FRANKLIN TELECOMMUNICATIONS CORP, S-1, 1997-04-09

FRANKLIN TELECOMMUNICATIONS CORP
S-1, 1997-04-09
COMPUTER COMMUNICATIONS EQUIPMENT

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 9, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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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<S> <C> <C>
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
4695 MACARTHUR COURT, SUITE 840
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. [_]

CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
DOLLAR AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock.............................. $10,863,125* $3.50* $10,863,125* $3,291.86
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* Estimated solely for the purpose of calculating the filing fee

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

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FRANKLIN TELECOMMUNICATIONS CORP.

CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1 REGISTRATION STATEMENT.

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REGISTRATION STATEMENT ITEMS AND
HEADINGS
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1. Forepart of the Registration
Statement and Outside Front Cover
of Prospectus...................... Facing Page; Cross-Reference Sheet;
Cover Page of Prospectus.

2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front and Outside Back Cover
Page of Prospectus; Additional
Information.

3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges............................ Prospectus Summary; Risk Factors.

4. Use of Proceeds..................... Use of Proceeds.

5. Determination of Offering Price..... Cover Page of Prospectus; Plan of
Distribution.

6. Dilution............................ Dilution.

7. Selling Security Holders............ Selling Shareholders.

8. Plan of Distribution................ Cover Page of Prospectus; Plan of
Distribution.

9. Description of Securities to be
Registered......................... Description of Common Stock.

10. Interest of Named Experts and
Counsel............................ Not Applicable.

11. Information with Respect to the
Registrant......................... Prospectus Summary; Risk Factors;
Capitalization; Selected Financial
Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Principal Shareholders.
12. Disclosure of Commission Position on
Indemnification for Securities Act Part II of Registration Statement.
Liabilities........................
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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 April 4, 1997 was $3.50 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, 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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<C> <S>
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..................... 15,080,821 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 and unaudited interim financial
statements included elsewhere herein.

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SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
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1994 1995 1996 1995 1996
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (IN THOUSANDS,
EXCEPT PER SHARE DATA):
Net sales............... $ 1,241 $ 1,481 $ 430 $ 211 $ 881
Gross profit (loss)..... 725 963 (160) (135) 440
Income (loss) from
operations............. (473) (173) (1,497) (757) (434)
Net (loss).............. (485) (160) (1,467) (740) (252)
Net (loss) per common
share.................. $ (0.08) $ (0.02) $ (0.14) $ (.08) $ (.02)
Weighted average common
shares outstanding..... 5,753,589 6,475,984 10,279,281 9,829,276 11,864,085
</TABLE>

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<CAPTION>
JUNE 30, DECEMBER 31,
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1995 1996 1995 1996
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<S> <C> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Total assets............................... $ 998 $ 712 $ 1,119 $ 1,840
Total liabilities.......................... $ 1,384 $ 1,461 $ 1,310 $ 1,791
Accumulated deficit........................ $(4,684) $(6,151) $(5,424) $(6,403)
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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 December 31, 1996, of $6,403,000.
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 period
between January 1, 1997 and February 28, 1997, the Company's subsidiary, FNet,
raised approximately $1,327,000 in equity financing. 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. The
Company owns approximately 74% 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 the date of this
Prospectus there were options to purchase 2,139,000 shares of FNet
outstanding, constituting approximately 10.6% 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 SIX MONTHS ENDED DECEMBER 31, 1996; DEPENDENCE ON A SINGLE
CUSTOMER

While the Company's revenues for the period of six months ended December 31,
1996 showed a significant increase over the revenues for the prior period,
substantially all the increase was due to sales of the Company's Wide Area
Network products to a single customer. 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, four

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customers accounted for approximately 60% of the Company's product sales, and
in the period of six months ended December 31, 1996 two customers accounted
for approximately 63% of revenues. 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. 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.

6
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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

10
<PAGE>

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.

11
<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.

12
<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 six months ended December 31, 1996,
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
to be strong, with interest primarily coming from Fortune 500 communications
companies. The Company is also currently developing a new line of hardware
products to complement the D-Mark's capabilities. FNet's Internet service
business has been growing at a rate better than that initially expected by
management, and it 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 takes a digital T1 telephone line 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, low-cost solution for
utilizing analog lines for companies using 16 or more phones or modems.

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.

13
<PAGE>

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 transmissions of volume data. Internet Passport is an Internet
Service Provider that has obtained contractual arrangements with satellite
transmission providers.

RESULTS OF OPERATIONS

Six Months Ended December 31, 1996 and 1995

Net Sales. Net sales increased by $670,000, or 318%, from $211,000 in the
six months ended December 31, 1995 to $881,000 in the six months ended
December 31, 1996. 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. Five customers constituted
78% of total sales for the six months ended December 31, 1996. 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 who significantly
expanded its operations during the period. Sales of the ACP 186 for the six
months ended December 31, 1996 were $464,000. The revenue mix for the six
months ended December 31, 1996 consisted of 80% wide area network products, 8%
newly introduced D-Mark hardware products, and 12% Internet services.

Gross Profit (Loss). Gross profit increased as a percentage of net sales to
50% for the six months ended December 31, 1996, from a gross loss of 64% of
net sales for the corresponding period of 1995. 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.

Operating Expenses. Operating expenses increased by $252,000, or 41%, from
$622,000 in the six months ended December 31, 1995 to $874,000 in the six
months ended December 31, 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 enhancing the general and administrative
infrastructure to support higher sales volumes.

Other Income (Expense). Interest expense increased by $3,000, or 21%, from
$14,000 in the six months ended December 31, 1995 to $17,000 in the six months
ended December 31, 1996, due primarily to an increase in loans from an officer
of the Company. Other income decreased by $20,000, or 65%, from $31,000 in the
six months ended December 31, 1995 to $11,000 in the six months ended December
31, 1996, 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

14
<PAGE>

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 writedown 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 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.

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 December 31, 1995, due to various non-operating items.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and net working capital totaled $379,000 and
$213,000, respectively, as of December 31, 1996. 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,
$987,000 and $701,000 in equity financing, for the years ended June 30, 1995
and 1996, and for the six months ended December 31, 1996, respectively. Its
subsidiary, FNet, raised $140,000 for the six months ended December 31, 1996.
FNet has continued to experience losses, due to the growth nature of the
Internet services business. However, FNet received an additional $1,327,000 in
equity financing between the period January 1, 1997 through February 28, 1997.
The above amounts for equity financing do not include shares issued for
services or in connection with acquisitions.

15
<PAGE>

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 the proceeds from the exercise of the Warrants,
together with existing cash and cash equivalents and cash flow from
operations, will be sufficient to meet the Company's presently anticipated
working capital needs for at least the next 12 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, 1994, 1995 and 1996 have been derived from the Company's consolidated
financial statements, audited by Corbin & Wertz, 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, 1992 and 1993 have
been derived from the Company's consolidated financial statements, audited by
Corbin & Wertz, but which are not included in this Prospectus. The selected
financial data set forth below for the six months ended December 31, 1995 and
1996 have been derived from unaudited financial statements which are also
included herein, and which, in the opinion of the Company, reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the results of operations for the six months ended December 31,
1995 and 1996. The results of operations for the six months ended December 31,
1996 are not necessarily indicative of results to be expected for any future
quarter or for the fiscal year ending June 30, 1997.

STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER,
------------------------------------------------------ ---------------------
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... $ 2,401 $ 2,512 $ 1,241 $ 1,481 $ 430 $ 211 $ 881
Cost of sales........... 1,821 778 516 518 590 346 441
--------- --------- --------- --------- ---------- --------- ----------
Gross profit (loss).... 580 1,734 725 963 (160) (135) 440
--------- --------- --------- --------- ---------- --------- ----------
Operating expenses:
Research and
development expenses.. 598 519 327 308 320 172 215
Selling, general and
administrative
expenses.............. 1,407 1,088 871 828 1,017 450 659
--------- --------- --------- --------- ---------- --------- ----------
Total operating
expenses............ 2,005 1,607 1,198 1,136 1,337 622 874
--------- --------- --------- --------- ---------- --------- ----------
Income (loss) from
operations............. (1,425) 127 (473) (173) (1,497) (757) (434)
--------- --------- --------- --------- ---------- --------- ----------
Other income (expense):
Interest expense....... (43) (21) (14) (10) (26) (14) (17)
Gain on settlement of
accounts payable...... 108
Loss on settlement of
litigation............ (82)
Other.................. (3) 1 4 25 (5) 31 11
--------- --------- --------- --------- ---------- --------- ----------
Total other income
(expense)........... (46) 6 (10) 15 (31) 17 (6)
--------- --------- --------- --------- ---------- --------- ----------
Income (loss) before
minority interest and
income taxes........... (1,471) 133 (483) (158) (1,528) (740) (440)
Minority interest in
loss of subsidiary..... -- -- -- -- 63 -- 188
--------- --------- --------- --------- ---------- --------- ----------
Income (loss) before
income taxes........... (1,471) 133 (483) (158) (1,465) (740) (252)
Provision for income
taxes.................. 2 (13) 2 2 2 -- --
--------- --------- --------- --------- ---------- --------- ----------
Net income (loss)....... $ (1,473) $ 120 $ (485) $ (160) $ (1,467) $ (740) $ (252)
========= ========= ========= ========= ========== ========= ==========
Net loss per common
share.................. $ (.26) $ 0.02 $ (0.08) $ (0.02) $ (0.14) $ (.08) $ (.02)
========= ========= ========= ========= ========== ========= ==========
Weighted average number
of shares outstanding.. 5,661,512 5,736,512 5,753,589 6,475,984 10,279,281 9,829,276 11,864,085

BALANCE SHEET DATA (IN THOUSANDS):
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------------------------------ ---------------------
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash.................... $ 92 $ 492 $ 98 $ 135 $ 166 $ 470 $ 379
Working capital
(deficit).............. (265) 452 (15) 98 (206) 343 403
Total assets............ 1,320 1,220 769 998 712 1,119 1,840
Long-Term Debt.......... 156 120 50 161 238 237 296
Other liabilities....... -- 537 543 508 503 504 496
Stockholder's equity
(deficiency)........... (195) (75) (549) (386) (749) (191) 49
</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 closing price for the Common
Stock as reported by the OTC Bulletin Board during the calendar years
indicated.

<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 (through 3/30/97)............................. 5.50 1.81
</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 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 takes a digital T1 telephone line 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.

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.

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 $40 to
$180, depending on speed and service options. A one-time setup fee ranging
from $40 to $180 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
$1,000 per month depending on access speeds, data throughput and other data
transfer metrics. A one-time setup fee ranging from $250 to $1,000 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 now offers 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

In June 1996 the Company acquired 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.

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.

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 to the owner of Internet Passport, and may
also issue up to an additional 100,000 shares to satisfy creditors of Internet
Passport.

In February 1997 the Company acquired 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.

23
<PAGE>

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 $4,740 per
month, expiring in September, 1997. The lease for this facility is renewable.
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. The Company also has copyrighted over 300 software programs and 20
hardware designs. The Company 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 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 February 28, 1997, the Company's backlog of orders was $8,179, all of
which are expected to be filled within the current fiscal year. This compares
with a backlog of $1,565 at February 29, 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, 1996 and 1995, the

24
<PAGE>

Company's research and product development expenses were approximately
$320,000 and $308,000, 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.

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.

EMPLOYEES

As of December 31, 1996, the Company had 18 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.

25
<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.

26
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth certain compensation paid or accrued by the
Company during the years ended June 30, 1995 and June 30, 1996 to its Chief
Executive Officer 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.......... 1995 $259,488(1) -0- -0-
1996 $275,056(1) $100,000 -0-
Thomas Russell...................... 1995 -0- -0- -0-
1996 $ 17,708(2) -0- -0-
</TABLE>
- --------
(1) Portions of these amounts were deferred. See "Transactions with
Management," below.

(2) Mr. Russell was employed by the Company for a portion of the year.

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, 1995 and 1996 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.

27
<PAGE>

The following table sets forth information with respect to ownership of
options and option values as of December 31, 1996 with respect to the Named
Executive Officers. No options were exercised by the Named Executive Officers
in the fiscal year ended June 30, 1996. The Company has no outstanding stock
appreciation rights, either freestanding or in tandem with options.

<TABLE>
<CAPTION>
OPTION VALUES AS OF DECEMBER 31, 1996
---------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996 ($)(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Frank W. Peters....... 1,000,000/850,000 $1,425,000/$1,488,000
Thomas Russell........ 100,000/200,000 $82,000/$288,000
</TABLE>
- --------
(1) Assumes that a share of Common Stock was valued at $2.13 per share on
December 31, 1996. Amounts reflected are based on this assumed price minus
the exercise price and do not indicate that shares were sold.

Option Grants During the Years Ended June 30, 1995 and 1996. 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..... 1995 1,000,000 93% $.10 3/13/96-3/13/97
Frank W. Peters..... 1996 350,000 39% $.78 3/15/98
Thomas Russell...... 1996 200,000 22% $.69 5/11/97-5/11/2000
</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%.

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.
The President has waived any defaults or penalties with respect to the unpaid
portions of these notes.

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 two officers of the Company 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
$117,556 in compensation, included in the table above, to its President, Frank
W. Peters, with his permission, for an undetermined time period.

28
<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.

29
<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 28, 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 ........ 5,294,024 41%
733 Lakefield Road
Westlake Village, CA
91361
Peter S. Buswell ....... 80,000 1%
733 Lakefield Road
Westlake Village, CA
91361
Robert S. Harp ......... -0- -0-
733 Lakefield Road
Westlake Village, CA
91361
Thomas Russell.......... 100,000 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)...... 6,074,024 48%
</TABLE>

30
<PAGE>

SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 28, 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.,
Inc...................... 595,000 3.9% 595,000 -0- -0-
Wilson Davis.............. 30,000 0.2% 30,000 -0- -0-
Sam Wilson................ 50,000 0.3% 50,000 -0- -0-
Paul Davis................ 110,000 0.7% 50,000 60,000 .4%
Lyle Davis................ 135,000 0.9% 60,000 75,000 .5%
Byron Barkley............. 40,000 0.3% 40,000 -0- -0-
Bollard Investment Co..... 40,000 0.3% 40,000 -0- -0-
Bruce Whaley.............. 62,000 0.4% 40,000 22,000 .1%
E. Bryan Bagley........... 40,000 0.3% 40,000 -0- -0-
Joe Fisher................ 132,000 0.9% 110,000 22,000 .1%
Gary Nelson............... 64,000 0.4% 64,000 -0- -0-
Gary Nelson
Transcorp C/F............. 44,000 0.3% 11,000 33,000 .2%
Gary Conrad............... 200,000 1.3% 200,000 -0- -0-
Mike Peters............... 546,066 3.6% 190,000 356,066 2.4%
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
Silvestri................ 28,000 0.2% 28,000 -0- -0-
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.............. 10,000 0.1% 10,000 -0- -0-
Kevin Charos.............. 10,000 0.1% 10,000 -0- -0-
Marcia Joedicker.......... 20,000 0.1% 20,000 -0- -0-
Frederick I. Camerer...... 159,147 1.1% 17,500 141,647 -0-
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>

31
<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......... 8,000 0.0% 8,000 -0- -0-
Peter Buswell......... 30,000 0.2% 30,000 -0- -0-
John Calderwood....... 6,250 0.0% 6,250 -0- -0-
Kristin Peters........ 48,127 0.3% 10,000 38,127 .3%
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................. 4,151,590 3,103,750 1,047,840 6.0%
=============== ========= ========= ===
</TABLE>

32
<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 (and certain selling shareholders may sell to or through M.H.
Meyerson & Co., Inc.), which may act as agents or principals. Although there
are no current arrangements therefor, commissions equal to or in excess of
normal brokerage commissions may be paid to brokerage firms in connection with
such sales. 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.

33
<PAGE>

DESCRIPTION OF COMMON STOCK

The Company is authorized to issue up to 90,000,000 shares of Common Stock,
without par value, of which 13,025,821 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. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights.

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 three 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 included herein are included in reliance upon the report of Corbin &
Wertz, given upon the authority of said firm as experts in auditing and
accounting.

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.

34
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996, and December
31, 1996 (unaudited).................................................... F-3
Consolidated Statements of Operations for the Fiscal Years Ended June 30,
1994, 1995 and 1996 and for the Six Months Ended December 31, 1995 and
1996 (unaudited)........................................................ F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the Fiscal
Years Ended June 30, 1994, 1995 and 1996 and for the Six-Month Period
Ended December 31, 1996 (unaudited)..................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30,
1994, 1995 and 1996 and for the Six Months Ended December 31, 1995 and
1996 (unaudited)........................................................ F-6
Notes to Consolidated Financial Statements............................... F-8
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Franklin Telecommunications Corp.

We have audited the consolidated balance sheets of Franklin
Telecommunications Corp. and subsidiaries (the "Company") as of June 30, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the years in the three-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
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended June 30, 1996 in conformity with
generally accepted accounting principles.

