

Section 12. Failure to Satisfy Conversions.
------------------------------

(a) Conversion Failure Payments. If, at any time, (x) a Holder
submits a Notice of Conversion (or is deemed to submit such notice pursuant to
Section 5(c) hereof), and the Company fails for any reason to deliver, on or
prior to the second business day following the Deadline ("Delivery Period") for
such conversion, such number of shares of Common Stock to which such Converting
Holder is entitled upon such conversion (which shares shall be listed,
authorized, reserved, registered, and freely tradeable to the extent required in
this Certificate of Determination, the Registration Rights Agreement between the
Company and the Holder(s) and the Subscription Agreement between the Company and
the Holder(s), collectively referred to as the "Governing Agreements"), or (y)
the Company provides notice to Holder at any time of its intention not to issue
shares of Common Stock upon exercise by Holder of its conversion rights in
accordance with the terms of this Certificate of Determination (each of (x) and
(y) being a "Conversion Failure"), then the Company shall accrue for the benefit
of the Holder, damages in an amount equal to the lower of:

11
<PAGE>

(i) "Damages Amount" X "D" X .005, and
(ii) the highest interest rate permitted by applicable
California law, where:

"D" means the number of days beginning the date of the Conversion Failure
through and including the Cure Date with respect to such Conversion Failure;

"Damages Amount" means the Original Series A Issue Price for each share of
Series A Preferred Stock subject to conversion plus all accrued and unpaid
Premium thereon as of the first day of the Conversion Failure, plus all damage
payments previously owed and unpaid.

"Cure Date" means (i) with respect to a Conversion Failure described in
clause (x) of its definition, the date the Company effects the conversion of the
shares of Series A Preferred Stock submitted for conversion and (ii) with
respect to a Conversion Failure described in clause (y) of its definition, the
date the Company undertakes in writing to timely issue Common Stock in
satisfaction of all conversions of Series A Preferred Stock in accordance with
the terms of this Certificate of Determination.

The amount to which a Holder shall be entitled pursuant to this Section are
referred to herein as "Conversion Failure Payments." The parties agree that the
damages caused by a breach hereof would be difficult or impossible to estimate
accurately. For the first ninety (90) days after the Conversion Failure, the
accrued Conversion Failure Payments shall be paid in Common Stock, as follows:

Upon conversion of each share of Preferred Stock, the Company shall issue
to the Subscriber the number of shares of Common Stock determined as set forth
in Section 5(a) of the Certificate of Determination, plus an additional number
of shares of Common Stock attributable to such share of Preferred Stock (the
Additional Shares") determined as set forth below:

Additional Shares = Conversion Failure Payment
--------------------------
Lowest Conversion Price

where the "Lowest Conversion Price" means the lowest Conversion Price in effect
during the period beginning on the date of the Conversion Failure through the
Cure Date for such Conversion Failure.

Such Additional Shares shall also be deemed "Registerable Securities" as
defined in the Registration Rights Agreement. Any Conversion Failure Payment(s)
accruing after the date that is ninety (90) days after the Conversion Failure
shall be payable Common Stock or in cash, at the Subscriber's option, as
follows: If Subscriber elects to be paid in cash, he, she or it shall so notify
the Company in writing, and such Conversion Failure Payment(s) shall be paid to
such Subscriber by a cashiers check, no later than ten (10) days after the end
of (i) the month in which the Company receives the Holder's cash payment request
and (ii) any subsequent month(s) for which such amounts accrue.

(b) Buy-In Cure. Unless a Conversion Failure described in clause (y)
of Section 12(a) hereof has occurred with respect to such a Holder, if (i) the
Company fails for any reason to deliver during the Delivery Period shares of
Common Stock to a Holder upon a conversion of the Series A

12
<PAGE>

Preferred Stock and (ii) after the applicable Delivery Period with respect to
such conversion, a Holder purchases (in an open market transaction or otherwise)
shares of Common Stock to make delivery upon a sale by a Holder of the shares of
Common Stock (the "Sold Shares") which such Holder anticipated receiving upon
such conversion (a "Buy-In"), the Company shall pay such Holder within two (2)
business days following receipt of written notice of a claim pursuant to Section
12(b) (in addition to any other remedies available to Holder) the amount by
which (x) such Holder's total purchase price (including brokerage commission, if
any) for the shares of Common Stock so purchased exceeds (y) the net proceeds
received by such Holder from the sale of the Sold Shares. For example, if a
Holder purchases shares of Common Stock having a total purchase price of $11,000
to cover a Buy-In with respect to shares of Common Stock sold for $10,000, the
Company will be required to pay such Holder $1,000. A Holder shall provide the
Company written notification indicating any amounts payable to Holder pursuant
to this Section 12.

(c) Adjustment to Conversion Price. If a Holder has not received
certificates for all shares of Common Stock within three (3) business days
following the expiration of the Delivery Period with respect to a conversion of
any portion of any of such Holder's Series A Preferred Stock for any reason,
then the Conversion Price applicable upon conversion of such portion of the
Series A Preferred Stock shall thereafter be the lowest Conversion Price in
effect during the period beginning on, and including, such Conversion Date
through and including the Cure Date. If there shall occur a Conversion Failure
of the type described in clause (y) of Section 12(a), then the Fixed Conversion
Price with respect to any conversion of Series A Preferred Stock thereafter
shall be the lowest Conversion Price in effect at any time during the period
beginning on, and including, the date of the occurrence of such Conversion
Failure through and including the Cure Date. The Conversion Price shall
thereafter be subject to further adjustment for any events described in Section
5(d).

Section 13. Events of Default.
-----------------

(a) Holder's Option to Demand Redemption. Upon the occurrence of
an Event of Default (as herein defined), each Holder shall have the right to
elect at any time and from time to time prior to the cure by Company of such
Event of Default to have all or any portion of such Holder's then outstanding
Series A Preferred Stock redeemed by the Company in cash for an amount equal to
the Holder Demand Redemption Amount (as herein defined).

(i) The right of a Holder to elect redemption shall be
exercisable upon the occurrence of an Event of Default by such Holder in its
sole discretion by delivery of a Demand Redemption Notice (as herein defined) in
accordance with the procedures set forth in this Section 13. Notwithstanding the
exercise of such right, the Holder shall be entitled to exercise all other
rights and remedies available under the provisions of this Certificate of
Determination and at law or in equity.

(ii) A Holder shall effect each demand for redemption under
this Section 13 by giving at least two (2) business days prior to written notice
(the "Demand Redemption Notice") of the date which such redemption is to become
effective (the "Effective Date of Demand of Redemption"), the Series A Preferred
Stock selected for redemption and the Holder Demand Redemption Amount to the
Company at the address and facsimile number provided in the stock records of the
Company, which Demand Redemption Notice shall be deemed to have been delivered
on the business day after the date of transmission of Holder's facsimile (with a
copy sent by overnight courier to the Company) of such notice.

13
<PAGE>

(iii) The Holder Demand Redemption Amount shall be paid to a
Holder whose Series A Preferred Stock are being redeemed within one (1) business
day following the Effective Date of Demand of Redemption; provided, however,
that the Company shall not be obligated to deliver any portion of the Holder
Demand Redemption Amount until one (1) business day following either the date on
which the Series A Preferred Stock being redeemed are delivered to the office of
the Company or the Transfer Agent, or the date on which the Holder notifies the
Company or the Transfer Agent that such Series A Preferred Stock have been lost,
stolen or destroyed and delivers the documentation required in accordance with
Section 5(b)(i) hereof.

(b) Holder Demand Redemption Amount. The "Holder Demand Redemption
Amount" means an amount of cash equal to the greater of: (a) 1.3 times the Total
Value of the Series A Preferred Stock for which demand is being made, through
the date of redemption or (b) the product of (1) the highest price at which the
Common Stock is traded on the date of the Event of Default (or on the most
recent trading date for the Common Stock if the Common Stock is not traded on
such date) divided by the Conversion Price in effect as of the date of the Event
of Default, and (2) the Total Value through the date of redemption, where,
"Total Value" shall mean the Stated Value of the Series A Preferred Stock, plus
liquidated damages, Conversion Failure Payments, Late Registration Payments and
any other cash payments then due from the Company and then unpaid, where "Stated
Value" shall mean the Original Series A Issue Price (as defined in Section 1) of
each share of Series A Preferred Stock, together with the accreted but unpaid
Premium (as defined in Section 4(a)).

(i) a Conversion Failure described in Section 12(a) hereof,
if such failure continues uncured for ninety (90) days;

(ii) a Share Authorization Failure described in Section
11(b) hereof, if such Share Authorization Failure continues uncured for ninety
(90) days after the Reservation Trigger Date;

(iii) the Company fails, and such failure continues uncured
for three (3) business days after the Company has been notified thereof in
writing by a Holder, to satisfy the share reservation requirements of Section 11
hereof;

(iv) the Company fails to maintain an effective registration
statement as required by the Registration Rights Agreement between the Company
and the Holder(s) (the "Registration Rights Agreement") except where such
failure lasts no longer than three (3) consecutive trading days and is caused
solely by failure of the Securities and Exchange Commission to timely review the
customary submission of or respond to the customary requests of the Company;

(v) for three (3) consecutive trading days or for an
aggregate of ten (10) trading days in any nine (9) month period, the Common
Stock (including any of the shares of Common Stock issuable upon conversion of
the Series A Preferred Stock, and exercise of the Common Warrants) is (i)
suspended from trading on any of the OTC Bulletin Board, Nasdaq SmallCap, NMS,
NYSE, or AMEX, or (ii) is not qualified for trading on at least one of the OTC
Bulletin Board, Nasdaq SmallCap, NMS, NYSE, or;

14
<PAGE>

(vi) the Company fails, and such failure continues uncured
for three (3) business days after the Company has been notified thereof in
writing by a Holder, to remove any restrictive legend on any certificate for any
shares of Common Stock issued to a Holder upon conversion of any Series A
Preferred Stock, or exercise of any Common Warrant as and when required by this
Certificate of Determination, the Common Warrants, the Subscription Agreement,
between the Company and the Holder(s) (the "Subscription Agreement") or the
Registration Rights Agreement;

(vii) the Company breaches, and such breach continues uncured
for three (3) business days after the Company has been notified thereof in
writing by a Holder, any significant covenant or other material term or
condition of this Certificate of Determination, the Subscription Agreement, the
Common Warrants or the Registration Rights Agreement;

(viii) any representation or warranty of the Company made
herein or in any agreement, statement or certificate given in writing pursuant
hereto or in connection herewith (including, without limitation, the
Subscription Agreement and Registration Rights Agreement), shall be false or
misleading in any material respect when made;

(ix) the Company or any subsidiary of the Company shall make
an assignment for the benefit of its creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its
property or business, or such receiver or trustee shall otherwise be appointed;
or

(x) bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Company or any
subsidiary of the Company (and such proceedings shall continue unstayed for
thirty (30) days).

(d) Failure to Pay Damages Amount. If the Company fails to pay the
Holder Demand Redemption Amount within five (5) business days of its receipt of
a Demand Redemption Notice, then such Holder shall have the right, at any time
and from time to time prior to the payment of the Holder Demand Redemption
Amount, to require the Company, upon written notice, to immediately convert (in
accordance with the terms of Section 5) all or any portion of the Holder Demand
Redemption Amount, into shares of Common Stock at the then current Conversion
Price, provided that if the Company has not delivered the full number of shares
of Common Stock issuable upon such conversion within three (3) business days
after the Company receives written notice of such conversion, the Conversion
Price with respect to such Holder Demand Redemption Amount shall thereafter be
deemed to be the lowest Conversion Price in effect during the period beginning
on the date of the Event of Default through the date on which the Company
delivers to the Holder the full number of freely tradable shares of Common Stock
issuable upon such conversion. In the event the Company is not able to pay all
amounts due and payable with respect to all Series A Preferred Stock subject to
Holder Demand Redemption Notices, the Company shall pay the Holders such amounts
pro rata, based on the total amounts payable to such Holder relative to the
total amounts payable to all Holders.

Section 14. Remedies, Other Obligations, Breaches and Injunctive Relief.
-----------------------------------------------------------
The remedies provided in this Certificate of Determination shall be cumulative
and in addition to all other remedies available under the Certificate of
Determination at law or in equity (including a decree of specific performance
and/or other injunctive relief), no remedy contained herein shall be deemed a
waiver of

15
<PAGE>

compliance with the provision giving rise to such remedy and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Company to comply with the terms of this Certificate of Determination. Amounts
set forth or provided for herein with respect to payments, conversion and the
like (and the computation thereof) shall be the amounts to be received by the
holder hereof and shall not, except as expressly provided herein, be subject to
any other obligation of the Company (or the performance thereof). The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the holders of Series A Preferred Stock and that the remedy
at law for any such breach may be inadequate. The Company therefore agrees, in
the event of any such breach or threatened breach, the holders of Series A
Preferred Stock shall be entitled, in addition to all other available remedies,
to an injunction restraining any breach, without the necessity of showing
economic loss and without any bond or other security being required.

4. The authorized number of shares of Series A Preferred Stock is One
Thousand (1,000), and no such shares have been issued.

We declare under penalty of perjury under the laws of the State of California
that the matters set forth in this Certificate are true and correct of our own
knowledge.

Dated: October 23, 1997.

____________________________________
Frank W. Peters, President and Chief
Executive Officer

____________________________________
Helen West, Secretary

<PAGE>

EXHIBIT 10.16

FRANKLIN TELECOMMUNICATIONS CORP.

REGULATION D SUBSCRIPTION AGREEMENT

THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES AUTHORITIES. THEY
MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE
SECURITIES LAWS.

THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED
HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN RECOMMENDED
BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH AUTHORITIES
REVIEWED OR DETERMINED THE ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SUBSCRIBERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND
ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK FACTORS SET FORTH IN THE
ATTACHED DISCLOSURE DOCUMENTS AS EXHIBIT G.

SEE ADDITIONAL LEGENDS AT SECTIONS 3.7 and 9.

THIS REGULATION D SUBSCRIPTION AGREEMENT (this "Agreement") is made as
of the 31st day of October, 1997, by and between Franklin Telecommunications
Corp., a corporation duly organized and existing under the laws of the State of
California (the "Company"), and the undersigned subscriber executing this
Agreement ("Subscriber").

THE PARTIES HEREBY AGREE AS FOLLOWS:

This Agreement is executed by Subscriber in connection with the offer by
the Company and the purchase by Subscriber of Series A Preferred Stock (the
"Preferred Stock"), of the Company. The Preferred Stock is being offered at a
purchase price of Ten Thousand Dollars ($10,000), U.S., per share, in minimum
subscription amounts of at least ten (10) shares ($100,000), and increments of
five (5) shares ($50,000) in excess thereof, with a minimum aggregate offering
amount of Five Hundred (500) shares of Preferred Stock, or Five Million Dollars
($5,000,000) (the "Minimum

1
<PAGE>

Amount"), and up to a maximum aggregate amount of One Thousand (1,000) shares of
Preferred Stock, or Ten Million Dollars ($10,000,000) (the "Maximum Amount")
(collectively, the "Offering"). The terms of the Preferred Stock, including the
terms on which the Preferred Stock may be converted into common stock of the
Company (the "Common Stock"), are set forth in the Certificate of Determination
of Series A Preferred Stock (the "Certificate of Determination"), substantially
in the form attached hereto as Composite Exhibit A. The Preferred Stock is
-------------------
accompanied by a warrant or warrants, in the form of Exhibit B annexed hereto
(the "Series A Common Warrants"), that entitles the holder thereof to purchase a
number of shares of the common stock of the Company's subsidiary, FNet Corp.
(hereinafter "FNet") equal to one hundred percent (100%) of the aggregate
purchase price of the Subscriber's Preferred Stock divided by the Fixed
Conversion Price, as defined in the Certificate of Determination of the Series A
Preferred Stock, at an exercise price of $1.00 ("Series A Exercise Option #1).
However, if FNet fails to complete a public offering by June 30, 1998, the
Holder has the option, upon written notice to FNet and FTEL no later than July
31, 1998, to convert to "Series A Exercise Option #2" (in lieu of Series A
Exercise Option #1), which entitles the holder to purchase a number of shares of
Common Stock of the Company, equal to one hundred percent (100%) of the
aggregate purchase price of the Subscriber's Preferred Stock divided by the
Fixed Conversion Price exercisable at the Fixed Conversion Price. The Preferred
Stock is also accompanied by an option to purchase an amount of shares of Series
B Preferred Stock up to fifty percent (50%) of the principal amount of Series A
Preferred Stock purchased by Subscriber in the Offering (the "Preferred Option")
in a second closing (the "Second Closing"), as further described in Section 4.12
below. The terms of the Series B Preferred Stock, including the terms on which
the Series B Preferred Stock may be converted into Common Stock, are set forth
in the form of the Certificate of Determination for the Series B Preferred Stock
(the "Series B Certificate of Determination") attached hereto as Composite
---------
Exhibit A. Each share of Series B Preferred Stock is accompanied by a warrant
- ---------
or warrants, in the form of Exhibit C annexed hereto, (the "Series B Common
Warrants") that entitles the holder thereof to purchase a number of shares of
the common stock of FNet equal to one hundred percent (100%) of the aggregate
purchase price of the Subscriber's Series B Preferred Stock divided by the Fixed
Conversion Price, at an exercise price of (x) 80% of the average closing bid
price of FNet's common stock for the five (5) trading days prior to issuance, or
(y) if FNet common stock is not then publicly traded, then the price of the most
recent private placement of one million dollars ($1,000,000) or more by FNet
("Series B Exercise Option #1"). However, if FNet fails to complete a public
offering by June 30, 1998, Holder has the option, upon written notice to FNet
and FTEL no later than July 31, 1998, to convert to "Series B Exercise Option
#2" (in lieu of Series B Exercise Option #1), which entitles the holder to
purchase a number of shares of Common Stock of the Company, equal to one hundred
percent (100%) of the aggregate purchase price of the Subscriber's Preferred
Stock divided by the Fixed Conversion Price exercisable at the Fixed Conversion
Price.

The Series A Common Warrants may be referred to hereinafter as the "Common
Warrants" or the "Warrants." The solicitation of this subscription and, if
accepted by the Company, the offer and sale of the Preferred Stock are being
made in reliance upon the provisions of Regulation D ("Regulation D")
promulgated under the Securities Act of 1933, as amended ("the Act"). The
Preferred Stock and the Common Stock issuable upon conversion thereof (the
"Conversion Shares"), together with the Common Warrants and the Common Stock
issuable upon exercise thereof (the "Warrant Shares")

2
<PAGE>

are sometimes referred to herein singularly as "Security" and collectively as
the "Securities."

It is agreed as follows:

1. Offering

1.1 Offer to Subscribe; Purchase Price and Closing; and Placement
-------------------------------------------------------------
Fees.
----

Subject to satisfaction of the conditions to closing set forth in Section 1.2
below, Subscriber hereby offers to subscribe for and purchase Preferred Stock
and accompanying Warrants, for the aggregate purchase price in the amount set
forth in Section 10 of this Agreement, in accordance with the terms and
conditions of this Agreement. Assuming that the Minimum Amount and
corresponding subscription agreements accepted by the Company are received into
the Company's designated escrow account for this Offering established pursuant
to the Escrow Agreement and Instructions (the "Escrow Agreement") by and among
the Company, First Union National Bank of Georgia (the "Escrow Agent") and the
Placement Agent (as defined below) (the "Escrow Account"), the closing of a sale
and purchase of Preferred Stock as to each Subscriber (the "Closing") shall be
deemed to occur when this Agreement has been executed by both Subscriber and the
Company and full payment shall have been made by Subscriber, by wire transfer to
the Escrow Account as set forth in Section 7.1(a) for payment in consideration
for the Company's delivery of certificates representing the Preferred Stock
subscribed for.

The parties hereto acknowledge that Swartz Investments, LLC is acting as
placement agent (the "Placement Agent") for this Offering and will be
compensated by the Company in cash and warrants to purchase Common Stock. The
Placement Agent has acted solely as placement agent in connection with the
Offering by the Company of the Preferred Stock pursuant to this Agreement. The
information and data contained in the Disclosure Documents (as defined in
Section 2.2.4) have not been subjected to independent verification by the
Placement Agent, and no representation or warranty is made by the Placement
Agent as to the accuracy or completeness of the information contained in the
Disclosure Documents.

The Company and Subscriber acknowledge that the Matthew Fund, N.V. (the "Fund"),
which is managed by affiliates of the Placement Agent, may subscribe for
securities in the Offering. The parties acknowledge that neither the Placement
Agent nor any of its affiliates shall be under any obligation to advise the
Company or Subscriber of the activities of the Fund with respect to such
securities following the consummation of the Offering. Such acknowledgment
shall not act as a waiver of any obligation required by law or written agreement
of which the Fund is a party. It is understood that the Fund will act
independently of the Placement Agent and may take action with respect to such
investment which may be inconsistent or contrary to any action or interest of
the Placement Agent, the Company or any of the other Subscribers.

1.2 Conditions to Subscriber's Obligations. Subscriber's obligations
--------------------------------------
hereunder are conditioned upon all of the following:

3
<PAGE>

(a) the following documents shall have been deposited with the Escrow
Agent: the Registration Rights Agreement, substantially in the form
attached hereto as Exhibit D (the "Registration Rights Agreement")
---------
(executed by the Company), an opinion of counsel, substantially in the
form attached hereto as Exhibit E (the "Opinion of Counsel") (signed
---------
by the Company's counsel), the Irrevocable Instructions to Transfer
Agent, substantially in the form attached hereto as Exhibit F (the
---------
"Irrevocable Instructions to Transfer Agent")(executed by the Company
and the Company's transfer agent, the "Transfer Agent"), the
Certificate of Determination of Series A Preferred Stock,
substantially in the form attached hereto as Composite Exhibit A
-------------------
(together with evidence showing that it has been filed with the
Secretary of State of California), a form of the Series B Certificate
of Designation, substantially in the form attached as Composite
---------
Exhibit A; certificates representing the Preferred Stock issued in the
-----------
name of the Subscriber; the Common Warrants issued in the name of the
Subscriber;

(b) the Company's Common Stock shall be actively trading on the OTC
Bulletin Board;

(c) other than losses described in the Risk Factors as set forth in
Section 2.2.4 below there have been no material adverse changes in the
Company's business prospects or financial condition since the date of
the last balance sheet included in the Disclosure Documents (defined
below in Section 2.2.4), including but not limited to incurring
material liabilities;

(d) the representations and warranties of the Company are true and
correct in all material respects at the Closing as if made on such
date, and the Company shall deliver a certificate, signed by an
officer of the Company, to such effect to the Escrow Agent;

(e) the Minimum Amount and corresponding subscription agreements
accepted by the Company shall have been received by the Escrow Agent;
and

(f) the Company shall have reserved for issuance a sufficient number
of shares of Common Stock to effect conversions of the Preferred Stock
and exercise of the Common Warrants, which number of shares shall
initially be equal to Five Million Five Hundred Thousand (5,500,000)
shares.

2. Representations and Warranties of Subscriber. Subscriber hereby
represents and warrants to the Company as follows:

2.1 Accredited Investor. Subscriber is an accredited investor, as
-------------------
defined in Rule 501 of Regulation D, and has checked the applicable box set
forth in Section 10 of this Agreement.

2.2 Investment Experience; Access to Information; Independent
---------------------------------------------------------
Investigation.
--------------

2.2.1 Access to Information. Subscriber or Subscriber's
professional advisor has been granted the opportunity to ask questions of and
receive answers from representatives of the

4
<PAGE>

Company, its officers, directors, employees and agents concerning the terms and
conditions of this Offering, the Company and its business and prospects, and to
obtain any additional information which Subscriber or Subscriber's professional
advisor deems necessary to verify the accuracy and completeness of the
information received.

2.2.2 Reliance on Own Advisors. Subscriber has relied completely
on the advice of, or has consulted with, Subscriber's own personal tax,
investment, legal or other advisors and has not relied on the Company or any of
its affiliates, officers, directors, attorneys, accountants or any affiliates of
any thereof and each other person, if any, who controls any thereof, within the
meaning of Section 15 of the Act for any tax or legal advice (other than
reliance on information in the Disclosure Documents as defined in Section 2.2.4
below and on the Opinion of Counsel). The foregoing, however, does not limit or
modify Subscriber's right to rely upon representations and warranties of the
Company in Section 4 of this Agreement.

2.2.3 Capability to Evaluate. Subscriber has such knowledge and
experience in financial and business matters so as to enable such Subscriber to
utilize the information made available to it in connection with the Offering in
order to evaluate the merits and risks of the prospective investment, which are
substantial, including without limitation those set forth in the Disclosure
Documents (as defined in Section 2.2.4 below).

2.2.4 Disclosure Documents. Subscriber, in making Subscriber's
investment decision to subscribe for the Securities hereunder, represents that
(a) Subscriber has received and had an opportunity to review (i) Amendment No. 1
to the Company's Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on October 1, 1997, (ii) the Risk Factors,
attached as Exhibit G, (iii) the Capitalization Schedule, attached as Exhibit H
--------- ---------
(the "Capitalization Schedule") and (iv) the Use of Proceeds Schedule, attached
as Exhibit I (the "Use of Proceeds Schedule"); (b) Subscriber has read,
---------
reviewed, and relied solely on the documents described in (a) above, the
Company's representations and warranties and other information in this
Agreement, including the exhibits, any other written information prepared by the
Company which has been specifically provided to Subscriber in connection with
this Offering (the documents described in Section 2.2.4 (a) and (b) are
collectively referred to as the "Disclosure Documents"), and an independent
investigation made by Subscriber and Subscriber's representatives, if any; (c)
Subscriber has, prior to the date of this Agreement, been given an opportunity
to review material contracts and documents of the Company which have been filed
as exhibits to the Company's Registration Statement on From S-1 and has had an
opportunity to ask questions of and receive answers from the Company's officers
and directors; and (d) is not relying on any oral representation of the Company
or any other person, nor any written representation or assurance from the
Company other than those referred to in Section 4 or otherwise contained in the
Disclosure Documents or incorporated herein or therein. The foregoing, however,
does not limit or modify Subscriber's right to rely upon representations and
warranties of the Company in Section 4 of this Agreement. Subscriber
acknowledges and agrees that the Company has no responsibility for, does not
ratify, and is under no responsibility whatsoever to comment upon or correct any
reports, analyses or other comments made about the Company by any third parties,
including, but not limited to, analysts' research reports or comments
(collectively, "Third Party Reports"), and Subscriber has not relied upon any
Third Party

5
<PAGE>

Reports, including any provided by the Placement Agent, in making the decision
to invest.

2.2.5 Investment Experience; Fend for Self. Subscriber has
substantial experience in investing in securities and he, she or it has made
investments in securities other than those of the Company. Subscriber
acknowledges that Subscriber is able to fend for Subscriber's self in the
transaction contemplated by this Agreement, that Subscriber has the ability to
bear the economic risk of Subscriber's investment pursuant to this Agreement and
that Subscriber is an "Accredited Investor" by virtue of the fact that
Subscriber meets the investor qualification standards set forth in Section 2.1
above. Subscriber has not been organized for the purpose of investing in
securities of the Company, although such investment is consistent with
Subscriber's purposes.

2.3 Exempt Offering Under Regulation D.
-----------------------------------

2.3.1 Investment; No Distribution. Subscriber is acquiring the
Securities to be issued and sold hereunder for his, her or its own account (or a
trust account if such Subscriber is a trustee) for investment and not as a
nominee and not with a present view to the distribution thereof. Subscriber is
aware that there are legal and practical limits on Subscriber's ability to sell
or dispose of the Securities and, therefore, that Subscriber must bear the
economic risk of the investment for an indefinite period of time and has
adequate means of providing for Subscriber's current needs and possible personal
contingencies and has need for only limited liquidity of this investment.
Subscriber's commitment to illiquid investments is reasonable in relation to
Subscriber's net worth. By making the representations in this Section 2.3.1,
the Subscriber does not agree to hold the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption from
registration under the Act, except as otherwise required in this Agreement or in
the Registration Rights Agreement.

2.3.2 No General Solicitation. The Securities were not offered
to Subscriber through, and Subscriber is not aware of, any form of general
solicitation or general advertising, including, without limitation, (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, and
(ii) any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.