CORBIN & WERTZ

Irvine, California
September 20, 1996, except
as to Notes 1 and 12 which are
as of February 28, 1997

F-2
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30,
DECEMBER ------------------------
31, 1996 1996 1995
----------- ----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash...................................... $ 379,000 $ 166,000 $ 135,000
Accounts receivable, less allowance for
doubtful accounts of $17,000 (unaudited),
$8,000, and $10,000, respectively........ 472,000 86,000 50,000
Inventories............................... 335,000 257,000 614,000
Prepaid expenses.......................... 26,000 5,000 14,000
Note receivable from related party........ 190,000
----------- ----------- -----------
Total current assets.................... 1,402,000 514,000 813,000
----------- ----------- -----------
Property:
Machinery and equipment................... 432,000 361,000 364,000
Furniture and fixtures.................... 48,000 46,000 68,000
Purchased software........................ 161,000 134,000 73,000
----------- ----------- -----------
641,000 541,000 505,000
Less accumulated depreciation and
amortization............................. (472,000) (456,000) (465,000)
----------- ----------- -----------
Property, net........................... 169,000 85,000 40,000
----------- ----------- -----------
Excess of cost over net assets of companies
acquired, net of accumulated amortization
of $8,000 (unaudited), $32,000 and $10,000,
respectively............................... 215,000 62,000 89,000
----------- ----------- -----------
Other assets, net........................... 54,000 51,000 56,000
----------- ----------- -----------
Total assets............................ $ 1,840,000 $ 712,000 $ 998,000
=========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
-----------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable.......................... $ 323,000 $ 143,000 $ 251,000
Accrued liabilities:
Salaries and related expenses........... 389,000 309,000 134,000
Other................................... 151,000 174,000 198,000
Current portions of long-term debt........ 136,000 94,000 132,000
----------- ----------- -----------
Total current liabilities............. 999,000 720,000 715,000
Long-term debt, less current portion........ 296,000 238,000 161,000
Other liabilities........................... 496,000 503,000 508,000
----------- ----------- -----------
Total liabilities..................... 1,791,000 1,461,000 1,384,000
----------- ----------- -----------
Minority interest........................... -- -- --
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock; no par value; 10,000,000
shares authorized; no shares issued or
outstanding.............................. -- -- --
Common stock; no par value; 90,000,000
shares authorized; 12,211,713
(unaudited), 10,868,786 and 8,720,289
shares issued and outstanding,
respectively............................. 6,378,000 5,372,000 4,298,000
Common stock committed; no par value;
52,000 and 48,350 shares, respectively,
committed but not yet issued............. 74,000 30,000 --
Accumulated deficit......................... (6,403,000) (6,151,000) (4,684,000)
----------- ----------- -----------
Total shareholders' equity (deficit).. 49,000 (749,000) (386,000)
----------- ----------- -----------
Total liabilities and shareholders'
equity (deficit)..................... $ 1,840,000 $ 712,000 $ 998,000
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements

F-3
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------------------ -----------------------------------
1996 1995 1996 1995 1994
----------- ----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................... $ 881,000 $ 211,000 $ 430,000 $1,481,000 $1,241,000
Cost of sales........... 441,000 346,000 590,000 518,000 516,000
---------- --------- ----------- ---------- ----------
Gross profit (loss). 440,000 (135,000) (160,000) 963,000 725,000
---------- --------- ----------- ---------- ----------
Operating expenses:
Research and
development expenses. 215,000 172,000 320,000 308,000 327,000
Selling, general and
administrative
expenses............. 659,000 450,000 1,017,000 828,000 871,000
---------- --------- ----------- ---------- ----------
Total operating
expenses........... 874,000 622,000 1,337,000 1,136,000 1,198,000
---------- --------- ----------- ---------- ----------
Loss from operations.... (434,000) (757,000) (1,497,000) (173,000) (473,000)
---------- --------- ----------- ---------- ----------
Other income (expense):
Interest expense...... (17,000) (14,000) (26,000) (10,000) (14,000)
Other income
(expense)............ 11,000 31,000 (5,000) 25,000 4,000
---------- --------- ----------- ---------- ----------
Total other income
(expense).......... (6,000) 17,000 (31,000) 15,000 (10,000)
---------- --------- ----------- ---------- ----------
Loss before minority
interest and income
taxes.................. (440,000) (740,000) (1,528,000) (158,000) (483,000)
Minority interest in
loss of subsidiary..... 188,000 -- 63,000 -- --
---------- --------- ----------- ---------- ----------
Loss before provision
for income taxes....... (252,000) (740,000) (1,465,000) (158,000) (483,000)
Provision for income
taxes.................. -- -- 2,000 2,000 2,000
---------- --------- ----------- ---------- ----------
Net loss................ $ (252,000) $(740,000) $(1,467,000) $ (160,000) $ (485,000)
========== ========= =========== ========== ==========
Net loss per common
share.................. $ (.02) $ (.08) $ (.14) $ (.02) $ (.08)
========== ========= =========== ========== ==========
Weighted average number
of shares outstanding.. 11,864,085 9,829,276 10,279,281 6,475,984 5,753,589
========== ========= =========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements

F-4
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 AND
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK COMMITTED
--------------------- ----------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
---------- ---------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1993... 5,736,512 $3,964,000 -- $ -- $(4,039,000) $ (75,000)
Sale of common stock.... 111,000 11,000 -- -- -- 11,000
Net loss................ -- -- -- -- (485,000) (485,000)
---------- ---------- ------- -------- ----------- -----------
Balances, June 30, 1994. 5,847,512 3,975,000 -- -- (4,524,000) (549,000)
Common stock issued for
business acquisition... 326,497 47,000 -- -- -- 47,000
Exercise of stock
options for cash....... 45,000 4,000 -- -- -- 4,000
Exercise of stock
options for notes
payable and
accrued interest....... 2,000,000 134,000 -- -- -- 134,000
Exercise of stock
options for
compensation........... 259,280 26,000 -- -- -- 26,000
Common stock issued for
compensation........... 22,000 2,000 -- -- -- 2,000
Common stock issued in
connection with a
private placement...... 220,000 110,000 -- -- -- 110,000
Net loss................ -- -- -- -- (160,000) (160,000)
---------- ---------- ------- -------- ----------- -----------
Balances, June 30, 1995. 8,720,289 4,298,000 -- -- (4,684,000) (386,000)
Adjustment to common
stock due to correction
of error............... 23,031 -- -- -- -- --
Common stock issued and
committed for business
acquisitions........... 85,000 65,000 25,000 10,000 -- 75,000
Exercise of stock
options for cash....... 44,500 4,000 -- -- -- 4,000
Common stock issued for
compensation........... 34,839 11,000 -- -- -- 11,000
Common stock issued as
payments on accounts
payable................ 7,555 11,000 -- -- -- 11,000
Common stock issued in
connection with private
placements............. 1,808,572 910,000 -- -- -- 910,000
Common stock issued upon
the exercise of
warrants............... 145,000 73,000 -- -- -- 73,000
Common stock committed
for cash............... -- -- 23,350 20,000 -- 20,000
Net loss................ -- -- -- -- (1,467,000) (1,467,000)
---------- ---------- ------- -------- ----------- -----------
Balances, June 30, 1996. 10,868,786 5,372,000 48,350 30,000 (6,151,000) (749,000)
Common stock issued and
committed for business
acquisitions
(unaudited)............ 60,987 85,000 40,000 50,000 -- 135,000
Exercise of stock
options for cash
(unaudited)............ 33,000 3,000 -- -- -- 3,000
Common stock committed
for services
(unaudited)............ -- -- 12,000 24,000 -- 24,000
Common stock issued for
previously committed
shares (unaudited)..... 48,350 30,000 (48,350) (30,000) -- --
Common stock issued in
connection with private
placements (unaudited). 820,590 698,000 -- -- -- 698,000
Common stock issued upon
the exercise of
warrants (unaudited)... 380,000 190,000 -- -- -- 190,000
Net loss (unaudited).... -- -- -- -- (252,000) (252,000)
---------- ---------- ------- -------- ----------- -----------
Balances, December 31,
1996 (unaudited)....... 12,211,713 $6,378,000 52,000 $ 74,000 $(6,403,000) $ 49,000
========== ========== ======= ======== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements

F-5
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
----------------------- ---------------------------------
1996 1995 1996 1995 1994
----------- ----------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(252,000) $(740,000) $(1,467,000) $(160,000) $(485,000)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operations,
net of effects of
business
acquisitions:
Depreciation and
amortization....... 23,000 20,000 45,000 29,000 89,000
Provision for loss
on obsolete
inventory.......... 2,000 112,000 226,000 4,000 17,000
Provision for loss
on doubtful
accounts........... 9,000 -- (2,000) (24,000) (2,000)
Write-down of
goodwill........... -- -- 70,000 -- --
Notes payable for
services rendered.. 100,000 -- -- 217,000 --
Stock issued for
services rendered.. 24,000 11,000 11,000 28,000 --
Minority interest of
loss of subsidiary. (188,000) -- -- -- --
Loss on disposal of
property........... -- -- 1,000 -- 6,000
Changes in operating
assets and
liabilities, net of
effects of business
acquisitions:
Accounts
receivable....... (395,000) 2,000 (34,000) 130,000 81,000
Inventories....... (80,000) 115,000 131,000 (117,000) (104,000)
Prepaid expenses.. (21,000) 7,000 9,000 (8,000) (6,000)
Accounts payable.. 180,000 (102,000) (97,000) 40,000 50,000
Accrued salaries
and related
expenses......... 51,000 32,000 175,000 (38,000) 49,000
Accrued other
liabilities...... (1,000) (4,000) (24,000) (92,000) 12,000
--------- --------- ----------- --------- ---------
Net cash provided by
(used in) operating
activities............. (548,000) (547,000) (956,000) 9,000 (293,000)
--------- --------- ----------- --------- ---------
Cash flows from
investing activities:
Purchases of property. (83,000) (31,000) (58,000) (8,000) (24,000)
Cash (paid) received
in connection with
business
acquisitions......... -- -- 3,000 (8,000) --
Other assets.......... (5,000) -- 1,000 1,000 --
--------- --------- ----------- --------- ---------
Net cash used in
investing activities... (88,000) (31,000) (54,000) (15,000) (24,000)
--------- --------- ----------- --------- ---------
Cash flows from
financing activities:
Payments on other
liabilities.......... -- -- (5,000) (35,000) (37,000)
Proceeds from sale of
Company stock........ 701,000 913,000 987,000 114,000 11,000
Proceeds from sale of
minority stock in
consolidated
subsidiary........... 148,000 -- -- -- --
Common stock committed
for cash............. -- -- 20,000 -- --
Issuance of long-term
debt................. -- -- 102,000 -- --
Payments on long-term
debt................. -- -- (63,000) (36,000) (51,000)
--------- --------- ----------- --------- ---------
Net cash provided by
(used in) financing
activities............. 849,000 913,000 1,041,000 43,000 (77,000)
--------- --------- ----------- --------- ---------
Net change in cash...... 213,000 335,000 31,000 37,000 (394,000)
Cash at beginning of
year................... 166,000 135,000 135,000 98,000 492,000
--------- --------- ----------- --------- ---------
Cash at end of year..... $ 379,000 $ 470,000 $ 166,000 $ 135,000 $ 98,000
========= ========= =========== ========= =========
Supplemental disclosure
of cash flow
information--
Cash paid during the
year for:
Interest............ $ -- $ -- $ 12,000 $ 4,000 $ 4,000
========= ========= =========== ========= =========
Income taxes........ $ -- $ -- $ 2,000 $ 2,000 $ 2,000
========= ========= =========== ========= =========
</TABLE>

See accompanying notes to consolidated financial statements

F-6
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED

Supplemental schedule of noncash investing and financing activities:

During the six month-period ended December 31, 1996 and the years ended June
30, 1996 and 1995, the Company completed four acquisitions as described in
Note 1. In conjunction with these acquisitions, aggregate liabilities assumed
were as follows:

<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, ------------------
1996 1996 1995
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Fair value of the assets acquired, net of
cash and including intangibles............ $ 90,000 $ 72,000 $199,000
Value of Company and subsidiary common
stock issued and committed for
consideration............................. (90,000) (75,000) (47,000)
Cash received in connection with the
acquisition............................... -- 3,000 (8,000)
-------- -------- --------
Aggregate liabilities assumed.............. $ -- $ -- $144,000
======== ======== ========
</TABLE>

During the six-month period ended December 31, 1996, the Company issued an
additional $85,000 of its common stock to resolve a dispute in the final
purchase price of an entity acquired in fiscal year 1995.

See Notes 3, 4 and 8 for additional noncash financing and investing
activities during the years ended June 30, 1996 and 1995.

See accompanying notes to consolidated financial statements

F-7
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994

NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

Franklin Telecommunications Corp. 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 provides
internet services through its majority-owned subsidiary, FNET. FNET has had
limited operations to date. The Company's customers are located predominantly
in the United States in a wide range of industries including financial
services, government and manufacturing.

Reliance on Equity Financings to Fund Operations

As shown in the accompanying consolidated statements of operations, the
Company has had a net loss for each of the years ended June 30, 1996, 1995 and
1994 and for the six months ended December 31, 1996 (unaudited). The Company
also has an accumulated deficit as of December 31, 1996 (unaudited) of
$6,403,000. As shown in the accompanying consolidated statements of cash flows
for the years ended June 30, 1996, 1995 and 1994 and for the six months ended
December 31, 1996 (unaudited), the Company has raised monies from sales of its
common stock and the common stock of its majority-owned subsidiary, FNET, to
fund its operating losses. In addition, as disclosed in Note 12 to the
consolidated financial statements, subsequent to December 31, 1996, the
Company has sold additional shares of its common stock and FNET stock for net
proceeds of $221,000 and $1,327,000, respectively (unaudited). 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. Management of the Company believes that the cash on hand as of
February 28, 1997 will sustain the Company's operations for at least one year.
However, if the Company is unable to generate sufficient sales out of FTEL and
FNET, it will need to obtain additional financings through additional equity
sales to sustain its future operations beyond a period of 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 the Company'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. In December
of 1996, the Company issued an additional 60,987 shares of its common stock to
resolve a dispute in the final purchase price of LPL. The value of the shares
issued of $85,000 was recorded to goodwill.

The acquisition of LPL was accounted for by the Company using the purchase
method of accounting. The excess of approximately $184,000 (as adjusted for
the $85,000 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 the Company's common stock and 50,000 shares of FNET common
stock.

F-8
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The acquisitions of Alpha and MIS were accounted for by Franklin 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 the Company's Common
Stock and options to purchase 10,000 shares 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 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 six months ended
December 31, 1996, 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
the Company's common stock. As part of the agreement, CPR's shareholder has
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 total purchase price will be valued based on the value of the
Company's stock given as consideration to acquire CPR.

On February 28, 1997, the Company agreed to acquire all of the outstanding
common stock of Internet Passport, Inc., a Georgia LLC, ("Passport") in
exchange for a maximum of 600,000 shares of the Company's common stock. The
agreement also provides for the issuance of an additional 100,000 shares of
its common stock to satisfy certain obligations of Passport. Passport is a
start-up company incorporated in August of 1996, that provides internet
services pursuant to contractual arrangements with satellite transmission
providers. The total purchase price will be valued based on the value of the
Company's common stock given as consideration to acquire Passport. The
purchase price is expected to be predominately allocated to intangibles and
goodwill.

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 remaining
interest being owned by the modem manufacturer. The joint venture had no
operations as of December 31, 1996.

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.

Consolidated Interim Financial Information

The accompanying interim consolidated financial statements have been
prepared without audit, and certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
although the

F-9
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Company believes that the disclosures herein are adequate to make information
presented not misleading. The consolidated results of operations for the six-
month period is not necessarily indicative of results for the full year. In
the opinion of management, the accompanying interim consolidated financial
statements contain all adjustments of a normal and recurring nature necessary
for a fair presentation of the Company's consolidated financial position as of
December 31, 1996 and the results of their operations and their cash flows for
each of the six-month periods ended December 31, 1996 and 1995.

Concentrations of Credit Risk

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

The Company 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 collectibility and provides for an allowance for
potential credit losses as deemed necessary.

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. Three customers accounted for 16%, 20% and 20%,
respectively, of the Company's product sales for the year ended June 30, 1994.
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 1%, 9% and 9% of product sales for the years ended June 30,
1996, 1995 and 1994, respectively, and comprised 3% of accounts receivable at
June 30, 1996. Two customers in the unaudited six-month periods ended December
31, 1996 and 1995 accounted for 52% and 11%, and 24% and 17%, respectively, of
the Company's total sales. At December 31, 1996, amounts due from one customer
amounted to 71% of accounts receivable.

Export sales, primarily to Canada, Australia, Poland and England,
represented 15%, 19% and 11% of net sales for the years ended June 30, 1996,
1995 and 1994, respectively. Export sales represented 5% and 16% of net sales
for the unaudited six-month periods ended December 31, 1996 and 1995.

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 effect the reported amounts of revenues and
expenses during the reported period. Actual results could materially differ
from these estimates.

Fair Value of Financial Instruments

The accompanying consolidated balance sheets includes 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, accounts receivable, accounts payable, long-term debt and
other liabilities. The carrying amounts of the Company's financial instruments
generally approximate their fair values at June 30, 1996. The fair value of
the long-term debt to the Company's president and majority stockholder (see
Note 3) and the other liabilities (see Note 9) are not readily determinable as
market comparables were not available for such instruments.

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. Such net realizable

F-10
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

Property is recorded at cost. Depreciation is computed 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. Amortization of purchased software is computed on a straight-line
basis over the estimated useful life of the software. Depreciation and
amortization expense related to property for the years ended June 30, 1996,
1995 and 1994 was $19,000, $17,000 and $89,000, respectively, and for the
unaudited six-month periods ended December 31, 1996 and 1995 was $15,000 and
$8,000, respectively.

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.