2.3.3 Restricted Securities. Subscriber understands that the
Preferred Stock and the Common Warrants issued at Closing are, and the
Conversion Shares, the Warrant Shares and the Series B Preferred Stock issued
upon exercise of the Preferred Option will be, characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
that under such laws and applicable regulations such securities may not be
transferred or resold without registration under the Act or pursuant to an
exemption therefrom. In this connection, Subscriber represents that Subscriber
is familiar with Rule 144 under the Act, as presently in effect, and understands
the resale limitations imposed thereby and by the Act.

2.3.4 Disposition. Without in any way limiting the
representations set forth

6
<PAGE>

above, Subscriber further agrees not to make any disposition of all or any
portion of the Securities unless and until:

(a) There is then in effect a registration statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or

(b) (i) Subscriber shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, Subscriber shall have furnished the Company
with an opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of the Securities under the Act. It is
agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 unless the exempted nature of the transaction is
reasonably self-evident.

2.4 Due Authorization.
-----------------

2.4.1 Authority. Subscriber, if executing this Agreement in a
representative or fiduciary capacity, has full power and authority to execute
and deliver this Agreement and each other document included herein for which a
signature is required in such capacity and on behalf of the subscribing
individual, partnership, trust, estate, corporation or other entity for whom or
which Subscriber is executing this Agreement. Subscriber has reached the age of
majority (if an individual) according to the laws of the state in which he
resides, has adequate means for providing for his current needs and personal
contingencies, is able to bear the economic risk of his investment in the
Securities for an indefinite period of time and could afford a complete loss of
such investment. Subscriber's commitment to illiquid investments is reasonable
in relation to Subscriber's net worth.

2.4.2 Due Authorization. If Subscriber is a corporation,
Subscriber is duly and validly organized, validly existing and in good tax and
corporate standing as a corporation under the laws of the jurisdiction of its
incorporation with full power and authority to purchase the Securities to be
purchased by Subscriber and to execute and deliver this Agreement.

2.4.3 Partnerships. If Subscriber is a partnership, the
representations, warranties, agreements and understandings set forth above are
true with respect to all partners of Subscriber (and if any such partner is
itself a partnership, all persons holding an interest in such partnership,
directly or indirectly, including through one or more partnerships), and the
person executing this Agreement has made due inquiry to determine the
truthfulness of the representations and warranties made hereby.

2.4.4 Representatives. If Subscriber is purchasing in a
representative or fiduciary capacity, the representations and warranties shall
be deemed to have been made on behalf of the person or persons for whom
Subscriber is so purchasing.

3. Acknowledgments Subscriber is aware that:

7
<PAGE>

3.1 Risks of Investment. Subscriber recognizes that an investment in
-------------------
the Company involves substantial risks, including the potential loss of
Subscriber's entire investment herein. Subscriber recognizes that this
Agreement and the exhibits hereto do not purport to contain all the information
which would be contained in a registration statement under the Act;

3.2 No Government Approval. No federal or state agency has passed
----------------------
upon the Securities, recommended or endorsed the Offering, or made any finding
or determination as to the fairness of this transaction;

3.3 No Registration. The Securities and any component thereof have
---------------
not been registered under the Act or any applicable state securities laws by
reason of exemptions from the registration requirements of the Act and such
laws, and may not be sold, pledged, assigned or otherwise disposed of in the
absence of an effective registration of the Securities and any component thereof
under the Act or unless an exemption from such registration is available;

3.4 Restrictions on Transfer. Subscriber may not attempt to sell,
------------------------
transfer, assign, pledge or otherwise dispose of all or any portion of the
Securities or any component thereof in the absence of either an effective
registration statement or an exemption from the registration requirements of the
Act and applicable state securities laws;

3.5 No Assurances of Registration. There can be no assurance that
-----------------------------
any registration statement will become effective at the scheduled time.
Therefore, Subscriber may bear the economic risk of Subscriber's investment for
an indefinite period of time;

3.6 Exempt Transaction. Subscriber understands that the Securities
------------------
are being offered and sold in reliance on specific exemptions from the
registration requirements of federal and state law and that the representations,
warranties, agreements, acknowledgments and understandings set forth herein are
being relied upon by the Company in determining the applicability of such
exemptions and the suitability of Subscriber to acquire such Securities;

3.7 Legends. It is understood that the certificates evidencing the
-------
Preferred Stock, the Common Warrants, the Conversion Shares and the Warrant
Shares shall bear the following legend (the "Legend") (unless legend removal is
allowed under Section 5.9 below or otherwise allowed by applicable law):

"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities
laws, nor the securities laws of any other jurisdiction. They may not
be sold or transferred in the absence of an effective registration
statement under those securities laws or pursuant to an exemption
therefrom."

4. Representations and Warranties of the Company . The Company hereby
makes the following representations and warranties to Subscriber (which shall be
true at the signing of this

8
<PAGE>

Agreement, as of Closing, and as of any such later date as contemplated
hereunder) and agrees with Subscriber that:

4.1 Organization, Good Standing, and Qualification. The Company is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California USA and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the business or properties of the Company and its
subsidiaries taken as a whole. The Company is not the subject of any pending,
threatened or, to its knowledge, contemplated investigation or administrative or
legal proceeding by the Internal Revenue Service, the taxing authorities of any
state or local jurisdiction, or the Securities and Exchange Commission ("SEC"),
or any state securities commission, or any other governmental entity, which have
not been disclosed in the Disclosure Documents.

4.2 Corporate Condition. The Company's condition is, in all material
-------------------
respects, as described in the Disclosure Documents, except for changes in the
ordinary course of business and normal year-end adjustments that are not, in the
aggregate, materially adverse to the Company. There have been no material
adverse changes to the Company's business, financial condition, or prospects
since the date of such Disclosure Documents. The financial statements contained
in the Disclosure Documents have been prepared in accordance with generally
accepted accounting principles, consistently applied (except as otherwise
permitted by Regulation S-X of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), and fairly present the consolidated financial condition
of the Company as of the dates of the balance sheets included therein and the
consolidated results of its operations and cash flows for the periods then
ended. Without limiting the foregoing, there are no material liabilities,
contingent or actual, that are not disclosed in the Disclosure Documents (other
than liabilities incurred by the Company in the ordinary course of its business,
consistent with its past practice, after the period covered by the Disclosure
Documents). The Company has paid all material taxes which are due, except for
taxes which it reasonably disputes. There is no material claim, litigation, or
administrative proceeding pending, or, to the best of the Company's knowledge,
threatened against the Company, except as disclosed in the Disclosure Documents.
This Agreement and the Disclosure Documents do not contain any untrue statement
of a material fact and do not omit to state any material fact required to be
stated therein or herein necessary to make the statements contained therein or
herein not misleading in the light of the circumstances under which they were
made. No event or circumstance exists relating to the Company which under
applicable law, requires public disclosure but which has not been so publicly
announced or disclosed.

4.3 Authorization. Except for the filing of the Certificate of
-------------
Determination, all corporate action on the part of the Company by its officers,
directors and shareholders necessary for the authorization, execution and
delivery of this Agreement, the performance of all obligations of the Company
hereunder and the authorization, issuance and delivery of the Preferred Stock
being sold hereunder and the issuance (and/or the reservation for issuance) of
the Conversion Shares, the Common Warrants, and the Warrant Shares have been
taken, and this Agreement, the Certificate of Determination, the Irrevocable
Instructions to Transfer Agent, the Escrow Agreement and the

9
<PAGE>

Registration Rights Agreement constitute valid and legally binding obligations
of the Company, enforceable in accordance with their terms, except insofar as
the enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, or other similar laws affecting creditors' rights generally or
by principles governing the availability of equitable remedies. The Company has
obtained all consents and approvals required for it to execute, deliver and
perform each agreement referenced in the previous sentence.

4.4 Valid Issuance of Preferred Stock and Common Stock. The
--------------------------------------------------
Preferred Stock and the Common Warrants, when issued, sold and delivered in
accordance with the terms hereof, for the consideration expressed herein, will
be validly issued, fully paid and nonassessable and, based in part upon the
representations of Subscriber in this Agreement, will be issued in compliance
with all applicable U.S. federal and state securities laws. The Conversion
Shares, when issued in accordance with the terms of the Certificate of
Determination, and the Warrant Shares, when issued upon exercise of the Common
Warrants, as applicable, shall be duly and validly issued and outstanding, fully
paid and nonassessable, and based in part on the representations and warranties
of Subscriber of the Preferred Stock, will be issued in compliance with all
applicable U.S. federal and state securities laws. The Preferred Stock, the
Conversion Shares, the Common Warrants and the Warrant Shares will be issued
free of any preemptive rights. The Company currently has at least Five Million
Five Hundred Thousand (5,500,000) Conversion Shares and Warrant Shares reserved
for issuance upon conversion of the Preferred Stock and upon exercise of the
Common Warrants, respectively.

4.5 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any provisions of its Articles of Incorporation or
Bylaws each as amended, and in effect on and as of the date of the Agreement or
of any material provision of any material instrument or material contract to
which it is a party or by which it is bound or, to its knowledge, of any
provision of any federal or state judgment, writ, decree, order, statute, rule
or governmental regulation applicable to the Company, which would have a
material adverse affect on the Company's business or prospects, except as
described in the Disclosure Documents. The execution, delivery and performance
of this Agreement and the other agreements entered into in conjunction with the
Offering and the consummation of the transactions contemplated hereby will not
result in any such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument or contract or an event which results in the creation
of any lien, charge or encumbrance upon any assets of the Company.

4.6 Reporting Company. The Company does not currently have a class
-----------------
of securities registered under Section 12 of the Exchange Act but has filed a
Form 8-A to register its Common Stock under the Exchange Act, which has not yet
become effective.

4.7 Capitalization. The capitalization of the Company as of June 30,
--------------
1997, is, and the capitalization as of the Closing, after taking into account
the offering of the Securities contemplated by this Agreement and all other
share issuances occurring prior to this Offering, will be, as set forth in the
Capitalization Schedule as set forth in Exhibit H. Except as disclosed in the
---------
Capitalization Schedule, as of the date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to,

10
<PAGE>

or securities or rights convertible into or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its subsidiaries, or
arrangements by which the Company or any of its subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
subsidiaries, and (ii) other than agreements with M.H. Myerson & Co. and certain
warrant holders, there are no agreements or arrangements under which the Company
or any of its subsidiaries is obligated to register the sale of any of its or
their securities under the Act (except the Registration Rights Agreement).

4.8 Intellectual Property. The Company has valid, unrestricted and
---------------------
exclusive patents, trademarks, trademark registrations, trade names, copyrights,
know-how, technology and other intellectual property necessary to the conduct of
its business as set forth on Exhibit J-1. The Company has granted such licenses
-----------
or has assigned or otherwise transferred a portion of (or all of) such valid,
unrestricted and exclusive patents, trademarks, trademark registrations, trade
names, copyrights, know-how, technology and other intellectual property
necessary to the conduct of its business as set forth on Exhibit J-2. The
-----------
Company has been granted licenses, know-how, technology and/or other
intellectual property necessary to the conduct of its business as set forth on

Exhibit J-3. To the best of the Company's knowledge, the Company is not
- -----------
infringing on the intellectual property rights of any third party, nor is any
third party infringing on the Company's intellectual property rights. There are
no restrictions in any agreements, licenses, franchises, or other instruments
which preclude the Company from engaging in its business as presently conducted.

4.9 Use of Proceeds. As of the date hereof, the Company expects to
---------------
use the proceeds from this Offering (less fees and expenses) for the purposes
and in the approximate amounts set forth on the Use of Proceeds Schedule set
forth as Exhibit I hereto. These purposes and amounts are estimates and are
----------
subject to change without notice to any Subscriber.

4.10 No Rights of Participation. No person or entity, including, but
--------------------------
not limited to, current or former shareholders of the Company, underwriters,
brokers, agents or other third parties, has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the financing contemplated by this Agreement which has not been waived.

4.11 Company Acknowledgment. The Company hereby acknowledges that
----------------------
Subscriber may elect to hold the Securities for various periods of time, as
permitted by the terms of this Agreement, the Certificate of Determination, the
Common Warrants and other agreements contemplated hereby, and the Company
further acknowledges that Subscriber and the Placement Agent have made no
representations or warranties, either written or oral (other than those in
Section 2.3.1, to the extent applicable), as to how long the Securities will be
held by Subscriber or regarding Subscriber's trading history or investment
strategies.

4.12 Termination Date of Offering. In no event shall the last
----------------------------
Closing ("Last Closing") of a sale and purchase of the Series A Preferred Stock
and accompanying Common Warrants occur later than November 28, 1997, which date
can be extended by up to ten (10) days upon written approval by the Company and
the Placement Agent. The closing of the offering of Series B Preferred Stock
(the "Series B Closing") shall occur on the date that is six (6) months after
the Last Closing

11
<PAGE>

(or, if not a business day, the next business day thereafter), which date may be
extended by up to six (6) months upon the written agreement of the Company and
the Placement Agent.

4.13 Underwriter's Fees and Rights of First Refusal. The Company is
----------------------------------------------
not obligated to pay any compensation or other fees, costs or related
expenditures in cash or securities to any underwriter, broker, agent or other
representative other than the Placement Agent in connection with this Offering.

4.14 [Intentionally Omitted].

4.15 No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any of the Company's securities or
solicited any offers to buy any security under circumstances that would prevent
the parties hereto from consummating the transactions contemplated hereby
pursuant to an exemption from registration under the Act pursuant to the
provisions of Regulation D. The Company has not engaged in any form of general
solicitation or advertising in connection with the offering of the Series A
Preferred Stock.

4.16 Acknowledgment of Dilution. The number of Conversion Shares
--------------------------
issuable upon conversion of the Preferred Stock may increase substantially in
certain circumstances, including the circumstance wherein the trading price of
the Common Stock declines. The Company's executive officers and directors have
studied and fully understand the nature of the Securities being sold hereunder
and recognize that they have a potential dilutive effect. The board of
directors of the Company has concluded in its good faith business judgment that
such issuance is in the best interests of the Company. The Company acknowledges
that its obligation to issue Conversion Shares upon conversion of the Preferred
Stock is binding upon it and enforceable regardless of the dilution that such
issuance may have on the ownership interests of the other stockholders.

4.17 Foreign Corrupt Practices. Neither the Company, nor any of its
-------------------------
subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any subsidiary has, in the course of its actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of
1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback
or other unlawful payment to any foreign or domestic government official or
employee.