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 by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through projected undiscounted future cash flows. The amount of goodwill
impairment, if any, is measured based on projected undiscounted future cash
flows and charged to operations in the period in which goodwill impairment is
determined by management. During the year ended June 30, 1996, management of
the Company determined that $70,000 of goodwill had been impaired and,
accordingly, the Company charged this amount to operations as reflected under
other expenses in the accompanying 1996 consolidated statement of operations.
Amortization of goodwill for the years ended June 30, 1996 and 1995 amounted
to $22,000 and $10,000, respectively. Amortization of goodwill for the
unaudited six-month periods ended December 31, 1996 and 1995 amounted to
$6,000 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
$12,000 and $8,000 at June 30, 1996 and 1995, 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, 1996 and
1995 was $4,000 and $2,000, respectively.

Amortization of patent expenses for the six-month periods ended December 31,
1996 and 1995 was $2,000 in both periods.

F-11
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Minority Interest

Minority interest represents the minority stockholders' 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.

The transfer of shares of FNET by Franklin as described in the preceding
paragraph resulted in the recognition by Franklin of a dilution of its
investment which has been presented net of the minority interest in the loss
of FNET in the accompanying 1996 consolidated statement of operations.

During the unaudited six-month period ended December 31, 1996, FNET sold
140,000 shares of its stock to outside investors and issued 20,000 shares to
acquire No. 1. The shares sold to investors were 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 remained at 79% as of December 31, 1996.

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.

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, 1996, 1995 and 1994, and the unaudited six-month periods ended
December 31, 1996 and 1995. Common stock equivalents (see Note 4) have been
excluded from the aforementioned computations as their effect would be
antidilutive.

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." Statement No. 109 requires the asset and
liability method of accounting for income taxes. Under the asset and liability
method of Statement 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 Statement 109, the

F-12
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 1995 and 1994 consolidated financial statements have
been reclassified to conform to the 1996 presentation.

NOTE 2--INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -----------------
1996 1996 1995
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................. $142,000 $ 49,000 $207,000
Work in process............................... 106,000 44,000 228,000
Finished goods................................ 87,000 164,000 179,000
-------- -------- --------
$335,000 $257,000 $614,000
======== ======== ========
</TABLE>

NOTE 3--LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -------------------
1996 1996 1995
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Convertible notes payable to former
vendors, bearing interest at 12% per
annum, unsecured and due in December
1999................................... $ 24,000 $ 24,000 $ 24,000
Unsecured demand note payable to the
president and majority stockholder,
bearing interest at 10% per annum...... -- -- 2,000
Notes payable to the president and
majority stockholder, bearing interest
from 8% to 9% per annum, secured by
substantially all of the Company's
assets, with due dates ranging through
January 1999........................... 408,000 308,000 267,000
--------- -------- ---------
432,000 332,000 293,000
Less current portion.................... (136,000) (94,000) (132,000)
--------- -------- ---------
$ 296,000 $238,000 $ 161,000
========= ======== =========
</TABLE>

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

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

<TABLE>
<CAPTION>
YEARS
ENDING
JUNE 30,
--------
<S> <C>
1997........................................................... $ 94,000
1998........................................................... 90,000
1999........................................................... 148,000
--------
$332,000
========
</TABLE>

F-13
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During fiscal 1995, the Company canceled notes payable in the amount of
$92,000 to the president and majority stockholder in exchange for the issuance
of common stock (see Note 4).

On September 20, 1996, the Company entered into an additional $100,000
promissory note with its president and majority stockholder in exchange for
fiscal 1997 services rendered. No compensation expense was recorded in fiscal
1996 related to this new note. Compensation expense of $100,000 was recorded
in connection therewith in the six-month period ended December 31, 1996. The
note bears interest at 8% per annum, is secured by substantially all of the
Company's assets and is payable in thirty-six equal monthly installments of
$3,134. This new note is not included in the above maturity schedule.

NOTE 4--SHAREHOLDERS' EQUITY (DEFICIT)

Stock Options

The Company adopted an Incentive Stock Option Plan (Plan A) and a
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 nonstatutory options. The exercise price of the
incentive stock options and nonstatutory options may not be 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 nonstatutory.

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, to the options below, the Company has committed, but not
granted, 100,000 options to purchase the Company's common stock at exercise
prices from $1.68 to $2.12. The options will be granted upon adoption of a new
stock option plan. The Company has also issued options in connection with the
acquisition of No. 1 as discussed in Note 1.

F-14
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Activity as to all stock option plans is as follows:

<TABLE>
<CAPTION>
OPTION
SHARES PRICE
--------- ----------
<S> <C> <C>
Options outstanding at June 30, 1993................... 1,050,000 $.10
Options granted...................................... 490,000 $.10
Options canceled or expired.......................... (325,000) $.10
---------
Options outstanding at June 30, 1994................... 1,215,000 $.10
Options granted...................................... 1,075,000 $.10
Options canceled or expired.......................... (25,720) $.10
Options exercised.................................... (304,280) $.10
---------
Options outstanding at June 30, 1995................... 1,960,000 $.10
Options granted...................................... 889,000 $ .15-1.18
Options canceled or expired.......................... (225,000) $.10
Options exercised.................................... (44,500) $.10
---------
Options outstanding at June 30, 1996................... 2,579,500 $ .10-1.18
Options granted (unaudited).......................... 201,000 $1.62-2.05
Options exercised (unaudited)........................ (33,000) $.10
---------
Options outstanding at December 31, 1996 (unaudited)... 2,747,500
=========
Options exercisable at December 31, 1996 (unaudited)... 1,115,000 $ .10-1.31
=========
</TABLE>

Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method pursuant to SFAS 123, rather than the method
pursuant to APB #25 discussed herein. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions: risk-free interest rates of 6.3%; dividend yields
of 0.0%; volatility factors of the expected market price of the Company's
common stock of 100%; and expected terms of two to four years.

The Black-Scholes 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.

For purposes of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:

<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1996 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Pro forma net loss:
Net loss, as reported............................. $ (252,000) $(1,467,000)
Compensation expense under SFAS 123............... (899,000) (46,000)
----------- -----------
Pro forma net loss.................................. $(1,151,000) $(1,513,000)
=========== ===========
Pro forma net loss per share........................ $ (.10) $ (.15)
=========== ===========
</TABLE>

F-15
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Included in the six months ended December 31, 1996 (unaudited) 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 six months ended
December 31, 1996 (unaudited) of $721,000 was charged to pro forma net loss
for the entire estimated fair market value of the 1,000,000 options awarded.

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 year ended June 30, 1996, FNET granted 448,000 options
to employees to acquire FNET common stock at an exercise price of $1.00.
During the six months ended December 31, 1996, FNET issued an additional
1,691,000 options at an exercise price of $1.00. Total FNET options
outstanding and exercisable at December 31, 1996 (unaudited) were 2,139,000
and 1,000,000, respectively.

Stock Issuances

During the year ended June 30, 1994, the Company issued 111,000 shares of
its common stock to employees for cash of $11,000, the approximate fair value
at the date of issuance.

The Company issued 326,497 shares of its common stock during fiscal 1995 in
connection with a business acquisition (See Note 1).

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. During the year ended
June 30, 1995, the Company issued 2,000,000 shares of its common stock for the
exercise of such options and canceled notes payable in the amount of $92,000
and accrued interest in the amount of $42,000.

During the year ended June 30, 1995, the Company 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.

During the year ended June 30, 1995, the Company 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.

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, respectively, provided certain
financing events took place. The options were both issued in the year of grant
and are exercisable over a two-year period.

During 1995, the Company also granted to a service provider options to
acquire, within two years, 150,000 shares of its common stock at an exercise
price of $.10. None of these options were exercisable at June 30, 1996 and are
not within the aforementioned stock option plans.

During the years ended June 30, 1996 and 1995, the Company issued 44,500 and
45,000 shares, respectively, of its common stock in connection with stock
options exercised at $.10 per share for cash of $4,000 and $4,500,
respectively.

F-16
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During the years ended June 30, 1996 and 1995, the Company issued 1,780,000
and 220,000 shares, respectively, of its common stock for cash of $890,000 and
$110,000, respectively, in connection with a private placement (the "1995
Private Placement"). The Company, in connection with these issuances of
shares, during the years ended June 30, 1996 and 1995, 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 the fair value at the date of issuance, as
determined by management of the Company, of the underlying stock at the date
of issuance. The Company paid no commissions or fees in connection with this
private placement.

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, 1996 none of these warrants had been exercised.

The Company 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).

During the year ended June 30, 1996, the Company 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.

During the year ended June 30, 1996, the Company issued 7,555 shares of its
common stock to certain vendors as payment on accounts payable of
approximately $11,000.

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.

The Company has 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 six-month period ended December 31, 1996, the Company issued
820,590 shares of its common stock in connection with a private placement (the
"1996 Private Placement") for cash of $698,000. The Company paid no
commissions or fees in connection with this private placement. On August 21,
1996, the Company issued 380,000 shares for a note receivable totaling
$190,000 in connection with warrants issued with the 1995 Private Placement.
This note receivable was paid in full subsequent to December 31, 1996. On
December 13, 1996, in connection with the acquisition of No. 1, the Company
issued 40,000 shares of its common stock and options to purchase 10,000 shares
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 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.

F-17
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Pursuant to state laws, the Company is currently restricted, and may be
restricted for the foreseeable future, from making dividends to its
stockholders as a result of its accumulated deficit as of June 30, 1996.

NOTE 5--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 6--INCOME TAXES

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

<TABLE>
<CAPTION>
JUNE 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts................ $ 3,000 $ 4,000
Compensated absences and deferred salaries,
principally due to accrual for financial
reporting purposes............................. 112,000 60,000
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 and allowance for
inventory obsolescence......................... 191,000 68,000
General business tax credit carryforwards....... 345,000 449,000
Net operating loss carryforwards................ 2,498,000 1,942,000
----------- -----------
Total gross deferred tax assets................. 3,149,000 2,523,000
Less valuation allowance........................ (3,145,000) (2,519,000)
----------- -----------
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>

The valuation allowance increased by approximately $626,000 and $179,000
during the years ended June 30, 1996 and 1995, respectively.

No provision for income taxes for the years ended June 30, 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>
JUNE 30,
------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Computed "expected" tax benefit............. $(520,000) $(54,000) $(144,000)
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.............................. 520,000 54,000 144,000
State income taxes........................ 2,000 2,000 2,000
--------- -------- ---------
$ 2,000 $ 2,000 $ 2,000
========= ======== =========
</TABLE>

F-18
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

As of June 30, 1996 the Company had consolidated net operating loss
carryforwards of approximately $7,052,000 and $1,638,000 for Federal and state
income tax reporting purposes, respectively, which expire in varying amounts
through 2011. The Company also has general business tax credit carryforwards
of approximately $322,000 and $23,000 available to offset against future
Federal and state income taxes, respectively, which expire at various times
through 2011. 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 $3,000, $131,000 and $117,000 to
an entity affiliated with a stockholder of the Company during the years ended
June 30, 1996, 1995 and 1994, respectively.

On January 1, 1993, the Company entered into a five year employment
agreement with the president and stockholder 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 $275,000, $259,000 and $188,000
for the years ended June 30, 1996, 1995 and 1994, respectively.

During the year ended June 30, 1995 and six-month period ended December 31,
1996, the Company issued notes payable to the president and stockholder for
$217,000 and $100,000 (unaudited), respectively, of accrued compensation (see
Note 3).

NOTE 8--COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its production and administrative facilities under a
noncancelable operating lease that expires in fiscal 1997. 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 expenses related to the operating lease were $51,000, $59,000 and
$47,000 for the years ended June 30, 1996, 1995 and 1994, respectively. Rent
expense for the six-month period ended December 31, 1996 and 1995 was $28,000
(unaudited) and $26,000 (unaudited), respectively. Future minimum lease
payments as of June 30, 1996, which are all due in fiscal 1997, total
approximately $12,000 (unaudited).

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.

F-19
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 1996 consolidated balance sheet.

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 1933
Securities Act 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 1933 Securities Act 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 1933 Exchange Act.

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. As of
February 28, 1996, the Company was renegotiating the 50,000 shares of the
Company's common stock to be issued under the agreement. It is the Company's
intent that such shares will be provided by an affiliate.

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 no new modification has been entered into. Amounts paid under
these agreements totaled approximately $5,000, $16,000 and $13,000 during the
years ended June 30, 1996, 1995 and 1994, respectively. For the six-month
period ended December 31, 1996, $1,000 (unaudited) was paid under this
arrangement.

F-20
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10--OTHER ACCRUED LIABILITIES

Other accrued liabilities consists of the following:

<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, -----------------
1996 1996 1995
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Sales tax payable............................ $ 74,000 $ 76,000 $ 79,000
Accrued interest payable, primarily to
related party............................... 62,000 45,000 31,000
Accrued audit................................ -- 20,000 20,000
Accrued litigation settlement................ -- -- 23,000
Lease termination costs...................... -- -- 26,000
Other........................................ 15,000 33,000 19,000
-------- -------- --------
$151,000 $174,000 $198,000
======== ======== ========
</TABLE>

NOTE 11--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, 1996, 1995 or 1994.

NOTE 12--SUBSEQUENT EVENTS

In connection with the private placements as discussed in Note 4, the
Company had, from January 1, 1997 through February 28, 1997, sold an
additional 59,608 shares of its common stock for $190,000. The Company paid no
commissions or fees in connection with these private placements. On February
7, 1997, the Company issued 20,000 shares for $25,000 upon the exercise of
stock warrant issued with the aforementioned private placement.

In addition, during the period from January 1, 1997 through February 28,
1997, the Company received cash of $6,000 in connection with the exercise of
stock options. In connection therewith, the Company has issued 57,700 shares
of the Company's common stock.

Subsequent to December 31, 1996, the Company's majority-owned subsidiary,
FNET, issued 1,152,000 shares of its common stock in exchange for $1,327,000.
This reduced the Company's ownership in FNET from 79% to 74%. To the extent
that FNET continues to issue equity, the Company's ownership in FNET will be
further diluted.

See Note 1 regarding the acquisitions of Passport and CPR.

F-21
<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................................................................ 26
Principal Shareholders.................................................... 30
Selling Shareholders...................................................... 31
Plan of Distribution...................................................... 33
Description of Common Stock............................................... 34
Legal Matters............................................................. 34
Experts................................................................... 34
Additional Information.................................................... 34
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.............................. $
Registration fee............................................... 3,291.86
Blue sky filing fees and expenses..............................
Legal fees and expenses........................................
Accounting fees and expenses...................................
Transfer Agent fees............................................
Miscellaneous..................................................
---------
Total...................................................... $
=========
</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 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>
EXERCISABLE
NAME DATE SHARES WARRANTS
---- --------- ------- -----------
<S> <C> <C> <C>
1996 Private Placement........................ 8/1/96 890,595
28 Individuals
Len Bartz..................................... 6/30/96 23,350
Michael C. Peters............................. 3/1/96 380,000
Eileen Rouse.................................. 3/1/96 10,000
Michael Parkhurst............................. 8/26/96 5,000
Patrick Klos.................................. 10/1/96 15,000
Dianne Oliver................................. 10/8/96 8,000
Michael Klos.................................. 10/10/96 5,000
Terry Lee..................................... 12/2/96 20,000
Steve Sullivan................................ 12/2/96 20,000
Millhollan/Ellis.............................. 3/96-2/97 12,000
Charles & Barb Arledge........................ 12/4/96 5,808
Brew & Shirley Arms........................... 12/4/96 5,808
</TABLE>

II-1
<PAGE>

<TABLE>
<CAPTION>
EXERCISABLE
NAME DATE SHARES WARRANTS
---- -------- ------- -----------
<S> <C> <C> <C>
Andrew & Joan Chitiea...................... 12/4/96 5,808
Daniel & Pat Derbes........................ 12/4/96 11,617
Kenneth King............................... 12/4/96 2,905
Herman & D. Krantz......................... 12/4/96 7,260
Dale & Monica Sheets....................... 12/4/96 14,521
Robert & Erma Sheets....................... 12/4/96 7,260
John Calderwood............................ 1/7/97 5,000
Frederick I. Camerer....................... 3/96 5,000
Edward D. Bagley........................... 2/5/97 59,608
Marcia Marino.............................. 2/7/97 20,000
Peter Buswell.............................. 2/25/97 30,000
Kristin Peters............................. 2/26/97 10,000
Sparrow Marcioni........................... 1/28/97 600,000
Neil Wyenn................................. 2/26/97 25,000
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 20,000
shares
10/1/95
warrants
Bryan B. Bagley PFT Sharing ............... 3/1/96 20,000
Bryan B. Bagley............................ 3/1/96 20,000
Bollard Investment Co...................... 10/1/95 40,000
Bruce Whaley............................... 10/1/95 40,000
Joe Fisher................................. 3/96 70,000 40,000
shares
10/1/95
warrants
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-2
<PAGE>

<TABLE>
<CAPTION>
EXERCISABLE
NAME DATE SHARES WARRANTS
---- ------- --------- -----------
<S> <C> <C> <C>
Martin & Co............................... 10/1/95 146,000
Michael and Linda Silvestri............... 10/1/95 28,000
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
Michael C. Peters......................... 5/12/94 30,000
Frederick I. Camerer...................... 5/31/94 50,000
Mark Peters............................... 6/17/94 1,000
Kristen Peters............................ Jan-95 10,000
John Costello............................. Jan-95 199,806
Herman & D. Krantz........................ Jan-95 7,260
Dale & Monica Sheets...................... Jan-95 14,521
Robert & Erma Sheets...................... Jan-95 7,260
Colin Patterson........................... Jan-95 29,042
John Costello............................. Jan-95 7,260
Added Value............................... Jan-95 3,493
Robert & Erma Sheets...................... Jan-95 1,529
Herman & D. Krantz........................ Jan-95 1,529
Colin Patterson........................... Jan-95 6,087
Photo Vision.............................. Jan-95 405
Added Value............................... Feb-95 389
Micropolus................................ Feb-95 489
Future Elect.............................. Feb-95 2,043
Charles Arledge........................... Feb-95 1,159
Brew Arms................................. Feb-95 1,159
Andew Chitiea............................. Feb-95 1,160
Dan Derbes................................ Feb-95 2,319
Kenneth King.............................. Feb-95 580
Frederick I. Camerer...................... Apr-95 25,000
Kristen Peters............................ Apr-95 10,000
UPS....................................... Apr-95 1,084
Frank Peters.............................. Apr-95 2,000,000
Dale & Monica Sheets...................... May-95 3,070
Michelle Nisbet........................... May-95 4,280
Frank Dragun.............................. May-95 22,000
</TABLE>

II-3
<PAGE>

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

II-4
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.