4.18 Key Employees. Each Key Employee (as defined below) is
-------------
currently serving the Company in the capacity disclosed in Exhibit K. No Key
---------
Employee, to the best knowledge of the Company and its subsidiaries, is, or is
now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement, non-
competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. No Key Employee has, to the best

12
<PAGE>

knowledge of the Company and its subsidiaries, any intention to terminate his
employment with, or services to, the Company or any of its subsidiaries. "Key
Employee" means Frank W. Peters.

4.19 Representations Correct. The foregoing representations,
-----------------------
warranties and agreements are true, correct and complete in all material
respects, and shall survive the Closing and the issuance of the shares of
Preferred Stock.

5. Covenants of the Company

5.1 Independent Auditors. The Company shall, until at least three
--------------------
(3) years after the date of the Last Closing, maintain as its independent
auditors an accounting firm authorized to practice before the SEC.

5.2 Corporate Existence and Taxes. The Company shall, until at least
-----------------------------
the later of (i) the date that is three (3) years after the date of the Last
Closing or (ii) the conversion or redemption of all of the Preferred Stock
purchased pursuant to this Agreement, including the Series B Preferred Stock
issued upon exercise of the Preferred Option and the exercise of the Common
Warrants, maintain its corporate existence in good standing (provided, however,
that the foregoing covenant shall not prevent the Company from entering into any
merger or corporate reorganization as long as the surviving entity in such
transaction, if not the Company, assumes the Company's obligations with respect
to the Preferred Stock and has Common Stock trading on a stock exchange or on
Nasdaq and is a "Reporting Issuer") and shall pay all its taxes when due except
for taxes which the Company disputes.

5.3 Registration Rights. The Company will enter into a registration
-------------------
rights agreement covering the resale of the Conversion Shares and the Warrant
Shares substantially in the form of the Registration Rights Agreement attached
as Exhibit D.
---------

5.4 Notification of Final Closing Date by Company. Within five (5)
---------------------------------------------
business days after the Last Closing, the Company shall notify Subscriber in
writing that the Last Closing has occurred, the date of the Last Closing, the
dates that Subscriber is entitled to convert Subscriber's Preferred Stock, the
value of the Fixed Conversion Price, as that term is defined in the Certificate
of Determination, and the name and telephone number of an administrative contact
person at the Company whom Subscriber may contact regarding information related
to conversion of the Preferred Stock as contemplated by the Certificate of
Determination.

5.5 Asset Transfers. The Company shall not transfer, sell, convey or
----------------
otherwise dispose of any of its material assets to any Subsidiary or affiliate
except for a cash or cash equivalent consideration and for a proper business
purpose, while any of the Series A Preferred Stock are outstanding; provided,
however, that asset transfers between FTEL and FNet that occur in the ordinary
course of business shall be permissible.

5.6 Capital Raising Limitations; Rights of First Refusal.
----------------------------------------------------

13
<PAGE>

5.6.1 Capital Raising Limitations. Except for offerings
contemplated herein, the Company shall not issue any debt or equity securities
for cash in private capital raising transactions ("Future Offerings") for a
period beginning on the date hereof and ending One Hundred and Eighty (180) days
after the Last Closing without obtaining the prior written approval of
Subscribers holding a majority of the purchase price of Preferred Stock then
outstanding.

5.6.2 Right of First Offer. The Company agrees that, during the
period beginning on the date hereof and terminating on the first anniversary of
the date of the Last Closing, the Company will not, without the prior written
consent of each Subscriber (which shall be deemed given for the warrants to
purchase Common Stock issued or to be issued to the Placement Agent in
consideration of its services in connection with this Agreement and the
transactions contemplated hereby) issue or sell, or agree to issue or sell any
equity or debt securities of the Company or any of its subsidiaries (or any
security convertible into or exercisable or exchangeable, directly or
indirectly, for equity or debt securities of the Company or any of its
subsidiaries) ("Future Offerings") unless the Company or its Placement Agent
shall have first delivered to each Subscriber at least thirty (30) days prior to
the closing of such Future Offering, written notice describing the proposed
Future Offering, including the terms and conditions thereof, and providing each
Subscriber and its affiliates an option during the twenty (20) day period
following delivery of such notice to purchase up to the full amount of the
securities being offered in the Future Offering on the same terms as
contemplated by such Future Offering (the limitations referred to in this
sentence are collectively referred to as the "Capital Raising Limitations").
The Subscriber shall notify the Company or the Placement Agent, in writing,
prior to the end of such thirty (30) day period if it desires to participate in
the Future Offering.

5.6.3 Amount of Subscriber's Right of First Refusal. The amount
of securities which a Subscriber is entitled to purchase in such a Future
Offering shall be a number obtained by multiplying the aggregate amount of
securities being offered in the Future Offering by a fraction, the numerator of
which is the purchase price of the Preferred Stock purchased by the Subscriber
pursuant to this Agreement and the denominator of which is the aggregate dollar
amount of Preferred Stock placed in this Offering.

5.6.4 Exceptions to the Capital Raising Limitation. The Capital
Raising Limitations shall not apply to any transaction involving issuances of
securities in connection with a merger, consolidation, acquisition or sale of
assets, or in connection with any strategic partnership or joint venture (the
primary purpose of which is not to raise equity capital), or in connection with
the disposition or acquisition of a business, product or license by the Company
or exercise of options by employees, consultants or directors. The Capital
Raising Limitations also shall not apply to (a) the issuance of securities
pursuant to an underwritten public offering, (b) the issuance of securities upon
exercise or conversion of the Company's options, warrants or other convertible
securities outstanding as of the date hereof or (c) the grant of additional
options or warrants, or the issuance of additional securities, under any Company
stock option or restricted stock plan for the benefit of the Company's
employees, directors or consultants.

5.7 Financial 10-K Statements, Etc. and Current Reports on Form 8-K.
---------------------------------------------------------------
The

14
<PAGE>

Company shall make available to the Subscriber copies of its Exchange Act
documents for the period commencing with the Company's registration for its
Common Stock for as long any Preferred Stock may remain outstanding.

5.8 Opinion of Counsel. Subscribers shall, upon purchase of the
------------------
Preferred Stock and accompanying Warrants pursuant to this Agreement, receive an
opinion letter from Phillips & Haddan LLP, 4675 MacArthur Court, Suite 710,
Newport Beach, CA 92660, Telephone (714) 752-6100, Telefax (714) 752-6161
("Counsel"), counsel to the Company, in the form attached as Exhibit E.
----------

5.9 Removal of Legend Upon Conversion. As contemplated by the
---------------------------------
Certificate of Determination, upon conversion of the Preferred Stock, Subscriber
shall submit a Notice of Conversion and Resale, substantially in the form
attached hereto as Exhibit L. The Legend shall be removed and the Company shall
---------
issue a certificate without such Legend to the holder of any Security upon which
it is stamped, and a certificate for a security shall be originally issued
without the Legend, if, unless otherwise required by state securities laws, (a)
the sale of such Security is registered under the Act, and the Holder or its
broker represents to the Company in writing that a current prospectus was
delivered in conjunction with the sale of such Security or (b) if the no
registration statement is then effective for the resale of the Securities, such
holder provides the Company with an opinion of counsel, in form, substance and
scope customary for opinions of counsel in comparable transactions (the
reasonable cost of which shall be borne by the Company), to the effect that a
public sale or transfer of such Security may be made without registration under
the Act, or (c) such holder provides the Company with reasonable assurances that
such Security can be sold pursuant to Rule 144. Each Subscriber agrees to sell
all Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement and to deliver a prospectus in
connection with such sale or in compliance with an exemption from the
registration requirements of the Act. In the event the Legend is removed from
any Security or any Security is issued without the Legend and thereafter the
effectiveness of a registration statement covering the resale of such Security
is suspended or the Company determines that a supplement or amendment thereto is
required by applicable securities laws, then upon reasonable advance notice to
Subscriber holding such Security, the Company may require that the Legend be
placed on any such Security that cannot then be sold pursuant to an effective
registration statement or Rule 144 or with respect to which the opinion referred
to in clause (b) next above has not been rendered, which Legend shall be removed
when such Security may be sold pursuant to an effective registration statement
or Rule 144 or such holder provides the opinion with respect thereto described
in clause (b) next above.

5.10 Listing. Subject to the remainder of this Section 5.10, the
-------
Company shall ensure that its shares of Common Stock (including all Conversion
Shares and Warrant Shares) are available for trading on the OTC Bulletin Board.
Thereafter, the Company shall (i) use its best efforts to continue the trading
of its Common Stock on the OTC Bulletin Board, or on the Nasdaq Small Cap
Market ("NASDAQ"), Nasdaq National Market System ("NMS"), the New York Stock
Exchange ("NYSE"), or the American Stock Exchange ("AMEX") or any other national
exchange or over-the-counter market system; (ii) take all action necessary to
cause and maintain the trading of its Common Stock on the OTC Bulletin Board at
any time the Common Stock is not traded on NASDAQ, NMS,

15
<PAGE>

NYSE or AMEX; and (iii) comply in all respects with the Company's reporting,
filing and other obligations under the by-laws or rules of the National
Association of Securities Dealers ("NASD") and such exchanges, as applicable.

5.11 The Company's Instructions to Transfer Agent. The Company will
--------------------------------------------
issue to its Transfer Agent the Irrevocable Instructions to Transfer Agent
substantially in the form of Exhibit F instructing the Transfer Agent to issue
---------
certificates, registered in the name of each Subscriber or its nominee, for the
Conversion Shares and Warrant Shares in such amounts as specified from time to
time by such Subscriber to the Company upon conversion of the Preferred Stock,
including the Series B Preferred Stock issued upon the exercise of the Preferred
Option and exercise of the Common Warrants. Such certificates shall bear a
Legend only to the extent permitted by Section 5.9 hereof. The Company warrants
that no instruction, other than such instructions referred to in Section 5.9
hereof or in this Section 5.11 and stop transfer instructions to give effect to
Section 3.7 hereof in the case of Conversion Shares and Warrant Shares prior to
registration of the Conversion Shares and Warrant Shares under the Act, will be
given by the Company to its Transfer Agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way each Subscriber's obligations
and agreement set forth in Sections 2.3.3 or 2.3.4 hereof to resell the
Securities pursuant to an effective registration statement and to deliver a
prospectus in connection with such sale or in compliance with an exemption from
the registration requirements of applicable securities laws. If (a) a
Subscriber provides the Company with an opinion of counsel, which opinion of
counsel shall be in form, substance and scope customary for opinions of counsel
in comparable transactions (the reasonable cost of which shall be borne by the
Company), to the effect that the Securities to be sold or transferred may be
sold or transferred pursuant to an exemption from registration or (b) a
Subscriber transfers Securities to an affiliate which is an accredited investor
pursuant to Rule 144, the Company shall permit the transfer, and, in the case of
Conversion Shares and Warrant Shares, promptly instruct its transfer agent to
issue one or more certificates in such name and in such denomination as
specified by such Subscriber. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to a Subscriber by
vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5.11 will be inadequate and agrees, in the event
of a breach or threatened breach by the Company of the provisions of this
Section 5.11, that a Subscriber shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required. The Company hereby
agrees that, without the written approval of the Placement Agent, it will not
unilaterally terminate its relationship with the Transfer Agent for any reason
prior to the date which is three (3) years after the Last Closing or one (1)
month after the first date that no Preferred Stock and no Warrants are
outstanding, whichever is earlier (the "Ending Date"). In the event the
Company's agency relationship with the Transfer Agent should be terminated for
any other reason prior to the date which is three (3) years after the Last
Closing, the Company's Transfer Agent shall continue acting as transfer agent
pursuant to the terms of the Irrevocable Instructions to Transfer Agent until
such time that a successor transfer agent (i) is appointed by the Company; (ii)
is approved by seventy-five percent (75%) of the Subscribers of outstanding
Preferred Stock; and (iii)

16
<PAGE>

executes and agrees to be bound by the terms of the Irrevocable Instructions to
Transfer Agent.

5.12 Terms of Series B Preferred Option. In conjunction with the
-----------------------------------
issuance of the Series B Preferred Stock and the accompanying Series B Common
Warrants, the Company agrees to execute agreements substantially similar to this
Subscription Agreement, the Registration Rights Agreement, the Irrevocable
Instructions to Transfer Agent and other applicable agreements from the Series A
offering.

6. Subscriber Covenant/Miscellaneous

6.1 Representations and Warranties Survive the Closing; Severability.
----------------------------------------------------------------
Subscriber's and the Company's representations and warranties shall survive the
Closing of the transactions contemplated by this Agreement notwithstanding any
due diligence investigation made by or on behalf of the party seeking to rely
thereon. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that no such severability shall be effective if it
materially changes the economic benefit of this Agreement to any party.

6.2 Successors and Assigns. The terms and conditions of this
----------------------
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. Subscriber may assign Subscriber's rights hereunder, in
connection with any private sale of the Preferred Stock of such Subscriber, so
long as, as a condition precedent to such transfer, the transferee executes an
acknowledgment agreeing to be bound by the applicable provisions of this
Agreement.

6.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California without respect to conflict of laws
principles.

6.4 Execution in Counterparts Permitted. This Agreement may be
-----------------------------------
executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.

6.5 Titles and Subtitles; Gender. The titles and subtitles used in
----------------------------
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. The use in this Agreement of a
masculine, feminine or neither pronoun shall be deemed to include a reference to
the others.

6.6 Written Notices, Etc. Any notice, demand or request required or
--------------------
permitted to be given by the Company or Subscriber pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally, or by facsimile (with a hard copy to follow by two (2) day courier),
addressed to the parties at the addresses and/or facsimile telephone number of
the parties set forth at the end of this Agreement or such other address as a
party may request by

17
<PAGE>

notifying the other in writing.

6.7 Expenses. Each of the Company and Subscriber shall pay all costs
--------
and expenses that it respectively incurs, with respect to the negotiation,
execution, delivery and performance of this Agreement.

6.8 Entire Agreement; Written Amendments Required. This Agreement,
---------------------------------------------
including the Exhibits attached hereto, the Certificate of Determination, the
Preferred Stock certificates, the Common Warrants, the Registration Rights
Agreement, the Escrow Agreement, the Irrevocable Instructions to Transfer Agent
and the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.