The following exhibits are filed with this Registration Statement:

<TABLE>
<C> <S>
3.1 Articles of Incorporation of Franklin Telecommunications Corp.
3.2 Bylaws of Franklin Telecommunications Corp.
5.1 Opinion of Phillips & Haddan LLP (to be supplied by amendment)
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.
23.1 Consent of Corbin & Wertz, Certified Public Accountants
23.2 Consent of Phillips & Haddan LLP (to be included as part of Exhibit
5.1)
</TABLE>

II-5
<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 small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer 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 small business
issuer of expense incurred or paid by a director, officer or controlling
person of the small business issuer 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
small business issuer 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-6
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Westlake Village, State
of California, on March 11, 1997.

Franklin Telecommunications Corp.

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

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Frank W. Peters his attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments to
this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

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 March 11, 1997
____________________________________
Frank W. Peters

(2) Principal Financial and Accounting Officer

/s/ Thomas Russell Chief Financial Officer and March 11, 1997
____________________________________ a Director
Thomas Russell

(3) Directors

/s/ Peter S. Buswell Director March 11, 1997
____________________________________
Peter S. Buswell

/s/ Robert S. Harp Director March 11, 1997
____________________________________
Robert S. Harp
</TABLE>

II-7

<PAGE>

EXHIBIT 3.1

ENDORSED
FILED
In the office of the Secretary of
State of the State of California
NOV 18 1981
MARCH FONG EU, Secretary of State
Gloria J. Carroll
Deputy

ARTICLES OF INCORPORATION

FRANKLIN TELECOMMUNICATIONS CORP.

The name of the corporation is FRANKLIN TELECOMMUNICATIONS CORP.

II.

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 name and address in the State of California of this corporation's initial
agent for service of process is:

Frank W. Peters
413 Bethany St.
Thousand Oaks, CA. 91360

The corporation is authorized to issue only one class of stock; and the total
number of shares which this corporation is authorized to issue is 1,000,000

DATED NOV. 22, 1981 /s/ Frank W. Peters
------------------------------
Frank W. Peters

I hereby declare that I am the person who executed the foregoing Articles of
Incorporation, which execution is my act and deed.

/s/ Frank W. Peters
------------------------------
<PAGE>

ENDORSED
FILED
In the office of the Secretary of State
of the State of California
JAN 31 1994
MARCH FONG EU, Secretary of State

CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
FRANKLIN TELECOMMUNICATIONS CORP.

Frank W. Peters and Nicole Burbank certify that:

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

2. Article IV (a) of the Articles of Incorporation of this corporation is
hereby amended to read as follows:

"The number of shares of Preferred Stock authorized to be issued is Ten
Million (10,000,000) and the number of shares of Common Stock authorized to be
issued is Ninety Million (90,000,000). Upon the amendment of the Articles of
Incorporation of this corporation as hereinabove provided, each ten (10)
outstanding shares of Common Stock shall thereby be combined, reconstituted and
converted into one share of Common Stock. No fractional shares shall be issued
to shareholders in connection with such "reverse stock split", but in lieu
thereof a certificate or certificates evidencing the aggregate of all fractional
shares, rounded to the next higher whole share, if necessary, shall be issued to
each holder of Common Stock who otherwise would be entitled to have a fractional
share or fractional shares issued thereto.

3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors of this corporation in accordance with
Section 902 of the Corporations Code.

4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of the shareholders in accordance with Section 902
of the Corporations Code. The total number of outstanding shares of the
Corporation is 57,365,120. The number of shares voting in favor of the amendment
equaled or exceed the vote required. The percentage vote required was more than
50%.

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
or our own knowledge.

Dated: January 25, 1994

/s/ Frank W. Peters
------------------------------
Frank W. Peters, President

/s/ Nicole Burbank
------------------------------
Nicole Burbank, Secretary

<PAGE>

EXHIBIT 3.2

BY-LAWS OF

FRANKLIN TELECOMMUNICATIONS CORP.

(A California, Corporation)

ARTICLE I
SHAREHOLDERS' MEETINGS

Section 1. TIME. An annual meeting for the election of directors and for the
- ---------
transaction of any other proper business and any special meeting shall be held
on the date and at the time as the Board of Directors shall from time to time
fix.

Time of Meeting: 10:00 o'clock A.M.; 9O days after the corporation's fiscal
year end.

Section 2. PLACE. Annual meetings and special meetings shall be held at such
- ---------
place, within or without the State of California, as the Directors may, from
time to time, fix. Whenever the Directors shall fail to fix such place, the
meetings shall be held at the principal executive office of the corporation.

Section 3. CALL. Annual meetings may be called by the Directors, by the
- ---------
Chairman of the Board, if any, Vice Chairman of the Board, if any, the
President, if any, the Secretary, or by any officer instructed by the Directors
to call the meeting. Special meetings may be called in like manner and by the
holders of shares entitled to cast not less than ten percent of the votes at the
meeting being called.

Section 4. NOTICE. Written notice stating the place, day and hour of each
- ---------
meeting, and, in the case of a special meeting, the general nature of the
business to be transacted or, in the case of an Annual Meeting, those matters
which the Board of Directors, at the time of mailing of the notice, intends to
present for action by the shareholders, shall be given not less than ten days
(or not less than any such other minimum period of days as may be prescribed by
the General Corporation Law) or more than sixty days (or more than any such
maximum period of days as may be prescribed by the General Corporation Law)
before the date of the meeting, by mail, personally, or by other means of
written communication, charges prepaid by or at the direction of the Directors,
the President, if any, the Secretary or the officer or persons calling the
meeting, addressed to each shareholder at his address appearing on the books of
the corporation or given by him to the corporation for the purpose of notice,
or, if no such address appears or is given, at the place where the principal
executive office of the corporation is located or by publication at least once
in a newspaper of general

-1-
<PAGE>

circulation in the county in which the said principal executive office is
located. Such notice shall be deemed to be delivered when deposited in the
United States mail with first class postage therein prepaid, or sent by other
means of written communication addressed to the shareholder at his address as it
appears on the stock transfer books of the corporation. The notice of any
meeting at which directors are to be elected shall include the names of nominees
intended at the time of notice to be presented by management for election. At
an annual meeting of shareholders, any matter relating to the affairs of the
corporation, whether or not stated in the notice of the meeting, may be brought
up for action except matters which the General Corporation Law requires to be
stated in the notice of the meeting. The notice of any annual or special
meeting shall also include, or be accompanied by, any additional statements,
information, or documents prescribed by the General Corporation Law. When a
meeting is adjourned to another time or place, notice of the adjourned meeting
need not be given if the time and place thereof are announced at the meeting at
which the adjournment is taken; provided that, if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each shareholder. At the adjourned meeting, the
corporation may transact any business which might have been transacted at the
original meeting.

Section 5. CONSENT. The transaction of any meeting, however called and
- ---------
noticed, and wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum is present and if, either before
or after the meeting, each of the shareholders or his proxy signs a written
waiver of notice or a consent to the holding of the meeting or an approval of
the minutes thereof. All such waivers, consents and approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting constitutes a waiver of notice of such
meeting, except when the person objects, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened and except that attendance at a meeting shall not constitute a waiver
of any right to object to the consideration of matters required by the General
Corporation Law to be included in the notice if such objection is expressly made
at the meeting. Except as otherwise provided in subdivision (f) of Section 601
of the General Corporation Law, neither the business to be transacted at nor the
purpose of any regular or special meeting need be specified in any written
waiver of notice.

Section 6. CONDUCT OF MEETING. Meetings of the shareholders shall be presided
- ---------
over by one of the following officers in the order of seniority and if present
and acting -- the Chairman of the Board, if any, the Vice-Chairman of the Board,
if any, the President, if any, a Vice President, or, if none of the foregoing is
in office and present and acting, by a chairman to be chosen by the
shareholders. The Secretary of the corporation, or in his absence, an Assistant
Secretary, shall act as secretary of every meeting, but,

-2-
<PAGE>

if neither the Secretary nor an Assistant Secretary is present, the Chairman of
the meeting shall appoint a secretary of the meeting.

Section 7. PROXY REPRESENTATION. Every shareholder may authorize another
- ---------
person or persons to act as his proxy at a meeting or by written action. No
proxy shall be valid after the expiration of eleven months from the date of its
execution unless otherwise provided in the proxy. Every proxy shall be
revocable at the pleasure of the person executing it prior to the vote or
written action pursuant thereto, except as otherwise provided by the General
Corporation Law. As used herein, a "proxy" shall be deemed to mean a written
authorization signed by a shareholder or a shareholder's attorney in fact giving
another person or persons power to vote or consent in writing with respect to
the shares of such shareholder, and "Signed" as used herein shall be deemed to
mean the placing of such shareholder's name on the proxy, whether by manual
signature, typewriting, telegraphic transmission or otherwise by such
shareholder or such shareholder's attorney in fact. Where applicable, the form
of any proxy shall comply with the provisions of Section 604 of the General
Corporation Law.

Section 8. INSPECTORS - APPOINTMENT. In advance of any meeting, the Board of
- ---------
Directors may appoint inspectors of election to act at the meeting and any
adjournment thereof. If inspectors of election are not so appointed, or, if any
persons so appointed fail to appear or refuse to act, the Chairman of any
meeting of shareholders may, and on the request of any shareholder or a
shareholder's proxy shall, appoint inspectors of election, or persons to replace
any of those who so fail or refuse, at the meeting. The number of inspectors
shall be either one or three. If appointed at a meeting on the request of one or
more shareholders or proxies, the majority of shares represented shall determine
whether one or three inspectors are to be appointed.

The inspectors of election shall determine the number of shares outstanding
and the voting power of each, the shares represented at the meeting, the
existence of a quorum, the authenticity, validity, and effect of proxies,
receive votes, ballots, if any, or consents, hear and determine all challenges
and questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result, and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders. If there are three inspectors of election,
the decision, act, or certificate of a majority shall be effective in all
respects as the decision, act, or certificate of all.

Section 9. SUBSIDIARY CORPORATIONS. Shares of this corporation owned by a
- ---------
subsidiary shall not be entitled to vote on any matter. A subsidiary for these
purposes is defined as a corporation, the shares of which possessing more than
25% of the total combined voting power of all classes of shares entitled to
vote, are owned directly or indirectly through one or more subsidiaries.

-3-
<PAGE>

Section 10. QUORUM; VOTE; WRITTEN CONSENT. The holders of a majority of the
- ----------
voting shares shall constitute a quorum at a meeting of shareholders for the
transaction of any business. The shareholders present at a duly called or held
meeting at which a quorum is present may continue to do business until
adjournment notwithstanding the withdrawal of enough shareholders to leave less
than a quorum if any action taken, other than adjournment, is approved by at
least a majority of the shares required to constitute a quorum. In the absence
of a quorum, any meeting of shareholders may be adjourned from time to time by
the vote of a majority of the shares represented thereat, but no other business
may be transacted except as hereinbefore provided.

In the election of directors, a plurality of the votes cast shall elect.
No shareholder shall be entitled to exercise the right of cumulative voting at a
meeting for the election of directors unless the candidate's name or the
candidates' names have been placed in nomination prior to the voting and the
shareholder has given notice at the meeting prior to the voting of the
shareholder's intention to cumulate the shareholder's votes. If any one
shareholder has given such notice, all shareholders may cumulate their votes for
such candidates in nomination.

Except as otherwise provided by the General Corporation Law, the Articles
of Incorporation or these By-Laws, any action required or permitted to be taken
at a meeting at which a quorum is present shall be authorized by the affirmative
vote of a majority of the shares represented at the meeting.

Except in the election of directors by written consent in lieu of a
meeting, and except as may otherwise be provided by the General Corporation Law,
the Articles of Incorporation or these By-Laws, any action which may be taken at
any annual or special meeting may be taken without a meeting and without prior
notice, if a consent in writing, setting forth the action so taken, shall be
signed by holders of shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Directors may not
be elected by written consent except by unanimous written consent of all shares
entitled to vote for the election of directors. Notice of any shareholder
approval pursuant to Section 310, 317, 1201 or 2007 without a meeting by less
than unanimous written consent shall be given at least ten days before the
consummation of the action authorized by such approval, and prompt notice shall
be given of the taking of any other corporate action approved by shareholders
without a meeting by less than unanimous written consent to those shareholders
entitled to vote who have not consented in writing.

Section 11. BALLOT. Elections of directors at a meeting need not be by ballot
- ----------
unless a shareholder demands election by ballot at the election and before the
voting begins. In all other matters, voting need not be by ballot.

Section 12. SHAREHOLDERS' AGREEMENTS. Notwithstanding the above provisions in
- ----------
the event this corporation elects to become a close corporation, an agreement
between two or more shareholders thereof,

-4-
<PAGE>

if in writing and signed by the parties thereof, may provide that in exercising
any voting rights the shares held by them shall be voted as provided therein or
in Section 706, and may otherwise modify these provisions as to shareholders
meetings and actions.

ARTICLE II
BOARD OF DIRECTORS

Section 1. FUNCTIONS. The business and affairs of the corporation shall be
- ---------
managed and all corporate powers shall be exercised by or under the direction of
its Board of Directors. The Board of Directors may delegate the management of
the day-to-day operation of the business of the corporation to a management
company or other person, provided that the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised under
the ultimate direction of the Board of Directors. The Board of Directors shall
have authority to fix the compensation of directors for services in any lawful
capacity.

Each director shall exercise such powers and otherwise perform such duties
in good faith, in the manner such director believes to be in the best interests
of the corporation, and with care, including reasonable inquiry, using ordinary
prudence, as a person in a like position would use under similar circumstances.
(Section 309).

Section 2. EXCEPTION FOR CLOSE CORPORATION. Notwithstanding the provisions of
- ---------
Section 1, in the event that this corporation shall elect to become a close
corporation as defined in Section 158, its shareholders may enter into a
Shareholders' Agreement as provided in Section 300 (b). Said Agreement may
provide for the exercise of corporate powers and the management of the business
and affairs of this corporation by the shareholders, provided however such
agreement shall, to the extent and so long as the discretion or the powers of
the Board in its management of corporate affairs is controlled by such
agreement, impose upon each shareholder who is a party thereof, liability for
managerial acts performed or omitted by such person pursuant thereto otherwise
imposed upon Directors as provided in Section 300 (d).

Section 3. QUALIFICATIONS AND NUMBER. A director need not be a shareholder of
- ---------
the corporation, a citizen of the United States, or a resident of the State of
California. The authorized number of directors constituting the Board of
Directors until further changed shall be four. Thereafter, the authorized
number of directors constituting the Board shall be at least three provided
that, whenever the corporation shall have only two shareholders, the number of
directors may be at least two, and, whenever the corporation shall have only one
shareholder, the number of directors may be at least one. Subject to the
foregoing provisions, the number of directors may be changed from time to time
by an amendment of these By-Laws adopted by the shareholders. Any such
amendment reducing the number of directors to fewer than five cannot be adopted
if the votes cast against its adoption at a meeting or the shares not consenting
in writing in the case of action by written

-5-
<PAGE>

consent are equal to more than sixteen and two-thirds percent of the outstanding
shares. No decrease in the authorized number of directors shall have the effect
of shortening the term of any incumbent director.

Section 4. ELECTION AND TERM. The initial Board of Directors shall consist of
- ---------
the persons elected at the meeting of the incorporator, all of whom shall hold
office until the first annual meeting of shareholders and until their successors
have been elected and qualified, or until their earlier resignation or removal
from office. Thereafter, directors who are elected to replace any or all of the
members of the initial Board of Directors or who are elected at an annual
meeting of shareholders, and directors who are elected in the interim to fill
vacancies, shall hold office until the next annual meeting of shareholders and
until their successors have been elected and qualified, or until their earlier
resignation, removal from office, or death. In the interim between annual
meetings of shareholders or of special meetings of shareholders called for the
election of directors, any vacancies in the Board of Directors, including
vacancies resulting from an increase in the authorized number of directors which
have not been filled by the shareholders, including any other vacancies which
the General Corporation Law authorizes directors to fill, and including
vacancies resulting from the removal of directors which are not filled at the
meeting of shareholders at which any such removal has been effected, if the
Articles of Incorporation or a By-Law adopted by the shareholders so provides,
may be filled by the vote of a majority of the directors then in office or of
the sole remaining director, although less than a quorum exists. Any director
may resign effective upon giving written notice to the Chairman of the Board, if
any, the President, the Secretary or the Board of Directors, unless the notice
specifies a later time for the effectiveness of such resignation. If the
resignation is effective at a future time, a successor may be elected to the
office when the resignation becomes effective.

The shareholders may elect a director at any time to fill any vacancy
which the directors are entitled to fill, but which they have not filled. Any
such election by written consent shall require the consent of a majority of the
shares.