6.9 Arbitration. Any controversy or claim arising out of or related
-----------
to this Agreement or the breach thereof, shall be settled by binding arbitration
in Los Angeles, California in accordance with the Expedited Procedures (Rules
53-57) of the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"). A proceeding shall be commenced upon written demand by
Company or any Subscriber to the other. The arbitrator(s) shall enter a
judgment by default against any party which fails or refuses to appear in any
properly noticed arbitration proceeding. The proceeding shall be conducted by
one (1) arbitrator, unless the amount alleged to be in dispute exceeds two
hundred fifty thousand dollars ($250,000), in which case three (3) arbitrators
shall preside. The arbitrator(s) will be chosen by the parties from a list
provided by the AAA, and if they are unable to agree within ten (10) days, the
AAA shall select the arbitrator(s). The arbitrators must be experts in
securities law and financial transactions. The arbitrators shall assess costs
and expenses of the arbitration, including all attorneys' and experts' fees, as
the arbitrators believe is appropriate in light of the merits of the parties'
respective positions in the issues in dispute. Each party submits irrevocably
to the jurisdiction of any state court sitting in Los Angeles, California or to
the United States District Court sitting in California for purposes of
enforcement of any discovery order, judgment or award in connection with such
arbitration. The award of the arbitrator(s) shall be final and binding upon the
parties and may be enforced in any court having jurisdiction. The arbitration
shall be held in such place as set by the arbitrator(s) in accordance with Rule
55.

6.10 Voting Trust Agreement. Upon issuance of Conversion Shares upon
----------------------
any conversion of Preferred Stock, or issuance of Warrant Shares upon exercise
of the Common Warrants, the Subscribers shall execute and deliver a Voting Trust
Agreement in the form of Exhibit M hereto, covering the Excess Shares, as that
term is defined below. As used herein, the term "Excess Shares" shall mean all
shares of Common Stock of the Company acquired by Subscribers in excess of the
number obtained by dividing the aggregate purchase price of all Series A
Preferred Stock issued to such Subscriber by the Fixed Conversion Price of the
Series A Preferred Stock. When and to the extent that the Conversion Shares and
Warrant Shares which are subject to the

18
<PAGE>

Voting Trust are sold in a public market transaction, such shares shall
thereafter no longer be subject to the Voting Trust Agreement.

7. Subscription and Wiring Instructions; Irrevocability.

7.1 Subscription
------------

(a) Wire transfer of Subscription Funds. Subscriber shall send this
signed Agreement by facsimile to the Placement Agent at (770)
640-7150, and send the subscription funds by wire transfer, to
the Escrow Agent as follows:

First Union National Bank
ABA No. 053000219
Account No. 465946
Account Name: Trust Ledger
Attn: Claire Moore/Nicole Stefanini
Telephone No.: (404) 827-7326
Reference: Franklin Esc #3072236887
Ref: Subscriber's Name

(b) Irrevocable Subscription. Subscriber hereby acknowledges and
agrees, subject to the provisions of any applicable laws
providing for the refund of subscription amounts submitted by
Subscriber, that this Agreement is irrevocable and that
Subscriber is not entitled to cancel, terminate or revoke this
Agreement or any other agreements executed by such Subscriber and
delivered pursuant hereto, and that this Agreement and such other
agreements shall survive the death or disability of such
Subscriber and shall be binding upon and inure to the benefit of
the parties and their heirs, executors, administrators,
successors, legal representatives and assigns. If the Securities
subscribed for are to be owned by more than one person, the
obligations of all such owners under this Agreement shall be
joint and several, and the agreements, representations,
warranties and acknowledgments herein contained shall be deemed
to be made by and be binding upon each such person and his heirs,
executors, administrators, successors, legal representatives and
assigns. Notwithstanding the foregoing, (i) if the conditions to
Closing are not satisfied or (ii) if the Disclosure Documents are
discovered prior to Closing to contain statements which are
materially inaccurate, or omit statements of material fact,
Subscriber may revoke or cancel this Agreement.

(c) Company's Right to Reject Subscription. Subscriber understands
that this Agreement is not binding on the Company until the
Company accepts it. This Agreement shall be accepted by the
Company when the Company countersigns this Agreement. Subscriber
hereby confirms that the Company

19
<PAGE>

has full right in its sole discretion to accept or reject the
subscription of Subscriber, in whole or in part, provided that,
if the Company decides to reject such subscription, the Company
must do so promptly and in writing. In the case of rejection, the
Company will promptly return any rejected payments and (if
rejected in whole) copies of all executed subscription documents
(including without limitation this Agreement) to Subscriber. In
the event of rejection, no interest will be payable by the
Company to Subscriber on any return of payment, provided however,
that any such interest accrued on such funds in the Escrow
Account shall be returned to the Subscriber by the Escrow Agent.

7.2 Acceptance of Subscription. In the case of acceptance of
--------------------------
Subscriber's subscription, ownership of the number of securities being purchased
hereby will pass to Subscriber upon the Closing.

7.3 Subscriber to Forward Original Signed Subscription Agreement to
---------------------------------------------------------------
Company. Subscriber agrees to courier to Company his, her or its original inked
- -------
signed Subscription Agreement within two (2) days after faxing said signed
agreement to Placement Agent.

8. Indemnification.

The Company agrees to indemnify and hold harmless Subscriber and the
Placement Agent and each of their respective officers, directors, employees and
agents, and each person who controls Subscriber or the Placement Agent within
the meaning of the Act or the Exchange Act (each, a "Subscriber Indemnified
Party") against any losses, claims, damages or liabilities, joint or several, to
which it, they or any of them, may become subject and not otherwise reimbursed
arising from or due to any untrue statement of a material fact or the omission
to state any material fact required to be stated in order to make the statements
not misleading in any representation or warranty made by the Company contained
in this Agreement or in any statements contained in the Disclosure Documents.

Subscriber agrees to indemnify and hold harmless the Company and the
Placement Agent and each of their respective officers, directors, employees and
agents, and each person who controls Company or the Placement Agent within the
meaning of the Act or the Exchange Act (each, a "Company Indemnified Party") (a
Subscriber Indemnified Party or a Company Indemnified Party may be hereinafter
referred to singularly as "Indemnified Party") against any losses, claims,
damages or liabilities, joint or several, to which it, they or any of them, may
become subject and not otherwise reimbursed arising from or due to any untrue
statement of a material fact or the omission to state any material fact required
to be stated in order to make the statements not misleading in any
representation or warranty made by Subscriber contained in this Agreement.

Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 8, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the

20
<PAGE>

right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 8, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 8 to the extent it is prejudicial.

9. Certain Additional Legends and Information.

FOR FLORIDA RESIDENTS:

THE SECURITIES REFERRED TO HEREIN WILL BE SOLD TO, AND ACQUIRED BY,
THE HOLDER IN A TRANSACTION EXEMPT UNDER SECTION 517.061 OF THE FLORIDA
SECURITIES ACT. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER SAID ACT IN THE
STATE OF FLORIDA. IN ADDITION, ALL FLORIDA RESIDENTS SHALL HAVE THE PRIVILEGE
OF VOIDING THE PURCHASE WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF
CONSIDERATION IS MADE BY SUCH SUBSCRIBER TO THE ISSUER, AN AGENT OF THE ISSUER,
OR AN ESCROW AGENT OR WITHIN THREE DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE
IS COMMUNICATED TO SUCH SUBSCRIBER, WHICHEVER OCCURS LATER.

FOR MAINE RESIDENTS:

THESE SECURITIES ARE BEING SOLD PURSUANT TO AN EXEMPTION FROM
REGISTRATION WITH THE BANK SUPERINTENDENT OF THE STATE OF MAINE UNDER SECTION
10502(2)(R) OF TITLE 32 OF THE MAINE REVISED STATUTES. THESE SECURITIES MAY BE
DEEMED RESTRICTED SECURITIES AND AS SUCH THE HOLDER MAY NOT BE ABLE TO RESELL
THE SECURITIES UNLESS PURSUANT TO REGISTRATION UNDER STATE OR FEDERAL SECURITIES
LAWS OR UNLESS AN EXEMPTION UNDER SUCH LAWS EXISTS.

FOR PENNSYLVANIA RESIDENTS:

EACH PENNSYLVANIA RESIDENT WHO SUBSCRIBES FOR THE SECURITIES BEING
OFFERED HEREBY AGREES NOT TO SELL THESE SECURITIES FOR A PERIOD OF TWELVE MONTHS
AFTER THE DATE OF PURCHASE UNLESS SUCH SECURITIES HAVE BEEN REGISTERED FOR SALE.
UNDER PROVISION OF THE PENNSYLVANIA SECURITIES ACT OF 1972 (THE "1972 ACT"),
EACH PENNSYLVANIA RESIDENT SHALL HAVE THE RIGHT TO WITHDRAW HIS ACCEPTANCE
WITHOUT INCURRING ANY LIABILITY, TO THE SELLER, UNDERWRITER (IF ANY) OR ANY
PERSON, WITHIN TWO (2) BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE ISSUER OF
HIS WRITTEN BINDING CONTRACT OF PURCHASE

21
<PAGE>

OR IN THE CASE OF A TRANSACTION IN WHICH THERE IS NO WRITTEN BINDING CONTRACT OF
PURCHASE, WITHIN TWO BUSINESS DAYS AFTER HE MAKES THE INITIAL PAYMENT FOR THE
SECURITIES BEING OFFERED. TO ACCOMPLISH THIS WITHDRAWAL, A SUBSCRIBER NEED ONLY
SEND A LETTER OR TELEGRAM TO THE SELLING AGENT AT THE ADDRESS SET FORTH IN THE
TEXT OF THE MEMORANDUM, INDICATING HIS OR HER INTENTION TO WITHDRAW. SUCH LETTER
OR TELEGRAM SHOULD BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED
SECOND BUSINESS DAY. IT IS PRUDENT TO SEND SUCH LETTER BY CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, TO ENSURE THAT IT IS RECEIVED AND ALSO TO EVIDENCE THE TIME
WHEN IT WAS MAILED. IF THE REQUEST IS MADE ORALLY (IN PERSON OR BY TELEPHONE, TO
THE SELLING AGENT AT THE NUMBER LISTED IN THE TEXT OF THE MEMORANDUM) A WRITTEN
CONFIRMATION THAT THE REQUEST HAS BEEN RECEIVED SHOULD BE REQUESTED.

FOR NEW HAMPSHIRE RESIDENTS:

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH
FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR
A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.

[INTENTIONALLY LEFT BLANK]

22
<PAGE>

10. Number of Shares and Purchase Price. Subscriber subscribes for
_________ shares of Preferred Stock (in the amount of $10,000 per Share) and the
accompanying Common Warrants against payment by wire transfer in the amount of
$___________________ ("Purchase Price").

11. Accredited Investor. Subscriber is an "accredited investor"
because (check all applicable boxes):

(a) [_] it is an organization described in Section 501(c)(3) of the
Internal Revenue Code, or a corporation, business trust, or
partnership not formed for the specific purpose of acquiring
the securities offered, with total assets in excess of
$5,000,000.

(b) [_] any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered,
whose purchase is directed by a sophisticated person who has
such knowledge and experience in financial and business matters
that he is capable of evaluating the merits and risks of the
prospective investment.

[_] is a director, executive officer or general partner of the issuer
of the securities being offered or sold or a director,
executive officer or general partner of a general partner of
that issuer.

[_] has an individual net worth, or joint net worth with that person's
spouse, at the time of his purchase exceeding $1,000,000.

[_] had an individual income in excess of $200,000 in each of the two
most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current
year.

(d) [_] an entity each equity owner of which is an entity described in a -b
above or is an individual who could check one (1) of the last
three (3) boxes under subparagraph (c) above.

(e) [_] other [specify]____________________________________________________

The undersigned acknowledges that this Agreement and the subscription
represented hereby shall not be effective unless accepted by the Company as
indicated below.

IN WITNESS WHEREOF, the undersigned Subscriber does represent and
certify under penalty of perjury that the foregoing statements are true and
correct and that Subscriber by the following signature(s) executed this
Agreement.

Dated this _____ day of October, 1997.

- --------------------------------- ------------------------------------------
Your Signature PRINT EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED

DELIVERY INSTRUCTIONS:
- --------------------------------- ----------------------
Name: Please Print Please type or print address where your
security is to be delivered

ATTN.:
- --------------------------------- ------------------------------------
Title/Representative Capacity
(if applicable)

- --------------------------------- ------------------------------------------
Name of Company You Represent Street Address
(if applicable)

- --------------------------------- ------------------------------------------
Place of Execution of this Agreement City, State or Province, Country,
Offshore Postal Code

------------------------------------------

23
<PAGE>

Phone Number (For Federal Express) and Fax Number (re: Notice)

THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF $ _________________
ON THE ____ DAY OF October, 1997.

Franklin Telecommunications Corp.

By:________________________________
Name:______________________________
Title:_______________________________

NOTICE OF CONVERSION [AND RESALE]

(To be Executed by the Registered Holder
in order to Convert the Preferred Stock)

The undersigned hereby irrevocably elects to convert _____________ shares of
Series A Preferred Stock, represented by stock certificate No(s).
________________ (the "Preferred Stock Certificates") into shares of common
stock ("Common Stock") of Franklin Telecommunications Corp. (the "Company")
according to the conditions of the Certificate of Determination of Series A
Preferred Stock, as of the date written below [in connection with the resale of
the underlying Common Stock unless otherwise indicated below]. If shares are to
be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates. No fee will be charged to the Holder for any
conversion, except for transfer taxes, if any. A copy of each of the Preferred
Stock Certificates being converted is attached hereto. The undersigned agrees
to deliver a Prospectus in connection with any sale made pursuant to the
Registration Statement, as provided in Section 5.10 of the Subscription
Agreement.