Section 5. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The
- ---------
corporation may indemnify any Director, Officer, agent or employee as to those
liabilities and on those terms and conditions as are specified in Section 317.
In any event, the corporation shall have the right to purchase and maintain
insurance on behalf of any such persons whether or not the corporation would
have the power to indemnify such person against the liability insured against.

Section 6. MEETINGS.
- ---------

TIME. Meetings shall be held at such time as the Board shall fix, except
that the first meeting of a newly elected Board shall be held as soon after its
election as the directors may conveniently assemble.

-6-
<PAGE>

PLACE. Meetings may be held at any place, within or without the State of
California, which has been designated in any notice of the meeting, or, if not
stated in said notice, or, if there is no notice given, at the place designated
by resolution of the Board of Directors.

CALL. Meetings may be called by the Chairman of the Board, if any and
acting, by the Vice Chairman of the Board, if any, by the President, if any,
by any Vice President or Secretary, or by any two directors.

NOTICE AND WAIVER THEREOF. No notice shall be required for regular
meetings for which the time and place have been fixed by the Board of Directors.
Special meetings shall be held upon at least four days' notice by mail or upon
at least forty-eight hours' notice delivered personally or by telephone or
telegraph. Notice of a meeting need not be given to any director who signs a
waiver of notice, whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such director. A notice or waiver of notice need not specify the
purpose of any regular or special meeting of the Board of Directors.

Section 7. SOLE DIRECTOR PROVIDED BY ARTICLES OF INCORPORATION. In the event
- ---------
only one director is required by the By-Laws or Articles of Incorporation, then
any reference herein to notices, waivers, consents, meetings or other actions by
a majority or quorum of the directors shall be deemed to refer to such notice,
waiver, etc., by such sole director, who shall have all the rights and duties
and shall be entitled to exercise all of the powers and shall assume all the
responsibilities otherwise herein described as given to a Board of Directors.

Section 8. QUORUM AND ACTION. A majority of the authorized number of directors
- ---------
shall constitute a quorum except when a vacancy or vacancies prevents such
majority, whereupon a majority of the directors in office shall constitute a
quorum, provided such majority shall constitute at least either one-third of the
authorized number of directors or at least two directors, whichever is larger,
or unless the authorized number of directors is only one. A majority of the
directors present, whether or not a quorum is present, may adjourn any meeting
to another time and place. If the meeting is adjourned for more than twenty-
four hours, notice of any adjournment to another time or place shall be given
prior to the time of the adjourned meeting to the directors, if any, who were
not present at the time of the adjournment. Except as the Articles of
Incorporation, these By-Laws and the General Corporation Law may otherwise
provide, the act or decision done or made by a majority of the directors present
at a meeting duly held at which a quorum is present shall be the act of the
Board of Directors. Members of the Board of Directors may participate in a
meeting through use of conference telephone or similar communications equipment,
so long as all members participating in such meeting can hear one another,

-7-
<PAGE>

and participation by such use shall be deemed to constitute presence in person
at any such meeting.

A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, provided that any action
which may be taken is approved by at least a majority of the required quorum for
such meeting.

Section 9. CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if
- ---------
present and acting, the Vice Chairman of the Board, if any and if present and
acting, shall preside at all meetings. Otherwise, the President, if any and
present and acting, or any director chosen by the Board, shall preside.

Section 10. REMOVAL OF DIRECTORS. The entire Board of Directors or any
- ----------
individual director may be removed from office without cause by approval of the
holders of at least a majority of the shares provided,that unless the entire
Board is removed, an individual director shall not be removed when the votes
cast against such removal, or not consenting in writing to such removal, would
be sufficient to elect such director if voted cumulatively at an election of
directors at which the same total number of votes were cast, or, if such action
is taken by written consent, in lieu of a meeting, all shares entitled to vote
were voted, and the entire number of directors authorized at the time of the
director's most recent election were then being elected. If any or all
directors are so removed, new directors may be elected at the same meeting or by
such written consent. The Board of Directors may declare vacant the office of
any director who has been declared of unsound mind by an order of court or
convicted of a felony.

Section 11. COMMITTEES. The Board of Directors, by resolution adopted by a
- ----------
majority of the authorized number of directors, may designate one or more
committees, each consisting of two or more directors to serve at the pleasure of
the Board of Directors. The Board of Directors may designate one or more
directors as alternate members of any such committee, who may replace any absent
member at any meeting of such committee. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have all the
authority of the Board of Directors except such authority as may not be
delegated by the provisions of the General Corporation Law.

Section 12. INFORMAL ACTION. The transactions of any meeting of the Board of
- ----------
Directors, however called and noticed or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice, if a quorum is
present and if, either before or after the meeting, each of the directors not
present signs a written waiver of notice, a consent to holding the meeting, or
an approval of the minutes thereof. All such waivers, consents, or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.

Section 13. WRITTEN ACTION. Any action required or permitted to be taken may
- ----------
be taken without a meeting if all of the members of

-8-
<PAGE>

the Board of Directors shall individually or collectively consent in writing to
such action. Any such written consent or consents shall be filed with the
minutes of the proceedings of the Board. Such action by written consent shall
have the same force and effect as a unanimous vote of such directors.

ARTICLE III
OFFICERS

Section 1. OFFICERS. The officers of the corporation shall be a Chairman of
- ---------
the Board or a President or both, a Secretary and a Chief Financial Officer.
The corporation may also have, at the discretion of the Board of Directors, one
or more Vice Presidents, one or more Assistant Secretaries and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article. One person may hold two or more offices.

Section 2. ELECTION. The officers of the corporation, except such officers as
- ---------
may be appointed in accordance with the provisions of Section 3 or Section 5 of
this Article shall be chosen annually by the Board of Directors, and each shall
hold his office until he shall resign or shall be removed or otherwise
disqualified to serve, or his successor shall be elected and qualified.

Section 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint such
- ---------
other officers as the business of the corporation may require, each of whom
shall hold office for such period, have such authority and perform such duties
as are provided in the By-Laws or as the Board of Directors may from time to
time determine.

Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with or
- ---------
without cause, by a majority of the directors at the time in office, at any
regular or special meeting of the Board, or, except in case of an officer chosen
by the Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.

Any officer may resign at any time by giving written notice to the Board
of Directors, or to the President, or to the Secretary of the corporation. Any
such resignation shall take effect at the date of the receipt of such notice or
at any later time specified therein; and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.

Section 5. VACANCIES. A vacancy in any office because of death, resignation,
- ---------
removal, disqualification or any other cause shall be filled in the manner
prescribed in the By-Laws for regular appointments to such office.

Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be
- ---------
such an officer, shall, if present, preside at all meetings of the Board of
Directors, and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by the By-
Laws.

-9-
<PAGE>

Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be
- ---------
given by the Board of Directors to the Chairman of the Board, if there be such
an officer, the President shall be the Chief Executive Officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. He shall preside at all meetings of the shareholders and in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall be ex officio a member of all the standing
committees, including the Executive Committee, if any, and shall have the
general powers and duties of management usually vested in the office of
President of a corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or the By-Laws.

Section 8. VICE PRESIDENT. In the absence or disability of the President, the
- ---------
Vice Presidents, in order of their rank as fixed by the Board of Directors, or
if not ranked, the Vice President designated by the Board of Directors, shall
perform all the duties of the President, and when so acting shall have all the
powers of, and be subject to, all the restrictions upon, the President. The
Vice Presidents shall have such other powers and perform such other duties as
from time to time may be prescribed for them respectively by the Board of
Directors or the By-Laws.

Section 9. SECRETARY. The Secretary shall keep, or cause to be kept, a book
- ---------
of minutes at the principal office or such other place as the Board of Directors
may order, of all meetings of Directors and Shareholders, with the time and
place of holding, whether regular or special, and if special, how authorized,
the notice thereof given, the names of those present at Directors' meetings, the
number of shares present or represented at Shareholders' meetings and the
proceedings thereof.

The Secretary shall keep, or cause to be kept, at the principal office or
at the office of the corporation's transfer agent, a share register, or
duplicate share register, showing the names of the shareholders and their
addresses; the number and classes of shares held by each; the number and date of
certificates issued for the same; and the number and date of cancellation of
every certificate surrendered for cancellation.

The Secretary shall give, or cause to be given, notice of all the meetings
of the shareholders and of the Board of Directors required by the By-Laws or by
law to be given, and he shall keep the seal of the corporation in safe custody,
and shall have such other powers and perform such other duties as may be
prescribed by the Board of Directors or by the By-Laws.

Section 10. CHIEF FINANCIAL OFFICER. This officer shall keep and maintain, or
- ----------
cause to be kept and maintained in accordance with generally accepted accounting
principles, adequate and correct accounts of the properties and business
transactions of the corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, earnings (or surplus) and
shares. The books of account shall at all reasonable times be

-10-
<PAGE>

open to inspection by any director.

This officer shall deposit all monies and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the Board of Directors. He shall disburse the funds of the corporation as may
be ordered by the Board of Directors, shall render to the President and
directors, whenever they request it, an account of all his transactions and of
the financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors or the
By-Laws.

ARTICLE IV
CERTIFICATES AND TRANSFERS OF SHARES

Section 1. CERTIFICATES FOR SHARES. Each certificate for shares of the
- ---------
corporation shall set forth therein the name of the record holder of the shares
represented thereby, the number of shares and the class or series of shares
owned by said holder, the par value, if any, of the shares represented thereby,
and such other statements, as applicable, prescribed by Sections 416 - 419,
inclusive, and other relevant Sections of the General Corporation Law of the
State of California (the "General Corporation Law") and such other statements,
as applicable, which may be prescribed by the Corporate Securities Law of the
State of California and any other applicable provision of the law. Each such
certificate issued shall be signed in the name of the corporation by the
Chairman of the Board of Directors, if any, or the Vice Chairman of the Board of
Directors, if any, the President, if any, or a Vice President, if any, and by
the Chief Financial Officer or an Assistant Treasurer or the Secretary or an
Assistant Secretary. Any or all of the signatures on a certificate for shares
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate for
shares shall have ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if such person were an officer, transfer agent or registrar at the
date of issue.

In the event that the corporation shall issue the whole or any part of its
shares as partly paid and subject to call for the remainder of the consideration
to be paid therefor, any such certificate for shares shall set forth thereon
the statements prescribed by Section 409 of the General Corporation Law.

Section 2. LOST OR DESTROYED CERTIFICATES FOR SHARES. The corporation may
- ---------
issue a new certificate for shares or for any other security in the place of any
other certificate theretofore issued by it, which is alleged to have been lost,
stolen or destroyed. As a condition to such issuance, the corporation may
require any such owner of the allegedly lost, stolen or destroyed certificate
or any such owner's legal representative to give the corporation a bond, or
other adequate security, sufficient to indemnify it against any claim that may
be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.

-11-
<PAGE>

Section 3. SHARE TRANSFERS. Upon compliance with any provisions of the General
- ---------
Corporation Law and/or the Corporate Securities Law of 1968 which may restrict
the transferability of shares, transfers of shares of the corporation shall be
made only on the record of shareholders of the corporation by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary of the corporation or with a transfer
agent or a registrar, if any, and on surrender of the certificate or
certificates for such shares properly endorsed and the payment of all taxes, if
any, due thereon.

Section 4. RECORD DATE FOR SHAREHOLDERS. In order that the corporation may
- ---------
determine the shareholders entitled to notice of any meeting or to vote or be
entitled to receive payment of any dividend or other distribution or allotment
of any rights or entitled to exercise any rights in respect of any other lawful
action, the Board of Directors may fix, in advance a record date, which shall
not be more than sixty days or fewer than ten days prior to the date of such
meeting or more than sixty days prior to any other action.

If the Board of Directors shall not have fixed a record date as aforesaid,
the record date for determining shareholders entitled to notice of or to vote at
a meeting of shareholders shall be at the close of business on the business day
next preceding the day on which notice is given or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held; the record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors has been taken, shall be the day on which the first
written consent is given; and the record date for determining shareholders for
any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto, or the sixtieth day
prior to the day of such other action, whichever is later.

A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than forty-five days from the date set for the original
meeting.

Except as may be otherwise provided by the General Corporation Law,
shareholders on the record date shall be entitled to notice and to vote or to
receive any dividend, distribution or allotment of rights or to exercise the
rights, as the case may be, notwithstanding any transfer of any shares on the
books of the corporation after the record date.

Section 5. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of other
- ---------
corporations standing in the name of this corporation may be voted or
represented and all incidents thereto may be exercised on behalf of the
corporation by the Chairman of the Board, the President or any Vice President or
any other person authorized by

-12-
<PAGE>

Section 6. MEANING OF CERTAIN TERMS. As used in these By-Laws in respect of
- ---------
the right to notice of a meeting of shareholders or a waiver thereof or to
participate or vote thereat or to assent or consent or dissent in writing in
lieu of a meeting, as the case may be, the term "share" or "shares" or
"shareholder" or "shareholders" refers to an outstanding share or shares and to
a holder or holders of record or outstanding shares when the corporation is
authorized to issue only one class of shares, and said reference is also
intended to include any outstanding share or shares and any holder or holders of
record of outstanding shares of any class upon which or upon whom the Articles
of Incorporation confer such rights where there are two or more classes or
series of shares or upon which or upon whom the General Corporation Law confers
such rights notwithstanding that the Articles of Incorporation may provide for
more than one class or series of shares, one or more of which are limited or
denied such rights thereunder.

Section 7. CLOSE CORPORATION CERTIFICATES. All certificates representing
- ---------
shares of this corporation, in the event it shall elect to become a close
corporation, shall contain the legend required by Section 418 (c).

ARTICLE V
EFFECT OF SHAREHOLDERS' AGREEMENT-CLOSE CORPORATION

Any Shareholders' Agreement authorized by Section 300 (b) shall only be
effective to modify the terms of these By-Laws if this corporation elects to
become a close corporation with appropriate filing of or amendment to its
Articles as required by Section 202 and shall terminate when this corporation
ceases to be a close corporation. Such an agreement cannot waive or alter
Sections 158 (defining close corporations), 202 (requirements of Articles of
- ------------
Incorporation), 500 and 501 relative to distributions, 111 (merger), 1201(e)
(reorganization) or Chapters 15 (Records and Reports),16 (Rights of Inspection),
18 (Involuntary Dissolution) or 22 (Crimes and Penalties). Any other
provisions of the Code or these By-Laws may be altered or waived thereby, but to
the extent they are not so altered or waived, these By-Laws shall be applicable.

ARTICLE VI
CORPORATE CONTRACTS AND INSTRUMENTS-HOW EXECUTED

The Board of Directors, except as in the By-Laws otherwise provided, may
authorize any officer or officers, agent or agents, to enter into any contract
or execute any instrument in the name of and on behalf of the corporation. Such
authority may be general or confined to specific instances. Unless so
authorized by the Board of Directors, no officer, agent or employee shall have
any power or authority to bind the corporation by any contract or agreement, or
to pledge its credit, or to render it liable for any purposes or any amount,
except as provided in Section 313 of the Corporations Code.

-13-
<PAGE>

ARTICLE VII
CONTROL OVER BY-LAWS

After the initial By-Laws of the corporation shall have been adopted by the
incorporator or incorporators of the corporation, the By-Laws may be amended or
repealed or new By-Laws may be adopted by the shareholders entitled to exercise
a majority of the voting power or by the Board of Directors; provided, however,
that the Board of Directors shall have no control over any By-Law which fixes or
changes the authorized number of directors of the corporation; provided,
further, than any control over the By-Laws herein vested in the Board of
Directors shall be subject to the authority of the aforesaid shareholders to
amend or repeal the By-Laws or to adopt new By-Laws; and provided further that
any By-Law amendment or new By-Law which changes the minimum number of directors
to fewer than five shall require authorization by the greater proportion of
voting power of the shareholders as hereinbefore set forth.

ARTICLE VIII
BOOKS AND RECORDS - STATUTORY AGENT

Section 1. RECORDS: STORAGE AND INSPECTION. The corporation shall keep at its
- ---------
principal executive office in the State of California, or, if its principal
executive office is not in the State of California, the original or a copy of
the By-Laws as amended to date, which shall be open to inspection by the
shareholders at all reasonable times during office hours. If the principal
executive office of the corporation is outside the State of California, and, if
the corporation has no principal business office in the State of California, it
shall upon request of any shareholder furnish a copy of the By-Laws as amended
to date.

The corporation shall keep adequate and correct books and records of
account and shall keep minutes of the proceedings of its shareholders, Board of
Directors and committees, if any, of the Board of Directors. The corporation
shall keep at its principal executive office, or at the office of its transfer
agent or registrar, a record of its shareholders, giving the names and addresses
of all shareholders and the number and class of shares held by each. Such
minutes shall be in written form. Such other books and records shall be kept
either in written form or in any other form capable of being converted into
written form.

Section 2. RECORD OF PAYMENTS. All checks, drafts or other orders for payment
- ---------
of money, notes or other evidences of indebtedness, issued in the name of or
payable to the corporation, shall be signed or endorsed by such person or
persons and in such manner as shall be determined from time to time by
resolution of the Board of Directors.

Section 3. ANNUAL REPORT. Whenever the corporation shall have fewer than one
- ---------
hundred shareholders, the Board of Directors shall not be required to cause to
be sent to the shareholders of the corporation the annual report prescribed by
Section 1501 of the General Corporation Law unless it shall determine that a
useful purpose would be served by causing the same to be sent or unless the
Department of Corporations, pursuant to the provisions of the Corporate
Securities Law of 1968, shall direct the sending of the same.

Section 4. AGENT FOR SERVICE. The name of the agent for service of process
- ---------
within the State of California is Frank W. Peters.

-14-
<PAGE>

CERTIFICATE OF ADOPTION OF BY-LAWS

ADOPTION BY INCORPORATOR(S) OR FIRST DIRECTOR(S).

The undersigned person(s) appointed in the Articles of Incorporation to act
as the Incorporator(s) or First Director(s) of the above-named corporation
hereby adopt the same as the By-Laws of said corporation.

Executed this 1st day of December , 1981.
--- ---------- ----

/s/ Frank W. Peters
------------------------------
Name FRANK W. PETERS

THIS IS TO CERTIFY:

That I am the duly-elected, qualified and acting Secretary of the above-
named corporation; that the foregoing By-Laws were adopted as the By-Laws of
said corporation on the date set forth above by the person(s) appointed in the
Articles of Incorporation to act as the Incorporator(s) or First Director(s) of
said corporation.

IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate
seal this 1st day of December , 1981.
--- ----------- ----

------------------------------
Secretary KAREN PETERS

(SEAL)

<PAGE>

ACTION TAKEN BY INCORPORATOR

FRANKLIN TELECOMMUNICATIONS CORP.

The undersigned, the Incorporator of FRANKLIN TELECOMMUNICATIONS
CORP., a California corporation, hereby takes the following actions:

RESOLVED, that the form of the Bylaws for the regulation of the
affairs of this corporation, attached hereto as Exhibit "A", is hereby
approved and the Bylaws are hereby adopted; and

FURTHER RESOLVED, that the following individuals are hereby elected to
be the first directors of the corporation, to hold office until the
next annual meeting of the stockholders and until their successors
shall be elected and shall qualify:

FRANK W. PETERS
KAREN PETERS

This action by Incorporator is taken pursuant to and in accordance
with Section 210 of the California Corporations Code.

The undersigned directs that this Action Taken By Incorporator be
filed with the proceedings of the Board of Directors of the corporation.

Executed this 1st day of December, 1981, at Thousand Oaks, California.

/s/ Frank W. Peters
------------------------------
FRANK W. PETERS
Incorporator

<PAGE>

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

March 1, 1993

THIS EMPLOYMENT AGREEMENT is made and entered into on this First day of MARCH,
1993 by and between FRANKLIN TELECOMMUNICATIONS CORP., Franklin Datacom
Inc. (FTC/FDI), California Corporations and Frank W. Peters of 864 Calle Compo
Thousand Oaks, CA 91360, who is an employee of FTC/FDI (Employee).

Recital
- -------

FTC/FDI desires to engage Employee, based on his particular qualifications, in a
capacity in which Employee may receive, initiate, contribute to or come in
contact with Confidential Information (as defined herein), and Employee desires
to be engaged in such a capacity. Employee specifically acknowledges that this
employment may include inventing, discovering, initiating or contributing to
Confidential Information as an integral part thereof.

Agreement
- ---------

1. In consideration of the foregoing and of mutual covenants contained herein,
FTC/FDI and Employee agree as follows:

(a) Employee shall be engaged as the President and CEO of FTC/FDI and
FTC/FDI under this Agreement for an initial term of five (5) years. During the
term of this Agreement, Employee shall retain his title as President, Chief
Executive Officer, Director and Treasurer of FTC/FDI. The normal duties and
responsibilities which he has been performing for the past ten years. Employee
shall devote such of his working time and effort to the business and affairs of
the Company as may reasonably be required of him in the discharge of such duties
and responsibilities, but no less than 40 hours per week. The duties shall be
performed within ten miles from Employees residence.

(b) FTC/FDI shall pay to Employee as compensation for the services
rendered under this Agreement an annual fee of $240,000, starting upon the
signing of this agreement payable in equal bi-weekly installments. In addition
to the fee, FTC/FDI shall reimburse Employee for all costs and expenses incurred
by Employee in connection with such services. Such reimbursements shall be due
and payable within ten (10) days following the end of each month during the term
of the Agreement.

(c) Employee shall be entitled to participate in or receive benefits
under FTC/FDI's life, health and disability insurance plans or arrangements as
in effect on the date of the Agreement for such period of time as such plans and
arrangements shall remain in effect. Nothing paid to Employee under any such
plan or arrangement shall be deemed to be in lieu of any compensation payable to
Employee under paragraph 1(b) hereof. For a period of at least three (3) years
from the date on which the Agreement is terminated by either party, FTC/FDI
shall at its sole cost and expense, maintain in full force and effect a health
insurance policy for Employee having substantially the same coverage and terms
as the policy currently maintained by FTC/FDI for Employee; provided, however,
--------- -------
Employee shall be obligated to pay policy
<PAGE>

premiums in the same amount currently paid by Employee on the existing policy.

(d) This Agreement shall not be terminated by FTC/FDI during the
initial term for any reason except (i) for "Cause" or (ii) upon the death or
"permanent disability" of Employee. For purposes of the Employee to
substantially perform the services listed on Exhibit A, other than any such
failure resulting from Employee's temporary disability, or (ii) the willful
engaging by Employee in gross misconduct materially injurious to FTC/FDI. For
purposes of this subparagraph, no act, or failure to act, on Employee's part
shall be considered "willful" unless done by Employee or omitted to be done,
other than in good faith and with a reasonable belief that Employee's action or
omission was in the best interests of FTC/FDI. In the event that the Agreement
is terminated for Cause, FTC/FDI shall pay Employee's fee through the date of
termination. "Permanent disability" shall mean any physical or mental condition
which, in the opinion of any qualified physician reasonably acceptable to
Employee, renders Employee unable to substantial perform the duties and
responsibilities set forth on Exhibit A for a period in excess of six (6)
months.

2. When countersigned below by Employee, it is intended that this letter
shall constitute an agreement in principle which shall be binding upon the
parties hereto, subject to satisfaction of the conditions specified above, and
which shall be governed by the laws of the State of California. In the event of
a breach of any of the agreements contained herein, the prevailing party in any
action brought on account thereof shall be entitled to recover the costs and
expenses of such action, including without limitation reasonable attorneys'
fees.

3. No announcement shall be made by either party with respect to the
receipt or acceptance of this agreement.

If the foregoing offer is acceptable to you, please so indicate by signing
below.

Very truly yours,
Franklin Telecommunications Corp. & Franklin Datacom Inc.

By: /s/ Peter S. Buswell
--------------------------------------------
Peter S. Buswell, Executive Vice President

Attested: /s/ Nicole DeNoyers
______________________________________
Nicole DeNoyers, Secretary

Corporate Seal

Agreed to and accepted this first day of March, 1993.

By: /s/ Frank W. Peters
--------------------------------------------
Frank W. Peters

<PAGE>

EXHIBIT 10.2
[LOGO OF FRANKLIN TELECOM]

733 LAKEFIELD ROAD. - WESTLAKE VILLAGE, CA 91361 Voice 805/373-8688;
Voice 800/372-6556 FAX 805/373-7373
Internet [email protected]
BBS 805/495-5517

CONFIDENTIAL AGREEMENT
----------------------

June 3, 1996

Mr. Paul Sper
Malibu Internet Services
575 South Dawson Dr.
Camarillo, CA 93012
(805) 383-1880

Dear Paul:

I am extremely pleased with the idea of combining our businesses.

ACQUISITION OF MALIBU INTERNET SERVICES (MIS) (FOR STOCK)
- --------------------------------------------------------

This letter is an offer to trade 60,000 shares of Franklin common stock for all
MIS stock, or ownership documents in an IRS Reg. D. "Tax Free Exchange" and
reorganization.

Pursuant to this Agreement MIS will operate as a wholly-owned subsidiary of
Franklin Telecom with such powers vested in the President & CEO of MIS that will
substantially allow him to operate MIS with full regard to the independent
financial stability of MIS. MIS will continue to maintain a separate financial
statement whereby the staff of MIS will be compensated. All revenues of MIS will
be under the sole discretion of the President & CEO of MIS.

This agreement will serve as a final firm commitment to enter into a business
combination of the two companies with FTC becoming the surviving member. All
parties understand that this transaction is very confidential and there can be
no publication, purchasing or selling of FTC stock by "Insiders" until a press
release is issued. Insiders are all potential signatories to this agreement and
their families & officers of both companies.

To begin this transaction the parties hereby agree to the following;

FTC acquires all of the stock and marketing rights of MIS, (no liabilities), via
a tax free reorganization for:

1. Sixty thousand (60,000) shares total of FTC common stock and Fifty thousand
(50,000) shares total of FNet stock for 100% ownership of MIS.

2. This is binding, final, definitive agreement.
<PAGE>

3. This offer is contingent upon the following:
a) An audit of MIS books to verify sales, profits, ongoing sales
probability, assets, liabilities, debt, AP, AR & GL. (See Attachment
A.)
b) A short form "Representations & Warranties" to cover all the above
points plus those items which may come to light during the time period
before the closing. (See Attachment B.)
c) No capital modifications or restructuring, non standard or unusual
payments to insiders in the form of cash or other property should take
place from this date.
d) Franklin will assume no debt. We understand there is no debt.

PERFORMANCE
- -----------

1. MIS agrees to manage, redesign and edit the following and future related
FNet WEB-SITES:
a. the existing FNet web-site
b. the future FTEL web-site
c. the existing FNet PPM/IPO web-site
d. the web pages for associated companies at a rate to be determined by
MIS at the date of creation of web pages

2. MIS will manage internet technical support operations for business
opportunity partnerships to be formed by FTEL and or FNet. FTEL and or FNet will
compensate additional support personnel as determined by MIS.

3. MIS will design, manage and support the creation of web-sites for existing
and future FTEL and FNet customers. MIS agrees to participate in and manage the
graphic design, HTML programming and web-site storage for FTEL and FNet
customers.

COMPENSATION
- ------------
Title: President & CEO of MIS
Effective Date: June 1, 1996.
Base Salary: Determined by President & CEO (MIS only)
Recoverable Draw: None.
Non-recoverable Draw: None.
Sales Quota: None.
Performance Bonus: None.
Stock Bonus: None.
Medical Plan: None.
Office: FTC HQ. Rent free
Network: FTC internal & Internet
Computer Equipment: None.
Stock: 60,000 new issue shares of FTEL Common.
Stock Options (FTC): 10,000 shares each @ $.70. which was the price
of the stock on April 26, 1996.
Stock (FNet): 50,000 shares-
Business Exp.: N/A.
Executive Bonus Plan: N/A
Commission: 80% paid to MIS for all web-site design &
development
15% commission on MIS sales of business
opportunity partnerships
<PAGE>

Notes:

(1) Commissions and bonuses will be paid within 30 days from the date payment
is received from the customer, less returns.
(2) Licensing, Software & Engineering Contracts: Licensing, software and
engineering consulting contracts by Franklin will not be considered as part
of this commission plan. There will be no commissions on licensing
agreements, corporate sales of assets, bulk transfers, corporate buy outs.
Evaluation units are not commissionable until a sale has occurred and an
invoice has been printed. Any disputes will be held in California and
interpreted by the laws of California.
(3) All products considered for commission must be sold from the published
Price List in the assigned territory. Sales Mfg. Rep/OEM/Dist sales
commission will be treated as "Discounted" for FTC manufactured products.
(4) Upon termination only shipments made up to and including the termination
date will be eligible for commissions/bonuses and or royalty (Herein after
Commissions). Commissions will be paid within 30 days from the date the
customer has paid provided the customer has paid within sixty days from the
employee's termination date. Franklin reserves the right to withhold
commissions if there are customer returns, Franklin equipment or any assets
including but not limited to marketing lists, software or hardware in your
possession until they are returned.
(5) I HAVE READ THE FOREGOING AND DO HEREBY AGREE TO FOLLOW THIS AGREEMENT.
(6) This offer is valid for 10 days from the date of this letter.
(7) The terms and conditions set forth in this Agreement constitute the entire
agreement between MIS and FTEL. No other representations shall be binding.

If you have any questions please call me. I look forward to having you on board
as a member of the FranklinNet team.

FRANKLIN TELECOMMUNICATIONS CORP.
Agreed to for the Board of Director

/s/ Frank W. Peters 6/3/96
- ------------------------------------- -----------------------------------
Frank W. Peters, President & CEO Date
FRANKLIN TELECOM

Agreed to for MIS

/s/ Paul Sper 6/3/96
- --------------------------------------- ------------------------------------
Paul Sper, President Date
Malibu Internet
<PAGE>

ATTACHMENT A
FINANCIALS:
MALIBU INTERNET SERVICES (MIS)
INCOME VS. SPENDING
1/11/96 THROUGH 5/28/96

CATEGORY TOTAL
- -------- -----

RECEIVABLES $9,665.95
TOTAL INCOME 9,665.95
ADVERTISING 53.45
BANK CHARGES 31.81
BILLS 3,044.30
CASH WITHDRAWALS 540.00
COMPUTER EXPENSE 3,851.11
CREDIT CARD 123.00
MISCELLANEOUS 108.25
PAYROLL 465.85
POSTAL 13.00
TOTAL EXPENSES 8,230.77
---------
NET INCOME 1,435.18

================================================================================

ATTACHMENT B
REPRESENTATIONS & WARRANTIES:

1. Debt. You verify that there is no debt.
2. There are no outside contractors involved in this agreement.
3. There are no contracts, written or oral not disclosed here.
4. The attached financial condition has had no material changes.
5. There are no pending or threatened legal actions.
6. There are no contracts which conflict or bind you from entering into this
agreement.

This Agreement is made between Franklin Internet (FNet) and Malibu Internet
Services (MIS) whereas FNet desires to contract with MIS to have MIS provide
internet related services in exchange for remuneration by FNet as detailed
above.

<PAGE>

EXHIBIT 10.3

[LOGO OF FRANKLIN TELECOM]

733 LAKEFIELD ROAD. - WESTLAKE VILLAGE, CA 91361
805/373-8688; FAX 805/373-7373 Internet; [email protected]
BBS 805/495-5517
WEB Site: www.ftel.com

CONFIDENTIAL

Mr. Phil Sutter May 23, 1996
President, StarComm Products Inc.
7413 Slater Ave
Huntington Beach, CA 92647
714/375-1241 Fax 375-1244 e-mail
[email protected]

Dear Phil:

This letter, when signed, will form a Joint Venture called Franklin Modem Corp.
which will have the following structure and charter:

1. Ownership - 70% Franklin Telecom; 30% StarComm
2. Structure - An FTC division or CA Corp. Auditing ex to be paid by FTC for
set up.
3. Charter - To design, build and manufacture a 4, 8, 16 port 28.8 - V.34
modem on an ISA card (perhaps with daughter cards) to function with the
FTC D-Mark Channel Bank. This would require the following capabilities (the
importance is rated 1 to 10; 10 being absolutely required.

. Auto bauding from 2.4 to 28.8 k bps 8
. V.34 compatibility with V.34 bis 9
. Operation at 28.8 10
. Minimum of 4 modems per ISA card 10
. Eight 4 modems per ISA card 9
. Design for 4 port to be finished by June 30, 1996 7
. Design for 8 port to be finished by July 31, 1996 8
Above board buss FABB & MVIP 10
. Auto answer 10
. Synchronous and Asynchronous operation 7

4. Terms & Conditions: Mr. Sutter will not compete for the same thing without
permission.
5. Rights to StarComm intellectual property used in the development and
manufacture of joint venture projects are not transferable and remain with
StarComm. (see paragraph 7).
6. StarComm may purchase all resulting products from the Joint Venture
(Franklin Modem Corp.) and remarket these products through StarComm's
distribution channels under the StarComm logo. The first product envisioned
is a bundled channel bank/modem product yet to be named.
7. For a period of 24 months, StarComm will be appointed as exclusive
manufacturer of the modem card for the joint venture. StarComm will make
all materials, including intellectual property, micro code and the like
available to Franklin if StarComm is unable, for any reason, to perform.
StarComm will be allowed to standard OEM supplier margins for these
services. These margins should take into account the 30% ownership of the
JV.
8. Royalties to StarComm: None but the 30% ownership will produce 30%
of the net profits.
9. Commissions: On new designs for the ISA application - TBD
10. Stock Options: In FTC TBD; In FNet TBD but a min of 10,000.

Yours Truly Agreed to

______________________________ ____ _______________________________ ____
Frank W. Peters, President FTC Date Phil Sutter, President Star Com Date

<PAGE>

EXHIBIT 10.4

[LOGO OF FRANKLIN TELECOM]

733 LAKEFIELD ROAD. - WESTLAKE VILLAGE, CA 91361
805/373-8688, 800/372-6556 FAX 805/373-7373
Internet [email protected]
WEB Site: www.ftel.com

February 28, 1997
Board of Directors
Internet Passport LLC
6059 Boylston Road, Suite 200
Atlanta GA 30328
404/257-0604

Ladies & Gentlemen:

In connection with our recent discussions, this is to confirm our mutual
agreements as to the terms and conditions upon which Franklin Telecommunications
Corp., a California corporation ("Franklin"), will acquire all of the issued and
outstanding capital stock of Internet Passport Inc., a Georga LLC ("IP") in
exchange for a maximum of 600,000 newly issued shares of the Common Stock of
Franklin ("Franklin Common Stock").

1. As of the date hereof, ALL of the shares of Internet Passport
(together with all additional shares of the Common Stock of Internet Passport
issuable as provided herein below, the "Shares"), issued and outstanding, which
constitute all of the issued and outstanding shares of capital stock of Internet
Passport. All of the Shares are owned, beneficially and of record, by the
Sparrow Marcioni ("Shareholder"), free of any liens, encumbrances or claims of
any third party. As of the date hereof, there are no outstanding warrants,
options and other rights to purchase from Internet Passport, nor any securities
convertible into or exchangeable for, shares of capital stock of Internet
Passport. The Shareholder warrants, and as a condition thereto, each warrant,
option, right, convertible security and exchangeable security currently
outstanding has been exercised, converted or exchanged, as the case may be, for
shares of Common Stock of Internet Passport, such that these additional shares
of Common Stock of Internet Passport are included among the Shares to be
purchased by Franklin at the Closing for the aggregate consideration specified
in paragraph 2 below.