____ Check here if this conversion is not being made in connection with the
resale of the Common Stock.

Date of Conversion:____________________

Applicable Conversion Price:___________

Number of Shares of
Common Stock to be Issued:_____________

Signature:_____________________________

Name:__________________________________

Address: ______________________________

24
<PAGE>

* No shares of Common Stock will be issued until the original Series A Preferred
Stock Certificate(s) to be converted and the Notice of Conversion are received
by the Company or its Transfer Agent. The Holder shall (i) send via facsimile,
on or prior to 11:59 p.m., New York City time, on the date of conversion, a copy
of this completed and fully executed Notice of Conversion to the Company at the
office of the Company and its designated Transfer Agent for the Series A
Preferred Stock that the Holder elects to convert and (ii) surrender, to a
common courier for either overnight or two (2) day delivery to the office of the
Company or the Transfer Agent, the original Series A Preferred Stock
Certificate(s) representing the Series A Preferred Stock being converted, duly
endorsed for transfer. The Company or its Transfer Agent shall issue shares of
Common Stock and surrender them to a common courier for delivery to the
shareholder within three (3) business days following receipt of a facsimile of
this Notice of Conversion and receipt by the Company or its Transfer Agent of
---
the original Series A Preferred Stock Certificate(s) to be converted, all in
accordance with the terms of the Certificate of Determination and the
Subscription Agreement, and shall make payments for the number of business days
such issuance and delivery is late, pursuant to the terms of the Subscription
Agreement.

EXHIBIT L

<PAGE>

EXHIBIT 10.17

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
October 31, 1997, by and among Franklin Telecommunications Corp., a corporation
duly incorporated and existing under the laws of the State of California
("Company"), Swartz Investments, LLC ("Swartz"), a Georgia limited liability
company, and the subscribers (hereinafter referred to as "Subscribers") to the
Company's offering ("Offering") of up to Ten Million Dollars ($10,000,000) of
Preferred Stock (the "Preferred Stock"), each pursuant to the Regulation D
Subscription Agreement between the Company and each of the Subscribers
("Subscription Agreement").

1. Definitions. For purposes of this Agreement:
-----------

(a) The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933 (the "Act"), and
pursuant to Rule 415 under the Act or any successor rule, and the declaration or
ordering of effectiveness of such registration statement or document;

(b) For purposes hereof, the term "Registrable Securities" means the
shares of the Company's Common Stock together with any capital stock issued in
replacement of, in exchange for or otherwise in respect of such Common Stock
(the "Common Stock"), issuable or issued upon (i) conversion of the Preferred
Stock, (ii) exercise of the warrants to purchase Common Stock to be issued to
the Subscribers in connection with the Offering (the "Subscriber Warrants") and
(iii) exercise of the Warrant to purchase Common stock issued to Swartz in
connection with the Offering (the "Placement Agent Warrant", together with the
Subscriber Warrants, collectively referred to as the "Warrants"), by Swartz or
any subsequent Holder of the Warrant or portion thereof.

Notwithstanding the above:

1. Common Stock which would otherwise be deemed to be Registrable
Securities shall not constitute Registrable Securities if those shares
of Common Stock may be resold in a public transaction without volume
limitations without registration under the Act, including without
limitation, pursuant to Rule 144 under the Act; and

2. any Registrable Securities resold in a public transaction shall
cease to constitute Registrable Securities.

(c) The number of shares of "Registrable Securities then outstanding"
shall be determined by the number of shares of Common Stock which have been
issued or are issuable upon conversion of the Preferred Stock and exercise of
the then outstanding Warrants at the time of such determination;

(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any permitted assignee thereof; and

1
<PAGE>

(e) The term "Due Date" means the date which is four (4) months after
the Last Closing (as defined in the Subscription Agreement) of the Offering.

2. Required Registration.
---------------------

(a) The Company shall, within two (2) months after the Last Closing of
the Offering of the Preferred Stock, file a registration statement on Form S-1
(or other suitable form), or a post-effective amendment to an effective
registration statement (collectively, a "Registration Statement") at the
Company's discretion, but subject to the reasonable approval of Subscribers),
covering the resale of all shares of Registrable Securities then outstanding or
issuable upon conversion of all then outstanding Preferred Stock or upon
exercise of the Warrants. Such Registration Statement shall initially cover the
number of shares issuable upon exercise of the Placement Agent Warrant plus at
least Five Million Five Hundred Thousand (5,500,000) shares of Common Stock and
shall cover, to the extent allowed by applicable law, such additional
indeterminate number of shares of Common Stock as are required to effect
conversion of the Preferred Stock due to fluctuations in the price of the
Company's Common Stock. The Company shall use its best efforts to have the
Registration Statement declared effective as soon as possible. In the event
that the Company determines, which determination shall be made by the Company
within five (5) business days after the last business day of each month after
the Due Date or is notified at any time by a Holder, that the Registration
Statement does not cover a sufficient number of shares of Common Stock to effect
the resales of a number of shares of Common Stock equal to one hundred twenty
five percent (125%) of the number of shares of Common Stock issuable to each
Subscriber upon conversion of all outstanding Preferred Stock then eligible for
conversion, at the Conversion Price (as defined in the Certificate of
Determination of the Preferred Stock) in effect on the last business day of such
month (the "Assumed Conversion Price"), and upon exercise of all the outstanding
Warrants (a "Registration Shortfall"), the Company shall, within five (5)
business days, amend the Registration Statement or file a new Registration
Statement (also an "Amended" or "New" Registration Statement, respectively), as
appropriate, to add such number of additional shares as would be necessary to
effect the resales of a number of shares of Common Stock equal to one hundred
fifty percent (150%) of the number of shares of Common Stock issuable to each
Subscriber upon conversion of all outstanding Preferred Stock then eligible for
conversion, at the Assumed Conversion Price then in effect and upon exercise of
all the outstanding Warrants. If the Registration Statement is not filed within
two (2) months after the Last Closing of the Offering, Company shall pay the
Subscribers an amount equal to two percent (2%) per month of the aggregate
amount of outstanding Preferred Stock held by Subscriber, accruing daily until
the Registration Statement is filed, payable in cash or Common Stock, as set
forth below ("Late Filing Payment"). If the Registration Statement is not
declared effective by the Due Date, or if any Amended or New Registration
Statement required to be filed hereunder is not declared effective within two
(2) calendar months of the date it is required to be filed, the Company shall
pay the Subscribers an amount equal to two (2%) per month of the aggregate
amount of outstanding Preferred Stock held by Subscriber, accruing daily until
the Registration Statement or a registration statement filed pursuant to Section
3 of this Agreement is declared effective (the "Late Registration Payment").
Any Late Filing Payment or Late Registration Payment shall be payable in Common
Stock for the first three (3) months of accrual of such payments, and thereafter
shall be payable in Common Stock or cash, at the

2
<PAGE>

Subscriber's option, as follows: If Subscriber elects to be paid in cash, such
late Filing Payment or Late Registration Payment shall be paid to such
Subscriber within five (5) business days following the end of the month in which
such Late Registration Payment was accrued. If Subscriber elects to be paid in
Common Stock, such number of shares shall be determined as follows:

Upon conversion of each share of Preferred Stock, the Company shall issue
to the Subscriber the number of shares of Common Stock determined as set
forth in Section 5(a) of the Certificate of Designation, plus an additional
number of shares of Common Stock

3
<PAGE>

attributable to such share of Preferred Stock (the "Additional Shares")
determined as set forth below:

Additional Shares = Late Registration Payment + Late Filing Payment
-----------------------------------------------
Conversion Price

With respect to the Preferred Stock, "Conversion Price" has the definition
ascribed to it in the Certificate of Designation.

Such Additional Shares shall also be deemed "Registrable Securities" as defined
herein. The Company covenants to use its best efforts to use Form S-1 for the
registration required by this Section during all applicable times contemplated
by this Agreement.

(b) The Registration Statement shall be prepared as a "shelf"
registration statement under Rule 415, and shall be maintained effective until
all Registrable Securities cease to exist.

(c) The Company represents that it is presently eligible to effect the
registration contemplated hereby on Form S-1 and will use its best efforts to
continue to take such actions as are necessary to maintain such eligibility.

3. Piggyback Registration. If the Registration Statement described
----------------------
in Section 2 is not effective by the Due Date, and if (but without any
obligation to do so) the Company proposes to register (including for this
purpose a registration effected by the Company for shareholders other than the
Holders) any of its Common Stock under the Act in connection with the public
offering of such securities solely for cash (other than a registration relating
solely for the sale of securities to participants in a Company stock plan or a
registration on Form S-4 promulgated under the Act or any successor or similar
form registering stock issuable upon a reclassification, upon a business
combination involving an exchange of securities or upon an exchange offer for
securities of the issuer or another entity), the Company shall, at such time,
promptly give each Holder written notice of such registration (a "Piggyback
Registration Statement"). Upon the written request of each Holder given by fax
within ten (10) days after mailing of such notice by the Company, the Company
shall cause to be included in such registration statement under the Act all of
the Registrable Securities that each such Holder has requested to be registered
("Piggyback Registration") to the extent such inclusion does not violate the
registration rights of any other Security holder of the company granted prior to
the date hereof; nothing herein shall prevent the Company from withdrawing or
abandoning the registration statement prior to its effectiveness. The election
of initiating Holders to participate in a Piggyback Registration Statement shall
not impact the amount payable to investors pursuant to Section 2(a) herein
except that the Late Registration Payment shall cease to accrue as of the date
of effectiveness of the Piggyback Registration Statement.

4. Limitation on Obligations to Register.
-------------------------------------

4
<PAGE>

(a) In the case of a Piggyback Registration on an underwritten public
offering by the Company, if the managing underwriter determines and advises in
writing that the inclusion in the registration statement of all Registrable
Securities proposed to be included would interfere with the successful marketing
of the securities proposed to be registered by the Company, then the number of
such Registrable Securities to be included in the registration statement, to the
extent such Registrable Securities may be included in such Piggyback
Registration Statement shall be allocated among all Holders who had requested
Piggyback Registration pursuant to the terms hereof, in the proportion that the
number of Registrable Securities which each such Holder, including Swartz, seeks
to register bears to the total number of Registrable Securities sought to be
included by all Holders, including Swartz. If required by the managing
underwriter of such an underwritten public offering, the Holders shall enter
into an agreement in customary form reasonably limiting the number of
Registrable Securities to be included in such Piggyback Registration Statement
and the terms, if any, regarding the future sale of such Registrable Securities.

(b) In the event the Company believes that shares sought to be
registered under Section 2 or Section 3 by Holders do not constitute
"Registrable Securities" by virtue of Section 1(b) of this Agreement, and the
status of those shares as Registrable Securities is disputed, the Company shall
provide, at its expense, an Opinion of Counsel, reasonably acceptable to the
Holders of the Securities at issue (and satisfactory to the Company's transfer
agent to permit the sale and transfer) that those securities may be sold
immediately, without volume limitation, without registration under the Act, by
virtue of Rule 144 or similar provisions.

5. Obligations of the Company. Whenever required under this
--------------------------
Agreement, or a post-effective amendment to an effective registration statement,
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:

(a) Prepare and file with the Securities and Exchange Commission
("SEC") a registration statement, or such a post-effective amendment, with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective.

(b) Prepare and file with the SEC such amendments and supplements to
such registration statement, or such a post-effective amendment, and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement.

(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.

(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders of
the Registrable Securities covered by such registration statement, provided that
the Company shall not be required in connection therewith or as a condition

5
<PAGE>

thereto to qualify to do business or to file a general consent to service of
process in any such states or jurisdictions.

(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.

(f) As promptly as practicable after becoming aware of such event,
notify each Holder of Registrable Securities of the happening of any event of
which the Company has knowledge, as a result of which the prospectus included in
the registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and subject to Section 6 use its best
efforts promptly to prepare a supplement or amendment to the registration
statement to correct such untrue statement or omission, and deliver a number of
copies of such supplement or amendment to each Holder as such Holder may
reasonably request.

(g) Provide Holders with written notice of the date that a
registration statement registering the resale of the Registrable Securities is
declared effective by the SEC, and the date or dates when the Registration
Statement is no longer effective.

(h) Provide Holders and their representatives the opportunity to
conduct a reasonable due diligence inquiry of Company's pertinent financial and
other records and make available its officers, directors and employees for
questions regarding such information as it relates to information contained in
the registration statement.

(i) Provide Holders and their representatives the opportunity to
review the registration statement and all amendments thereto a reasonable period
of time prior to their filing with the SEC if so requested by Holder in writing.

6. Black Out. In the event that, during the time that the
---------
Registration Statement is effective, the Company reasonably determines, based
upon advice of counsel, that due to the existence of material non-public
information, disclosure of such material non-public information would be
required to make the statements contained in the Registration Statement not
misleading, and the Company has a bona fide business purpose for preserving as
confidential such material non-public information, the Company shall have the
right to suspend the effectiveness of the Registration Statement, and no Holder
shall be permitted to sell any Registrable Securities pursuant thereto, until
such time as such suspension is no longer advisable; provided, however, that
such time shall not exceed a period of sixty (60) days. As soon as such
suspension is no longer advisable, the Company shall, if required, promptly, but
in no event later than the date the Company files any documents with the
Securities and Exchange Commission ("SEC") referencing such material
information, file with the SEC an amendment to the Registration Statement
disclosing such information and use its best efforts to have such amendment
declared effective as soon as possible.

6
<PAGE>

In the event the effectiveness of the Registration Statement is
suspended by the Company pursuant hereto, the Company shall promptly notify all
Holders whose securities are covered by the Registration Statement of such
suspension, and shall promptly notify each such Holder as soon as the
effectiveness of the Registration Statement has been resumed. The Company shall
be entitled to effect no more than one such suspension during the one (1) year
period following the Last Closing.

7. Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Agreement with
regard to each selling Holder that such selling Holder shall furnish to the
Company such information regarding Holder, the Registrable Securities held by
it, and the intended method of disposition of such securities as shall be
required to effect the registration of its Registrable Securities or to
determine that registration is not required pursuant to Rule 144 or other
applicable provision of the Act.

8. Expenses. All expenses other than underwriting discounts and
--------
commissions and fees and expenses of counsel to the selling Holders incurred in
connection with registrations, filings or qualifications pursuant hereto,
including (without limitation) all registration, filing and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the
Company, shall be borne by the Company.

9. Indemnification. In the event any Registrable Securities are
---------------
included in a Registration Statement or a post-effective amendment to an
effective registration statement or a Piggyback Registration Statement under
this Agreement:

(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the officers and directors of each Holder, any
underwriter (as defined in the Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act"), against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements or
omissions: (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, or (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, and the Company will reimburse each such Holder, officer
or director, underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 9(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, officer, director,

7
<PAGE>

underwriter or controlling person.

(b) To the extent permitted by law, each selling Holder, severally and
not jointly, will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the registration statement, each
person, if any, who controls the Company within the meaning of the Act, any
underwriter and any other Holder selling securities in such registration
statement or any of its directors or officers or any person who controls such
Holder, against any losses, claims, damages, or liabilities (joint or several)
to which the Company or any such director, officer, controlling person, or
underwriter or controlling person, or other such Holder or director, officer or
controlling person may become subject, under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any statement or
omission in each case to the extent (and only to the extent) that such statement
or omission is made in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration
statement; and each such Holder will reimburse any legal or other expenses
reasonably incurred by the Company and any such director, officer, controlling
person, underwriter or controlling person, other Holder, officer, director, or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this subsection 9(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld.

(c) Promptly after receipt by an indemnified party under this Section
9 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 9, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the reasonably incurred fees and
expenses of one such counsel to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential conflicting
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
9, but the omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 9.

(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 9 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and each Holder agree to
contribute to the aggregate claims, losses, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) (collectively "Losses") to which the Company and one or more of
the Holder may be subject in such

8
<PAGE>

proportion as is appropriate to reflect the relative fault of the Company and
the Holders in connection with the statements or omissions which resulted in
such Losses. Relative fault shall be determined by reference to whether any
alleged untrue statement or omission relates to information provided by the
Company or by the Holders. The Company and the Holders agree that it would not
be just and equitable if contribution were determined by pro rata allocation or
any other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 10(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 9, each person who controls a
Holder of Registrable Securities within the meaning of either the Securities Act
or the Exchange Act and each director, officer, partner, employee and agent of a
Holder shall have the same rights to contribution as such holder, and each
person who controls the Company within the meaning of either the Act or the
Exchange Act and each director of the Company, and each officer of the Company
who has signed the registration statement, shall have the same rights to
contribution as the Company, subject in each case to the applicable terms and
conditions of this paragraph (d).

(e) The obligations of the Company and Holders under this Section 9
shall survive the redemption and conversion, if any, of the Preferred Stock, the
completion of any offering of Registrable Securities in a Registration Statement
under this Agreement, and otherwise.

10. Reports Under Securities Exchange Act of 1934. With a view to
---------------------------------------------
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration, the
Company agrees to:

(a) make and keep public information available, as those terms are
understood and defined in Rule 144;

(b) use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the Act and the 1934
Act; and

11. Amendment of Registration Rights. Any provision of this
--------------------------------
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
a majority of the Registrable Securities provided that the amendment treats all
Holders equally. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each Holder, each future Holder, and the
Company.

12. Notices. All notices required or permitted under this Agreement
-------
shall be made in writing signed by the party making the same, shall specify the
section under this Agreement pursuant to which it is given, and shall be
addressed if to (i) the Company at: Tom Russell, 733 A Lakefield Road, Westlake
Village, CA 91361, Phone (805) 373-8688, Fax (805) 373-7373, and (ii) the
Holders at their respective last address as the party as shown on the records of
the Company. Any notice, except as otherwise provided in this Agreement, shall
be made by fax and shall be deemed

9
<PAGE>

given at the time of transmission of the fax.

13. Termination. This Agreement shall terminate on the earlier of
-----------
(i) the date that is thirty (30) days following the date of issuance of all
Registrable Securities or (ii) the date all Registrable Securities cease to
exist; but without prejudice to (i) the parties' rights and obligations arising
from breaches of this Agreement occurring prior to such termination (ii) other
indemnification obligations under this Agreement.

14. Assignment. No assignment, transfer or delegation, whether by
----------
operation of law or otherwise, of any rights or obligations under this Agreement
by the Company or any Holder, respectively, shall be made without the prior
written consent of the majority in interest of the Holders or the Company,
respectively; provided that the rights of a Holder may be transferred to a
subsequent holder of the Holder's Registrable Securities (provided such
transferee shall provide to the Company, together with or prior to such
transferee's request to have such Registrable Securities included in a Piggyback
Registration, a writing executed by such transferee agreeing to be bound as a
Holder by the terms of this Agreement); and provided further that the Company
may transfer its rights and obligations under this Agreement to a purchaser of
all or a substantial portion of its business if the obligations of the Company
under this Agreement are assumed in connection with such transfer, either by
merger or other operation of law (which may include without limitation a
transaction whereby the Registrable Securities are converted into securities of
the successor in interest) or by specific assumption executed by the transferee.

15. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Delaware applicable to agreements
made in and wholly to be performed in that jurisdiction, except for matters
arising under the Act or the Securities Exchange Act of 1934, which matters
shall be construed and interpreted in accordance with such laws.

16. Execution in Counterparts Permitted. This Agreement may be
-----------------------------------
executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.

[INTENTIONALLY LEFT BLANK]

10
<PAGE>

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of this
31st day of October, 1997.

FRANKLIN TELECOMMUNICATIONS CORP.

By: ________________________________
Frank Peters, President - CEO

Address: 733A Lakefield Road
Westlake Village, CA 91361
Telephone: (805) 373-8688
Facsimile: (805) 373-7373

SWARTZ INVESTMENTS, LLC

By: ________________________________
Eric S. Swartz, President

Address: 200 Roswell Summit, Suite 285
1080 Holcomb Bridge Road
Roswell, Georgia 30076
Telephone: (770) 640-8130
Facsimile: (770) 640-7150

INVESTOR(S)

___________________________________
Investor's Name

By:_________________________________
(Signature)

Address: ____________________________________

____________________________________

<PAGE>

EXHIBIT 10.18

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF OR EXERCISED UNLESS (i) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL
HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS
AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER.

AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. SUBSCRIBERS
MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND ASSESSMENT OF THE RISKS
INVOLVED. SEE THE RISK FACTORS SET FORTH IN THE ATTACHED DISCLOSURE DOCUMENTS
AS EXHIBIT F.

Warrant to Purchase
"N" shares
- --------

Warrant to Purchase Common Stock

THIS CERTIFIES that ________________ or any subsequent holder hereof
("Holder"), has the right to purchase from FNet Corp. ("FNet"), a California
corporation and a subsidiary of FRANKLIN TELECOMMUNICATIONS CORP., a California
corporation ("FTEL"), up to "N" fully paid and nonassessable shares of FNet's
---
common stock ("FNet Common Stock"), subject to adjustment as provided herein, at
a price equal to the FNet Exercise Price as defined in Section 3 below, at any
time beginning on the Date of Issuance (as defined below) and ending at 5:00
p.m., New York, New York time, on October ___, 2002 (the "Exercise
Period")("Exercise Option # 1"); provided however, that if FNet fails to
complete a public offering by June 30, 1998, the Holder has the option, upon
written notice to FNet and FTEL no later than July 31, 1998 and in lieu of the
right to purchase FNet common stock, to purchase from FTEL up to "N" fully paid
---
and nonassessable shares of common stock of FTEL ("Common Stock"), subject to
adjustment as provided herein, at a price equal to the FTEL Exercise Price, as
defined in Section 3 below, until the end of the Exercise Period ("Exercise
Option # 2"). For purposes hereof, "N" shall equal the principal amount of
Series A Preferred Stock purchased by the original Holder divided by the "Fixed
Conversion Price", as defined in the Certificate of Determination of the Series
A Preferred Stock. Holder purchased $__________ of Series A Preferred Stock,
therefore "N" equals $_____________ divided by the "Fixed Conversion Price".

Holder agrees with FTEL and FNet (individually referred to, as applicable,
the "Company" and collectively as the "Companies") that this Warrant to Purchase
Common Stock of the Companies (this "Warrant") is issued and all rights
hereunder shall be held
<PAGE>

subject to all of the conditions, limitations and provisions set forth herein.

1. Date of Issuance.
-----------------

This Warrant shall be deemed to be issued on October 31, 1997 ("Date of
Issuance").

2. Exercise.
--------

(a) Manner of Exercise. During the Exercise Period, this Warrant may be
exercised as to all or any lesser number of full shares of Common Stock covered
hereby upon surrender of this Warrant, with the Exercise Form attached hereto as
Exhibit A, for FTEL pursuant to Exercise Option # 2 or Exhibit B, for FNet
pursuant to Exercise Option # 1 (as applicable, the "Exercise Form") duly
completed and executed, together with the full Exercise Price (as defined below)
for each share of Common Stock as to which this Warrant is exercised, at the
office of FTEL, attn: Helen West, 733 Lakefield Road, Westlake Village, CA
91361, Phone (805) 373-8688, Fax (805) 373-7373, or, as applicable, at the
office of FNet, attn: President at the same address (or at such other office or
agency as the applicable Company may designate in writing), by overnight mail,
with an advance copy of the Exercise Form sent to FTEL or FNet, as applicable,
and its Transfer Agent by facsimile (such surrender and payment of the Exercise
Price hereinafter called the "Exercise of this Warrant").

(b) Date of Exercise. The "Date of Exercise" of the Warrant shall be
defined as the date that the advance copy of the completed and executed Exercise
Form is sent by facsimile to the applicable Company, provided that the original
Warrant and Exercise Form are received by the applicable Company as soon as
practicable thereafter. Alternatively, the Date of Exercise shall be defined as
the date the original Exercise Form is received by the applicable Company, if
Holder has not sent advance notice by facsimile.

(c) Cancellation of Warrant. This Warrant shall be canceled upon the
Exercise of this Warrant, and, as soon as practical after the Date of Exercise,
Holder shall be entitled to receive Common Stock for the number of shares
purchased upon such Exercise of this Warrant, and if this Warrant is not
exercised in full, Holder shall be entitled to receive a new Warrant (containing
terms identical to this Warrant) representing any unexercised portion of this
Warrant in addition to such Common Stock.

(d) Holder of Record. Each person in whose name any Warrant for shares of
Common Stock is issued shall, for all purposes, be deemed to be the Holder of
record of such shares on the Date of Exercise of this Warrant, irrespective of
the date of delivery of the Common Stock purchased upon the Exercise of this
Warrant. Nothing in this Warrant shall be construed as conferring upon Holder
any rights as a stockholder of the applicable Company.

3. Payment of Warrant Exercise Price.
---------------------------------

The "FNet Exercise Price" shall equal $1.00 per share and the "FTEL
Exercise Price" shall equal the Fixed Conversion Price per share, each subject
to adjustment as set forth

2
<PAGE>

herein.

Payment of the Exercise Price may be made by either of the following, or a
combination thereof, at the election of Holder:

(a) Cash Exercise: cash, bank or cashiers check or wire transfer; or

(b) Cashless Exercise: subject to the last sentence of this Section 3,
surrender of this Warrant at the principal office of the applicable Company
together with notice of cashless election, in which event the applicable Company
shall issue Holder a number of shares of Common Stock computed using the
following formula:

X = Y (A-B)/A

where: X = the number of shares of Common Stock to be issued to Holder.

Y = the number of shares of Common Stock for which this Warrant is being
exercised.

A = the Market Price of one (1) share of Common Stock (for purposes of
this Section 3(b), the "Market Price" shall be defined as the average
closing bid price of the Common Stock for the five (5) trading days
prior to the Date of Exercise of this Warrant (the "Average Closing
Price"), as reported on the OTC Bulletin Board, or if no longer traded
on the OTC Bulletin Board, the closing bid price on the principal
national securities exchange or the over-the-counter on which the
Common Stock is so traded and if not available, the mean of the high
and low prices on the principal securities exchange on which the
Common Stock is so traded. If the Common Stock is/was not traded
during the five (5) trading days prior to the Date of Exercise, then
the closing price for the last publicly traded day shall be deemed to
be the closing price for any and all (if applicable) days during such
five (5) trading day period.

B = the Exercise Price.

For purposes of Rule 144 and sub-section (d)(3)(ii) thereof, it is intended,
understood and acknowledged that the Common Stock issuable upon exercise of this
Warrant in a cashless exercise transaction shall be deemed to have been acquired
at the time this Warrant was issued. Moreover, it is intended, understood and
acknowledged that the holding period for the Common Stock issuable upon exercise
of this Warrant in a cashless exercise transaction shall be deemed to have
commenced on the date this Warrant was issued.

Notwithstanding anything to the contrary contained herein, this Warrant may not
be exercised in a cashless exercise transaction if, on the Date of Exercise, the
shares of Common Stock to be issued upon exercise of this Warrant would upon
such issuance (x) be immediately

3
<PAGE>

transferable in the United States free of any restrictive legend, including
without limitation under Rule 144; (y) be then registered pursuant to an
effective registration statement filed pursuant to that certain Registration
Rights Agreement dated on or about October 29, 1997 by and among the Companies
and certain investors; or (z) otherwise be registered under the Securities Act
of 1933, as amended.

4. Transfer and Registration.
-------------------------

(a) Transfer Rights. Subject to the provisions of Section 8 of this
Warrant, this Warrant may be transferred on the books of the Companies, in whole
or in part, in person or by attorney, upon surrender of this Warrant properly
completed and endorsed. This Warrant shall be canceled upon such surrender and,
as soon as practicable thereafter, the person to whom such transfer is made
shall be entitled to receive a new Warrant or Warrants as to the portion of this
Warrant transferred, and Holder shall be entitled to receive a new Warrant as to
the portion hereof retained.

(b) Registrable FTEL Securities. The FTEL Common Stock issuable upon the
exercise of this Warrant constitutes "Registrable Securities" under that certain
Registration Rights Agreement dated on or about October 29, 1997 between FTEL
and certain investors and, accordingly, has the benefit of the registration
rights pursuant to that agreement.

(i) Piggyback Registration. If (but without any obligation to do so)
----------------------
FNet proposes, after its initial public offering, to register (including for
this purpose a registration effected by FNet for shareholders other than the
Holders) any of its Common Stock under the Act in connection with the public
offering of such securities solely for cash (other than a registration relating
solely for the sale of securities to participants in a Company stock plan or a
registration on Form S-4 promulgated under the Act or any successor or similar
form registering stock issuable upon a reclassification, upon a business
combination involving an exchange of securities or upon an exchange offer for
securities of the issuer or another entity), FNet shall, at such time, promptly
give each Holder written notice of such registration (a "Piggyback Registration
Statement"). Upon the written request of each Holder given by fax within ten
(10) days after mailing of such notice by FNet, FNet shall cause to be included
in such registration statement under the Act all of the FNet Shares issuable
upon exercise of this Warrant (the "FNet Registrable Securities") that each such
Holder has requested to be registered ("Piggyback Registration") to the extent
such inclusion does not violate the registration rights of any other Security
holder of FNet granted prior to the date hereof; nothing herein shall prevent
FNet from withdrawing or abandoning the registration statement prior to its
effectiveness. The election of initiating Holders to participate in a Piggyback
Registration Statement shall not impact the amount payable to investors pursuant
to Section 2(a) herein except that the Late Registration Payment shall cease to
accrue as of the date of effectiveness of the Piggyback Registration Statement.
These rights shall exist as to one (1) such Registration Statement, unless an
underwriter limits the number of Holder's securities to be included in such
Registration Statement to less than all of Holder's securities, as set forth
below.