2. As the full purchase price for the Shares (the "Purchase Price"),
Franklin shall pay the Shareholder the following aggregate amounts, at the times
and in the manner below:

(a) At the Closing, Franklin shall issue and deliver to the
Shareholder, an aggregate of 600,000 shares of Franklin Common
Stock, which represents 100% of the maximum number of Franklin
Common Stock issuable to the Shareholder as hereunder;
(b) Franklin will retain the right to reduce the original 600,000
shares issued to IP, by way of shares returned to Franlin by the
Shareholder, on the next business day immediately following the
180th day of the Closing, or before, at the rate of one share for
every $1.00, or at the option of the Shareholder, $2.00 in cash
for every $1.00, if any, (i) which Internet Passport may be
required to pay for debts following the Closing with respect to
any and all obligations, liabilities and indebtedness of Internet
Passport existing as of the Closing which is not discharged as
provided in paragraph 4 below, and (ii) for costs, expenses or
liabilities incurred by Internet Passport or Franklin as a
consequence of one

-1-
<PAGE>

or more breaches of the representations, warranties and covenants
of Internet Passport and the Shareholder.
(c) It is the intent of the parties that the shares of Franklin
Common Stock will be issued to the Shareholder in connection with
a triangular merger between a newly to-be-formed subsidiary of
Franklin and Internet Passport that will be treated as a "tax
free reorganization" under Section 368(a)(l)(A) of the Internal
Revenue Code, and it is understood and agreed that the shares of
Franklin Common Stock will be issued to the Shareholder and
creditors of Internet Passport without registration under the
Securities Act of 1933, as amended, and thus will be "restricted
securities" as that term is defined in Rule 144 under the
Securities Act of 1933, as amended.
(d) At the Closing, Franklin will use its best efforts to gain
registration rights by including 300,000 of the Franklin Common
Shares in a planned S-1 Registration filing with the Securities
and Exchange Commission, and to file a related Application for
Qualification under the California Corporate Securities Law of
1968, allowing the IP Shareholder to offer their Franklin Common
Shares to the public through registered broker-dealers or through
privately negotiated transactions. Franklin will also undertake
to keep the Registration Statement current for a period of at
least 45 days from its effective date, and to pay all costs
(other than brokerage discounts and commissions) associated with
the Registration Statement. LOCKUP: Shareholder agrees not to
sell shares at a rate greater than five (5) percent of the
average daily volume. The remaining 300,000 shares will remain
without registration under the Securities Act of 1933, as
amended, and thus will be "restricted securities" as that term is
defined in Rule 144 under the Securities Act of 1933, as amended,
until final disposition of the shares is determined. Once final
disposition of the shares is determined, the shares will be
included in future registration procedures, at the discretion of
Franklin.

3. The Shareholder warrants that IP has disclosed to Franklin all assets
and liabilities, revenues, expenses, customer base, backlog, cash flow,
contracts, contingent liabilities, prospects and condition, financial and
otherwise, of Internet Passport, and that there has been no material adverse
change in Internet Passport's business, operations, prospects or financial
condition.

4. Consummation of this agreement will be subject to the following
conditions hereof and such representations and warranties concerning each of the
parties hereto as are customary for similar transactions:

(a) Internet Passport shall reach voluntary compromises with its
unsecured & secured creditors pursuant to which the unsecured
creditors shall agree to accept, up to, an aggregate of 100,000
shares with approval from Franklin, unregistered Franklin Common
Stock for full satisfaction and complete discharge of all of IP's
debts, aggregating approximately $360,000; which includes, but is
not limited to 5 equipment leases held in the name of Omni Group
and the Pulsar Group lease, held in the name of IP for leased
equipment. The Shareholder agrees to mitigate all debt between IP
and the Omni Group, a Georgia Corporation wholly owned by the
Shareholder, so that IP will not liable for any debt to Omni
Group. The Shareholder further agrees to transfer all ownership
of assets held in the name of Omni Group to IP, subject to the
above aforementioned leases. In addition, in the event that there
are any of the 100,000 shares remaining, after satisfaction of
the aforementioned lease obligations, shares will be used to
reduce the amounts loaned to IP by Franklin,

-2-
<PAGE>

totaling $38,000 as of February 28, 1997 for use to pay critical
vendors, and an anticipated additional amount of $35,000 to be
loaned to IP over the next 30 days. Amounts remaining from these
notes will continue to be a debt between IP and Franklin.

5. Sparrow Marcioni will be the CEO of IP and VP of marketing for
Franklin, as defined by the attached employment agreements. This agreement is
conditioned on the continued employment by Sparrow Marcioni.

6. Except as otherwise provided in paragraph 7 below, each party shall
bear all of its own expenses incurred in connection with the transactions
contemplated hereby.

7. The parties agree that this agreement shall be governed by the laws of
the State of California. In the event of a breach of any of the agreements
contained herein, the prevailing party in any action brought on account thereof
shall be entitled to recover the costs and expenses of such action, including
without limitation reasonable attorney's fees.

8. No announcement shall be made by any party hereto without the prior
written consent of the other party.

9. The parties acknowledge and agree that each provision herein shall be
treated as a separate and independent clause, and the unenforceability of any of
the other clauses herein. Moreover, if one or more of the provisions contained
in this Agreement shall for any reason be held to be excessively broad as to
scope, activity or subject so as to be unenforceable at law, such provision or
provisions shall be construed by the appropriate judicial body by limiting and
reducing it or them, so as to be enforceable to the maximum extent compatible
with the applicable law as it shall then appear.

10. This agreement replaces or supersedes all previous agreements.

Very truly yours,

Franklin TELECOMMUNICATIONS CORP.

/s/ Frank W. Peters
- -----------------------------------------------------
Frank W. Peters, President & CEO

INTERNET PASSPORT LLC. Agreed to and accepted this 28th day of February, 1997:

By: /s/ Sparrow Marcioni, President
-------------------------------------------------
Sparrow Marcioni, President, CEO & Shareholder

-3-

<PAGE>

EXHIBIT 10.5
Confidential

- -------------------------
FRANKLIN 800 CORP. 733 LAKEFIELD ROAD. - WESTLAKE VILLAGE, CA 91361
a Division of FNet Corp.
- ------------------------- 805/373-8688; FAX 805/373-7373
Internet
[email protected] http://www.franklin8OO.net

CONFIDENTIAL

SUBSCRIBER AGREEMENT

This Subscriber Agreement "agreement", made and entered into this 2nd day of
January, 1997, by and between FRANKLIN 800 CORP. a California Corporation.
(hereinafter "Company", having principal offices at 733 Lakefield Road, Westlake
Village CA 91361, and LASERVEND, INC. (hereinafter "Subscriber", a UTAH Corp.,
having principal offices at 1800 SOUTH STATE STREET, OREM, UTAH 84058.

WHEREAS, Company will cause a standard 800 or 888 toll free dial up number or
numbers to be directed to a number or numbers defined by the subscriber for flat
rate pricing based upon the number of accounts or customers utilizing the 800 or
888 number(s).

WHEREAS, Company will only direct the 800 or 888 number(s) to an existing dial
up, data modem access telephone number terminating within the confines of the 50
United States of America.

WHEREAS, Subscriber warrants that they are the responsible party for, or have
written authorization from the responsible party to allow the termination of the
800 or 888 number(s) to the Subscriber defined telephone number(s).

WHEREAS, Subscriber understands and agrees that this offer requires a minimum
subscription block of 4,000 accounts per month.

1. PRICING.
Each block will be charged according to the following table: ("800
Number" Service).

Subscriber is to have three (3) 800/888 numbers to be pointed at the
telephone numbers of Subscribers choice which may change from time to
time. FNet hereby agrees to cause these numbers to `point' to the
numbers of Subscribers choice. Commencing on 1-15-97
-------

These three numbers will cost Subscriber as follows:
1st Block 4,000 accounts (Minimum) $5.00 per account, per month
2nd Block 4,000 accounts (8,000 cumulative) $4.50 per account, per month
3rd Block 4,000 accounts (12,000 cumulative) $4.00 per account, per month

The above monthly fee is payable in advance each month. In addition a set up fee
of $1,500 is also due in advance. Rates are by the Block with each Block
independently priced.

1
<PAGE>

Confidential

2. SCOPE

Company agrees that this Agreement should not be construed to limit in any
way the type and manner of business activities that Subscriber may choose
to conduct on its own behalf Subscriber acknowledges that Company may
choose at any time to engage in business activities that compete directly
or indirectly with the business activities generally conducted by
Subscriber, including the development and distribution of communications
equipment computer programs and related support services and activities.

3. DUTIES AND RESPONSIBILITIES OF SUBSCRIBER

3.1 The Subscriber must pay for each month of service such that the funds
are received on or before the due date, beginning with the date of
this agreement. Company, at its sole discretion, may discontinue
service if the amount due if not paid on time or the funds to honor
payment instruments are not sound.

3.2 The Subscriber shall permit and assist the Company to establish a
direct, password protected, link to it's facilities which the 800
service is connected such that the Company can monitor, from time to
time the number of customers using the 800 facility.

3.3 In addition, the Subscriber shall permit and assist the Company or
it's designee, to review, during regular business hours, all billing
records which relate to the 800 service. It is Subscriber's
responsibility to separate the billing records to facilitate the
review by the Company.

3.4 The Subscriber shall use best efforts to ensure "Normal Acceptable Use
Policy" such that no "Nailed Up" users are permitted to continually
abuse the service and the Subscriber will report all 800 services
outages to Company ASAP.

3.5 The Subscriber hereby verifies the telephone numbers furnished to
Company are legally his to use and re-direct.

4. DUTIES AND RESPONSIBILITIES OF COMPANY

4.1 Company's sole responsibility is to cause to have up to three 800
numbers to be directed to the Subscribers telephone numbers.

4.2 This Agreement is nonexclusive and shall not limit the right of the
Company to conduct marketing for its own benefit or appoint or engage
other persons to conduct marketing activities on behalf of the Company
involving the same or other Products.

4.3 A finder's fee of $1,000 for each NEW Subscriber Agreement found or
procured by the Subscriber for the 800 service which the Company
enters into will be paid to Subscriber.

4.4 Also - the Products which the Company manufactures sold by the
Subscriber will be bear a commission or discounts. The commission or
discount rate will be that commission then being used by the Company.

4.5 Reports and Payment. Within 10 days after the close of each month
during the Term of this

2
<PAGE>

Confidential

Agreement, Subscriber shall provide Company with information
concerning of the total number of customers that used or had access to
the 800 facility during the preceding calendar month.

5. TERM AND TERMINATION

5.1 TERM. The term of this Agreement shall commence on the date hereof
and shall continue thereafter, until terminated as provided herein.
This agreement will be automatically renewed each year provided the
Subscriber has paid the amounts due.

5.2 TERMINATION. This is a 2 month contract.
Either party may terminate this Agreement at any time by giving the
other party at least 60 prior written days notice but not before 2
months.

5.3 SURVIVAL. Upon termination of this Agreement, both Subscriber and
Company shall be discharged from any and all remaining obligations
arising in connection with this Agreement; provided, however, that,
notwithstanding the termination of this Agreement, for whatever
reason, Company and Subscriber shall remain liable for all obligations
that have accrued.

6. INDEMNIFICATION

6.1 INDEMNIFICATION BY SUBSCRIBER. Subscriber shall defend, indemnify,
and hold harmless Company and all personnel of Company from and
against any and all damage, cost, liability, and expense whatsoever
(including court costs and actual attorney fees) incurred by reason of
(1) any failure by Subscriber to comply with any covenant or agreement
set forth herein; (2) any claim brought by any customer of Subscriber
as a result of or in connection with any other arrangement for the
acquisition of Subscriber Products; or (3) any claim brought by any
person or entity based on the condition, quality, or character of
Subscriber Products or any promise, representation, or warranty given
with respect to Subscriber Products.

6.2 CONDITIONS OF INDEMNIFICATION. It shall be a condition of any such
indemnification hereunder that the party seeking indemnification (1)
give the indemnifying party prompt written notice of any claim,
demand, or action for which such indemnification is sought; (2) allow
the indemnifying party to control the defense and/or settlement of any
such claim, demand, or action; and (3) cooperate fully with the
indemnifying party with respect to the investigation, defense, or
settlement of any such claim, demand, or action.

7. MERCHANTABILITY.

Warranty Disclaimer. Except as otherwise provide herein, Company makes no
other warranties, express or implied, including the implied warranties of
merchantability and fitness for a particular purpose.

8. INDEPENDENT STATUS OF SUBSCRIBER.

3
<PAGE>

Confidential

This Agreement alone establishes the rights, duties, and obligations of
Company and Subscriber with respect to the subject matter hereof. Company
shall have no right, title, or interest, nor shall Company assert any such
claim whatsoever, in any Subscriber Product, whether conceived or developed
by Subscriber or Subscriber Personnel before, during, or after either the
Term of this Agreement or the course of Agent's performance of any
particular Assignment hereunder.

9. TERMS HELD IN CONFIDENCE

Subscriber and Company shall hold in confidence the terms of compensation
and reimbursement set forth herein, and neither party hereto shall disclose
such terms to any other person or entity without the prior written consent
of the other.

10. GOVERNING LAW

This Agreement shall be governed by, and its terms and conditions shall be
construed in accordance with, the laws of the State of CA.

11. NO ASSIGNMENT

Neither this Agreement, nor any right or that may arise hereunder, may be
assigned, in whole or in part, voluntarily, involuntarily, or by operation
of law, by either party hereto without the prior written consent of the
other party, which consent may be granted only in writing by an authorized
representative of such other party.

12. NOTICES

All notices or other communications required or permitted to be given
hereunder shall be, as elected by the person giving such notice, (1)
personally delivered or (2) transmitted by postage-prepaid registered mail
to the parties as listed at the top of this agreement. Except as otherwise
specified herein, all notices and other communications shall be deemed to
have been given on (1) the date of receipt if delivered personally or (2)
five days after posting if transmitted by mail. Any party hereto may change
its address for purposes hereof by notice to the other party.

13. MISCELLANEOUS

13.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding of the parties and supersedes all prior agreements and
understandings of the parties of any kind whatsoever and pertaining to
any subject matter, whether written, oral, or otherwise, and may be
altered or amended only in a writing signed by both parties.

13.2 WAIVER. Except as otherwise expressly provided herein, no purported
waiver by any party of any breach by the other party of its
obligations, agreements, or covenants hereunder shall be effective
unless made in a writing subscribed by the party sought to be bound
thereby, and no failure to pursue or elect any remedy with respect to
any default under or breach of any

4
<PAGE>

provision of this Agreement shall be deemed to be a waiver of any
subsequent similar or different default or breach.

13.3 FORUM. Company and Subscriber hereby consent and agree that the
courts of the State of California are the exclusive forum for
litigation of any claim by Subscriber arising under this Agreement,
and hereby irrevocably waive and relinquish any right to bring, or
cause to be brought, any such action, or to have any such action
brought, in any judicial or administrative forum outside of the State
of California.

13.4 LIMITATION OF LIABILITY. Company shall not be responsible for any
damages arising from this agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

FRANKLIN 800 CORP.

/s/ Frank W. Peters 1/7/97
- ------------------------------------- ------------------------------
Frank W. Peters, CEO Date

SUBSCRIBER

By:/s/ David J. Griffiths 1-2-97
- ------------------------------------- ------------------------------
Date

Print Name David J. GRIFFITHS
--------------------------

Title: CEO/PRESIDENT
----------------------------
Must be a Corporate Officer

<PAGE>

EXHIBIT 10.6

Confidential

- ---------------------------
FRANKLIN 800 CORP. 733 LAKEFIELD ROAD - WESTLAKE VILLAGE, CA 91361
a Division of FNet Corp. 805/373-8688; FAX 805/373-7373
- --------------------------- Internet [email protected]
http://www.franklin800.net

CONFIDENTIAL

SUBSCRIBER AGREEMENT

This Subscriber Agreement "agreement", made and entered into this 28 day of
January, 1997, by and between FRANKLIN 800 CORP. a California Corporation.
(hereinafter "Company") having principal offices at 733 Lakefield Road, Westlake
Village CA 91361, and A-Online Information Services, Inc. (hereinafter
"Subscriber"), a Business C Corp., having principal offices at 123 E. Fireweed
Lane Suite 23 Anchorage, AK 99503.

WHEREAS, Company will only direct the 800 or 888 number(s) to an existing dial
up, data modem access telephone number terminating within the confines of the 50
United States of America.

WHEREAS, Subscriber understands and agrees that this offer requires a minimum
subscription block of 1,000 accounts per month.

1. PRICING.

Each block will be charged according to the following table: ("800 Number"
Service). Subscriber is to have one (1) 800/888 number (per 1000 accounts,
maximum three (3) 800/888 numbers) to be pointed at the telephone numbers
of Subscribers choice which may change from time to time. Company hereby
agrees to cause these numbers to 'point' to the numbers of Subscribers
choice. Commencing on March 9, 1997.