4
<PAGE>

(ii) Demand Registration. On or after the first anniversary of
-------------------
the date on which FNet has completed an underwritten public offering of its
Common Stock with net proceeds of $15 million or more, the Holder may, by
written notice to FNet, require FNet to file a Registration Statement under the
Act covering the Holder's FNet Registrable Securities (to the extent such FNet
Registrable Securities were not eligible for inclusion in any previous
Registration Statement). Upon receipt of such notice, FNet shall use its best
efforts within reason to promptly effect the registration under the Securities
Act, of such Shares as to which the Holder shall have requested registration in
the written request specified above; provided, however, that in no event shall
FNet be required to register the Shares if (1) the requests of the Holder (and
all other Holders of FNet Registrable Securities) cover less than 25% of the
shares of FNet's Common Stock issued or issuable upon exercise of the Warrants
issued in connection with the issuance Series A Preferred Stock, or (2) the
Board of Directors of FNet determines in good faith that filing a registration
statement at the time requested may have a materially adverse effect on FNet and
is not in the best interest of FNet, in which event the filing and processing of
the registration statement may be deferred (but not for more than 120 days)
until the likelihood of the occurrence of such material adverse effect is
eliminated. FNet shall not be obligated to file any registration statement
pursuant to this Section within 180 days following the effective date of any
registration statements as to which FNet shall have given notice to the Holder
as provided above.

(iii) Limitation on Obligations to Register.
-------------------------------------

(a) In the case of a Piggyback Registration on an underwritten
public offering by FNet, if the managing underwriter determines and advises in
writing that the inclusion in the registration statement of all securities of
the Holders' proposed to be included would interfere with the successful
marketing of the securities proposed to be registered by FNet, then the number
of such securities to be included in the registration statement, to the extent
such securities may be included in such Piggyback Registration Statement shall
be allocated among all Holders who had requested Piggyback Registration pursuant
to the terms hereof, in the proportion that the number of FNet Registrable
Securities which each such Holder seeks to register bears to the total number of
such securities sought to be included by all Holders. If required by the
managing underwriter of such an underwritten public offering, the Holders shall
enter into an agreement in customary form reasonably limiting the number of such
securities to be included in such Piggyback Registration Statement and the
terms, if any, regarding the future sale of such securities.

(b) In the event FNet believes that shares sought to be
registered under this Warrant by Holders do not require registration for public
sale and the status of those shares is disputed, FNet shall provide, at its
expense, an Opinion of Counsel, reasonably acceptable to the Holders of the
Securities at issue (and satisfactory to FNet's transfer agent to permit the
sale and transfer) that those securities may be sold immediately, without volume
limitation, without registration under the Act, by virtue of Rule 144 or similar
provisions.

(iv) General. The provisions of Sections 6,7,8 and 9 of the
-------
Registration Rights Agreement, dated on or about October 29, 1997 between FTEL
and certain investors named therein are hereby incorporated by reference, with
the term "Company" referring to

5
<PAGE>

FNet and the term "Holder" referring to the Holder of this Warrant.

5. Anti-Dilution Adjustments.
-------------------------

(a) Stock Dividend. If the applicable Company shall at any time declare a
dividend payable in shares of Common Stock, then Holder, upon Exercise of this
Warrant after the record date for the determination of holders of Common Stock
entitled to receive such dividend, shall be entitled to receive upon Exercise of
this Warrant, in addition to the number of shares of Common Stock as to which
this Warrant is exercised, such additional shares of Common Stock as such Holder
would have received had this Warrant been exercised immediately prior to such
record date and the Exercise Price will be proportionately adjusted.

(b) Recapitalization or Reclassification. If the applicable Company shall
at any time effect a recapitalization, reclassification or other similar
transaction of such character that the shares of Common Stock shall be changed
into or become exchangeable for a larger or smaller number of shares, then upon
the effective date thereof, the number of shares of Common Stock which Holder
shall be entitled to purchase upon Exercise of this Warrant shall be increased
or decreased, as the case may be, in direct proportion to the increase or
decrease in the number of shares of Common Stock by reason of such
recapitalization, reclassification or similar transaction, and the Exercise
Price shall be, in the case of an increase in the number of shares,
proportionally decreased and, in the case of decrease in the number of shares,
proportionally increased. Each Company shall give Holder the same notice it
provides to holders of Common Stock of any transaction described in this Section
5(b).

(c) Distributions. If the applicable Company shall at any time distribute
for no consideration to holders of Common Stock cash, evidences of indebtedness
or other securities or assets (other than cash dividends or distributions
payable out of earned surplus or net profits for the current or preceding year)
then, in any such case, Holder shall be entitled to receive, upon Exercise of
this Warrant, with respect to each share of Common Stock issuable upon such
exercise, the amount of cash or evidences of indebtedness or other securities or
assets which Holder would have been entitled to receive with respect to each
such share of Common Stock as a result of the happening of such event had this
Warrant been exercised immediately prior to the record date or other date fixing
shareholders to be affected by such event (the "Determination Date") or, in lieu
thereof, if the Board of Directors of the applicable Company should so determine
at the time of such distribution, a reduced Exercise Price determined by
multiplying the Exercise Price on the Determination Date by a fraction, the
numerator of which is the result of such Exercise Price reduced by the value of
such distribution applicable to one share of Common Stock (such value to be
determined by the Board of Directors of the applicable Company in its
discretion) and the denominator of which is such Exercise Price.

(d) Notice of Consolidation or Merger. In the event of a merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock shall be changed into
the same or a different number of shares of the same or another class or classes
of stock or securities or other assets of the

6
<PAGE>

applicable Company or another entity or there is a sale of all or substantially
all the applicable Company's assets (a "Corporate Change"), then this Warrant
shall be exerciseable into such class and type of securities or other assets as
Holder would have received had Holder exercised this Warrant immediately prior
to such Corporate Change; provided, however, that Company may not affect any
Corporate Change unless it first shall have given thirty (30) days notice to
Holder hereof of any Corporate Change.

(e) Exercise Price Adjusted. As used in this Warrant, the term "Exercise
Price" shall mean the purchase price per share specified in Section 3 of this
Warrant, until the occurrence of an event stated in subsection (a), (b) or (c)
of this Section 5, and thereafter shall mean said price as adjusted from time to
time in accordance with the provisions of said subsection. No such adjustment
under this Section 5 shall be made unless such adjustment would change the
Exercise Price at the time by $.01 or more; provided, however, that all
adjustments not so made shall be deferred and made when the aggregate thereof
would change the Exercise Price at the time by $.01 or more. No adjustment made
pursuant to any provision of this Section 5 shall have the net effect of
increasing the Exercise Price. The number of shares of Common Stock subject
hereto shall increase proportionately with each decrease in the Exercise Price.

(f) Adjustments: Additional Shares, Securities or Assets. In the event
that at any time, as a result of an adjustment made pursuant to this Section 5,
Holder shall, upon Exercise of this Warrant, become entitled to receive shares
and/or other securities or assets (other than Common Stock) then, wherever
appropriate, all references herein to shares of Common Stock shall be deemed to
refer to and include such shares and/or other securities or assets; and
thereafter the number of such shares and/or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions of this Section 5.

6. Fractional Interests.
--------------------

No fractional shares or scrip representing fractional shares shall be
issuable upon the Exercise of this Warrant, but on Exercise of this Warrant,
Holder may purchase only a whole number of shares of Common Stock. If, on
Exercise of this Warrant, Holder would be entitled to a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares of Common Stock
issuable upon exercise shall be the next higher number of shares.

7. Reservation of Shares.
---------------------

Each Company shall at all times reserve for issuance such number of
authorized and unissued shares of Common Stock (or other securities substituted
therefor as herein above provided) as shall be sufficient for the Exercise of
this Warrant and payment of the Exercise Price. Each Company covenants and
agrees that upon the Exercise of this Warrant, all shares of Common Stock
issuable upon such exercise shall be duly and validly issued, fully paid,
nonassessable and not subject to preemptive rights, rights of first refusal or
similar rights of any person or entity.

7
<PAGE>

8. Restrictions on Transfer.
------------------------

(a) Registration or Exemption Required. This Warrant has been issued in a
transaction exempt from the registration requirements of the Act by virtue of
Regulation D and exempt from state registration under applicable state laws. The
Warrant and the Common Stock issuable upon the Exercise of this Warrant may not
be pledged, transferred, sold or assigned except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Act and applicable state laws.

(b) Assignment. If Holder can provide the applicable Company with
reasonably satisfactory evidence that the conditions of (a) above regarding
registration or exemption have been satisfied, Holder may sell, transfer,
assign, pledge or otherwise dispose of this Warrant, in whole or in part. Holder
shall deliver a written notice to Company, substantially in the form of the
Assignment attached hereto as Exhibit C, indicating the person or persons to
whom the Warrant shall be assigned and the respective number of warrants to be
assigned to each assignee. Each Company shall effect the assignment within ten
(10) days, and shall deliver to the assignee(s) designated by Holder a Warrant
or Warrants of like tenor and terms for the appropriate number of shares.

9. Benefits of this Warrant.
------------------------

Nothing in this Warrant shall be construed to confer upon any person
other than the Companies and Holder any legal or equitable right, remedy or
claim under this Warrant and this Warrant shall be for the sole and exclusive
benefit of the Companies and Holder.

10. Applicable Law.
--------------

This Warrant is issued under and shall for all purposes be governed by
and construed in accordance with the laws of the state of California, without
giving effect to conflict of law provisions thereof.

11. Loss of Warrant.
---------------

Upon receipt by the Companies of evidence of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to each of the
Companies, and upon surrender and cancellation of this Warrant, if mutilated,
the Companies shall execute and deliver a new Warrant of like tenor and date.

12. Notice or Demands.
-----------------

Notices or demands pursuant to this Warrant to be given or made by Holder to or
on the applicable Company shall be sufficiently given or made if sent by
certified or registered mail, return receipt requested, postage prepaid, and
addressed, until another address is designated in writing by the applicable
Company, to the applicable Company's address as set forth in Section 2(a) above.
Notices or demands pursuant to this Warrant to be given or made by either
Company to or on Holder shall be sufficiently given or made if sent by certified
or

8
<PAGE>

registered mail, return receipt requested, postage prepaid, and addressed, to
the address of Holder set forth in the applicable Company's records, until
another address is designated in writing by Holder.

IN WITNESS WHEREOF, the undersigned has executed this Warrant as of the
______ day of October, 1997.

FRANKLIN TELECOMMUNICATIONS CORP.

By: ________________________________

_______________, _______________

FNet CORP.

By: ________________________________

_______________, _______________

9
<PAGE>

EXHIBIT A

FRANKLIN TELECOMMUNICATIONS CORP. EXERCISE FORM

TO: FRANKLIN TELECOMMUNICATIONS CORP.

The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Class A Common Stock (the "Common Stock") of
FRANKLIN TELECOMMUNICATIONS CORP., a California corporation (the "Company"),
evidenced by the attached warrant (the "Warrant"), and herewith makes payment of
the exercise price with respect to such shares in full, all in accordance with
the conditions and provisions of said Warrant.

1. The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any of the Common Stock obtained on exercise of the Warrant, except in
accordance with the provisions of Section 8(a) of the Warrant.

2. The undersigned requests that stock certificates for such shares be issued
free of any restrictive legend, if appropriate, and a warrant representing any
unexercised portion hereof be issued, pursuant to the Warrant in the name of the
undersigned and delivered to the undersigned at the address set forth below:

Dated:

________________________________________________________________________________
Signature

________________________________________________________________________________
Print Name

________________________________________________________________________________
Address

________________________________________________________________________________

NOTICE

The signature to the foregoing Exercise Form must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.

________________________________________________________________________________

10
<PAGE>

EXHIBIT B

FNet CORP. EXERCISE FORM

TO: FNet CORP.

The undersigned hereby irrevocably exercises the right to purchase
____________ of the shares of Class A Common Stock (the "Common Stock") of FNet
CORP., a California corporation (the "Company"), evidenced by the attached
warrant (the "Warrant"), and herewith makes payment of the exercise price with
respect to such shares in full, all in accordance with the conditions and
provisions of said Warrant.

Dated:

________________________________________________________________________________
Signature

________________________________________________________________________________
Print Name

________________________________________________________________________________
Address

________________________________________________________________________________

NOTICE

________________________________________________________________________________

11
<PAGE>

EXHIBIT C

ASSIGNMENT

(To be executed by the registered holder
desiring to transfer the Warrant)

FOR VALUE RECEIVED, the undersigned holder of the attached warrant (the
"Warrant") hereby sells, assigns and transfers unto the person or persons below
named the right to purchase either _______ shares of the Common Stock of FNet
Corp. or _________ shares of the Common Stock of FRANKLIN TELECOMMUNICATIONS
CORP., evidenced by the attached Warrant and does hereby irrevocably constitute
and appoint _______________________ attorney to transfer the said Warrant on the
books of FTEL, with full power of substitution in the premises.

Dated: ______________________________
Signature

Fill in for new registration of Warrant:

___________________________________
Name

___________________________________
Address

___________________________________
Please print name and address of assignee
(including zip code number)

_______________________________________________________________________________

NOTICE

The signature to the foregoing Assignment must correspond to the name as written
upon the face of the attached Warrant in every particular, without alteration or
enlargement or any change whatsoever.

________________________________________________________________________________

<PAGE>

EXHIBIT 23.3

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated September 17, 1997, accompanying the
consolidated financial statements of Franklin Telecommunications Corp. contained
in the Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."

Singer Lewak Greenbaum & Goldstein LLP

Los Angeles, California
November 7, 1997