These numbers will cost Subscriber as follows:

1st Block 1,000 accounts (Minimum) $8.00 per account, per month
2nd Block 2,000 accounts (cumulative) $6.00 per account, per month
3rd Block 4,000 accounts (cumulative) $5.00 per account, per month
4th Block 4,000 accounts (8,000 cumulative) $4.50 per account, per month
5th Block 4,000 accounts (12,000 cumulative) $4.00 per account, per month

1
<PAGE>

Confidential

The above monthly fee is payable in advance each month. In addition a set up fee
of $1,500 is also due in advance. Rates are by the Block with each Block
independently priced.

2. SCOPE

Company agrees that this Agreement should not be construed to limit in any
way the type and manner of business activities that Subscriber may choose
to conduct on its own behalf. Subscriber acknowledges that Company may
choose at any time to engage in business activities that compete directly
or indirectly with the business activities generally conducted by
Subscriber, including the development and distribution of communications
equipment computer programs and related support services and activities.

3. DUTIES AND RESPONSIBILITIES OF SUBSCRIBER

3.1 The Subscriber must pay for each month of service such that the funds
are received on or before the due date, beginning with the date of
this agreement. Company, at it's sole discretion, may discontinue
service if the amount due in not paid on time or the funds to honor
payment instruments are not sound.

3.5 The Subscriber hereby verifies the telephone numbers furnished to
Company are legally his to use and re-direct.

3.6 The Subscriber hereby agrees not to resell the 800 service.

3.7 The Subscriber hereby agrees not to offer pricing for an internet
customer below $25.00 per month.

4. DUTIES AND RESPONSIBILITIES OF COMPANY

4.1 Company's sole responsibility is to cause to have up to three 800
numbers to be directed to the Subscribers telephone numbers.

4.3 A finder's fee of $1,000 for each NEW Subscriber Agreement found or
procured by the Subscriber for the 800 service which the Company
enters into will be paid to Subscriber.

4.4 Also - the Products which the Company manufactures sold by the
Subscriber will be bear a

2
<PAGE>

Confidential

commission or discounts. The commission or discount rate will be that
commission then being used by the Company.

4.5 Reports and Payment. Within 10 days after the close of each month
during the Term of this Agreement, Subscriber shall provide Company
with information concerning of the total number of customers that used
or had access to the 800 facility during the preceding calendar month.

5. TERM AND TERMINATION

5.1 TERM. The Term of this Agreement shall commence on the date hereof
and shall continue thereafter, until terminated as provided herein.
This agreement will be automatically renewed each year provided the
Subscriber has paid the amounts due.

5.2 TERMINATION. This is a 1 month contract.
Either party may terminate this Agreement at any time by giving the
other party at least 60 prior written days notice but not before 12
months.

6. INDEMNIFICATION

6.2 CONDITIONS OF INDEMNIFICATION. It shall be a condition of any such
indemnification hereunder that the party seeking indemnification (1)
give the indemnifying party prompt written notice of any claim,
demand, or action for which such indemnification is sought; (2) allow
the indemnifying party to control the defense and/or settlement of any
such claim , demand, or action; and (3) cooperate fully with the
indemnifying party with respect to the investigation, defense, or
settlement of any such claim, demand, or action.

7. MERCHANTABILITY.

3
<PAGE>

Confidential

8. INDEPENDENT STATUS OF SUBSCRIBER.

9. TERMS HELD IN CONFIDENCE

10. GOVERNING LAW

This Agreement shall be governed by, and its terms and conditions shall be
construed in accordance with, the laws of the State of CA.

11. NO ASSIGNMENT

12. NOTICES

13. MISCELLANEOUS

13.1 ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
of the parties and supersedes all prior agreements and understandings
of the parties of any kind whatsoever and pertaining to any subject
matter, whether written, oral, or otherwise, and may be altered or
amended only in a writing signed by both parties.

13.2 WAIVER. Except as otherwise expressly provided herein, no purported
waiver by any party

4
<PAGE>

Confidential

of any breach by the other party of its obligations, agreements, or
covenants hereunder shall be effective unless made in a writing
subscribed by the party sought to be bound thereby, and no failure to
pursue or elect any remedy with respect to any default under or breach
of any provision of this Agreement shall be deemed to be a waiver of
any subsequent similar or different default or breach.

13.4 LIMITATION OF LIABILITY. Company shall not be responsible for any
damages arising from this agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

FRANKLIN 800 CORP.

/s/ Frank W. Peters 2-5-97
- ---------------------------------- ------------------------------
Frank W. Peters, CEO Date

SUBSCRIBER

By: /s/ Kelsey S. Gray 1/28/97
---------------------------------- ------------------------------
Date

Print Name Kelsey S. Gray
---------------------------

Title: President
-------------------------------
Must be a Corporate Officer

<PAGE>

EXHIBIT 10.7

Confidential

- -----------------------------
FRANKLIN 800 CORP. 733 LAKEFIELD ROAD. - WESTLAKE VILLAGE, CA
a Division of FNet Corp. 91361
- ----------------------------- 805/373-8688; FAX 8051373-7373
Internet [email protected]
http://www.franklin800.net

CONFIDENTIAL

SUBSCRIBER AGREEMENT

This Subscriber Agreement "agreement", made and entered into this 17th day
of January, 1997, by and between FRANKLIN 800 CORP., a California Corporation,
(hereinafter "Company"), having principal offices at 733 Lakefield Road,
Westlake Village CA 91361, and WebTV Networks Inc. (hereinafter "Subscriber"), a
California Corporation, having principal offices at 305 Lytton Avenue, Palo
Alto, CA 94301.

WHEREAS, Company will only direct the 800 or 888 number(s) to an existing dial
up, data modem access telephone number terminating within the confines of the 50
United States of America.

WHEREAS, Subscriber warrants that they are the responsible party for, or have
written authorization from the responsible party to allow the terminination of
the 800 or 888 number(s) to the Subscriber defined telephone number(s).

WHEREAS, An account is defined to be the communications activity for one
Subscriber customer. If Subscriber Customer cancels account with Subscriber or
otherwise does not need Franklin 800 or 888 service due to changes in local
coverage, Subscriber may substitute a new account for the remainder of the
month. Customer is defined as one WebTV Networks user.

1. PRICING.

For the period from December 23, 1996 to January 31, 1997, Subscriber
will pay Company $10,000 for use of one block of 4,000 accounts. Subscriber will
test Company's toll free service and confirm that the service is technically
sound and satisfactory in all regards for use by Subscriber. If Subscriber, in
its sole discretion, is not satisfied with service, Company, upon written
notification, will refund $5,000 to Subscriber within 10 days of said
notification.

After January 31, 1997, each block Subscriber purchases will be charged
according to the following table: ("800 Number" Service).

Subscriber is to have three (3) 800/888 numbers per block of 4000 accounts
to be pointed at the telephone numbers of Subscribers choice which may
change from time to time. Company hereby agrees to cause these numbers
to `point' to the numbers of Subscribers choice, commencing on January 31,
1997.

1
<PAGE>

Confidential

Each block will be billed to Subscriber as follows:
1st Block 4,000 accounts (4,000 cumulative) $5.00 per account, per month
2nd Block 4,000 accounts (8,000 cumulative) $4.50 per account, per month
3rd Block 4,000 accounts (12,000 cumulative) $4.00 per account, per month
4th through 1000th Blocks $4.00 per account, per month

The monthly fee for each block purchased is payable in advance each month.
Subscriber will specify quantity of blocks to be purchased before the first
of each month. In addition a one-time total set up fee of $1,500 is also
due in advance. Rates are by the Block with each Block independently
priced. If Subscriber purchases fewer blocks than are used, payment from
Subscriber for actual blocks used will be due with the next month's
payment.

2. SCOPE

3. DUTIES AND RESPONSIBILITIES OF SUBSCRIBER

3.1 The Subscriber must pay for each month of service such that the funds
are received on or before the due date, in advance, beginning with the
date of this agreement. Company, at its sole discretion, may
discontinue service if the amount due is not paid on time or the funds
to honor payment instruments are not sound, after written notice and
failure to cure within 10 days.

3.3 In addition, the Subscriber shall permit and assist the Company or
it's designee, to review, during regular business hours, all usage
records which relate to the 800 service. It is Subscriber's
responsibility to separate the usage records to facilitate the review
by the Company.

3.4 The Subscriber shall use best efforts to ensure "Normal Acceptable Use
Policy" such that no users are permitted to continually abuse the
service. The Subscriber will promptly report all 800 services outages
to Company.

3.5 The Subscriber hereby warrants that the telephone numbers furnished to
Company are legally his to use and re-direct.

3.6 The Subscriber hereby agrees not to resell the Company's 800 service.

2
<PAGE>

Confidential

4. DUTIES AND RESPONSIBILITIES OF COMPANY

4.1 Company is responsibile to have up to three 800 numbers per group of
4,000 accounts, to be directed to the Subscribers telephone numbers
and to ensure that these numbers are functioning properly and directed
towards telephone numbers the Subscriber deems to be correct. If, at
Subscriber's sole discretion, the 800 or 888 service is not at a
service level usual and customary for 800 or 888 service, Subscriber
has right to withhold payment until acceptable service is restored.

4.3 A finder's fee of $1,000 for each new agreement found or procured by
the Subscriber for the 800 service which the Company enters into will
be paid to Subscriber.

4.4 Also - the products which the Company manufactures which are sold by
the Subscriber will bear a commission or discounts to Subscriber. The
commission or discount rate will be that commission or discount rate
then being used by the Company.

5. TERM AND TERMINATION

5.1 Term. The Term of this Agreement shall commence on the date hereof
and shall continue thereafter for one year, until terminated as
provided herein. This agreement will be automatically renewed each
year provided the Subscriber has paid the amounts due and chooses to
renew the agreement. If Subscriber does not wish to renew, Subscriber
must give Company 30 days written notice of its intent not to renew.

5.2 Termination. This is a one year contract.
Either party may terminate this Agreement at any time by giving the
other party at least 120 days prior written notice but notice may only
be given 8 months after the initial testing period is complete.

5.3 Survival. Upon termination of this Agreement, both Subscriber and
Company shall be discharged from any and all remaining obligations
arising in connection with this Agreement; provided, however, that,
notwithstanding the termination of this Agreement, for whatever
reason, Company and Subscriber shall remain liable for all obligations
that have accrued.

5.4 Termination for cause. If Company or Subscriber is sued successfully
for issues stemming from resale of 800 or 888 service, Subscriber has
right to terminate this Agreement.

6. INDEMNIFICATION

6.1 Indemnification by Subscriber. Subscriber shall defend, indemnify,
and hold harmless Company and all personnel of Company from and
against any and all damage, cost, liability, and expense whatsoever
(including court costs and actual attorney fees) incurred by reason of
(1) any failure by Subscriber to comply with any covenant or agreement
set forth herein; (2) any claim brought by any Customer of Subscriber
as a result of or in connection with any

3
<PAGE>

Confidential

other arrangement for the acquisition of Subscriber products/services;
or (3) any claim brought by any person or entity based on the
condition, quality, or character of Subscriber products or any
promise, representation, or warranty given with respect to Subscriber
products.

6.2 Indemnification by Company. Company shall defend, indemnify, and hold
harmless Subscriber and all personnel of Subscriber from and against
any and all damage, cost, liability, and expense whatsoever (including
court costs and actual attorney fees) incurred by reason of (1) any
failure by Company to comply with any covenant or agreement set forth
herein; (2) any claim brought by any customer of Company as a result
of or in connection with any other arrangement for the acquisition of
Company products/services; or (3) any claim brought by any person or
entity based on the condition, quality, or character of Company
products or any promise, representation, or warranty given with
respect to Company products. Company warrants that it holds title to
or has Responsible Organization (RESPROG) Contract on file for each of
the 800 and 888 numbers that it has contracted to provide to
Subscriber and shall hold Subscriber harmless against any claims by
creditors, shareholders, owners, lienholders and any other
stakeholders involved in providing the 800 or 888 service to Company
and Subscriber.

6.3 Conditions of Indemnification. It shall be a condition of any such
indemnification hereunder that the party seeking indemnification (1)
give the indemnifying party prompt written notice of any claim,
demand, or action for which such indemnification is sought; (2) allow
the indemnifying party to control the defense and/or settlement of any
such claim, demand, or action; and (3) cooperate fully with the
indemnifying party with respect to the investigation, defense, or
settlement of any such claim, demand, or action.

7. MERCHANTABILITY.

Warranty Disclaimer. Except as otherwise provided herein, Company makes no
other warranties, express or implied, including the implied warranties of
merchantability and fitness for a particular purpose.

8. INDEPENDENT STATUS OF SUBSCRIBER.

9. TERMS HELD IN CONFIDENCE

The parties have previously signed a Mutual Non-Disclosure Agreement which
is incorporated by

4
<PAGE>

Confidential

reference herein and which shall be in effect during the term of this
agreement or attachment A, whichever is longer, and shall cover the terms
and conditions of this Agreement including the disclosure or publicity of
this Agreement as well as all the Confidential Information of both parties
developed during the term of this Agreement.

10. GOVERNING LAW

This Agreement shall be governed by, and its terms and conditions shall be
construed in accordance with, the laws of the State of California.

11. NO ASSIGNMENT

12. NOTICES

13. MISCELLANEOUS

13.1 Entire Agreement. This Agreement constitutes the entire understanding
of the parties and supersedes all prior agreements and understandings
of the parties of any kind whatsoever and pertaining to any subject
matter, whether written, oral, or otherwise, and may be altered or
amended only in a writing signed by both parties.

13.2 Waiver. Except as otherwise expressly provided herein, no purported
waiver by any party of any breach by the other party of its
obligations, agreements, or covenants hereunder shall be effective
unless made in a writing subscribed by the party sought to be bound
thereby, and no failure to pursue or elect any remedy with respect to
any default under or breach of any provision of this Agreement shall
be deemed to be a waiver of any subsequent similar or different
default or breach.

13.3 Forum. Company and Subscriber hereby consent and agree that the
courts of the State of California are the exclusive forum for
litigation of any claim by Subscriber arising under this Agreement,
and hereby irrevocably waive and relinquish any right to bring, or
cause to be brought, any such action, or to have any such action
brought, in any judicial or administrative forum outside of the State
of California.

5
<PAGE>

Confidential

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

FRANKLIN 800 CORP.

- ---------------------------------- ------------------------------
Frank W. Peters, CEO Date

WEBTV NETWORKS, INC.

/s/ Stephen G. Pertman 1/21/97
By:------------------------------- ------------------------------
Date

Print Name Stephen G. Pertman
------------------------

Title: President/CEO
----------------------------
Must be a Corporate Officer

6
<PAGE>

Confidential

ATTACHMENT A

PREVIOUSLY SIGNED MUTUAL NON-DISCLOSURE AGREEMENT

<PAGE>

EXHIBIT 10.8

FRANKLIN TELECOMMUNICATIONS CORP.
733 LAKEFIELD ROAD
WESTLAKE VILLAGE, CALIFORNIA 91361

February 26, 1997

CPR Computer Repair, Inc.
16115 Valerio Street
Van Nuys, California 91326

Dear Sir:

In connection with our recent discussions, this is to confirm our mutual
agreements as to the terms and conditions upon which Franklin Telecommunications
Corp., a California corporation ("Franklin"), will acquire all of the issued and
outstanding capital stock of CPR Computer Repair, Inc. ("CPR") a California
corporation in exchange for 25,000 newly issued shares of the Common Stock of
Franklin (the "Franklin Common Stock").

1. As of the date hereof, ALL of the shares of CPR, which constitute all
of the issued and outstanding shares of capital stock of CPR are owned,
beneficially and of record, by Neil Marc Wyenn are free of any liens,
encumbrances or claims by any third party. As of the date hereof, there are no
outstanding warrants, options and other rights to purchase from CPR, nor any
securities convertible into or exchangeable for, shares of capital stock of CPR.
Prior to the Closing, and as a condition thereto, each warrant, option, right,
convertible security and exchangeable security currently outstanding shall have
been exercised, converted or exchanged, as the case may be, for shares of Common
Stock of CPR, such that these additional shares of Common Stock of CPR shall be
included among the Shares to be purchased by Franklin at the Closing for the
aggregate consideration of 25,000 newly issued shares of Franklin Common Stock.

2. As a condition to this agreement, the existing Shareholder of CPR
agrees to personally satisfy all outstanding debt of CPR, as additional
consideration, and agrees to issue a note to Franklin for the purpose of
mitigating all of the CPR outstanding debt (Appendix A). The CPR outstanding
debt will be paid directly by the Shareholder of CPR from time to time, whereby
Franklin will reduce the amount of the aforementioned note by amounts paid to
CPR creditors by the Shareholder of CPR.

3. Merger. At the Closing, CPR will be merged with and into a
------
newly-to-be-formed and wholly-owned subsidiary of Franklin, which will be the
surviving corporation in the merger (the "Merger"). As a consequence of the
Merger, (a) all shares of CPR's issued and outstanding Common Stock will be
converted into 25,000 shares of Franklin's newly issued Common Stock, such that
the

1
<PAGE>

holders of CPR's currently outstanding Common Stock will be entitled to receive,
as a group, an aggregate of 25,000 shares of the Common Stock of Franklin.

4. Registration Rights and Lock-Up. At the Closing Franklin will use its
-------------------------------
best efforts to gain registration rights by including the shares in a planned
S-1 Registration filing with the Securities and Exchange Commission, and to file
a related Application for Qualification under the California Corporate
Securities Law of 1968, allowing the CPR shareholders to offer their Franklin
shares to the public through registered broker-dealers or through privately
negotiated transactions. Frankin will also undertake to keep the Registration
Statement current for a period of at least 45 days from its effective date, and
to pay all costs (other than brokerage discounts and commissions) associated
with the Registration Statement. LOCKUP: CPR shareholders agree not to sell more
than 1000 shares per day or five (5) percent of the daily volume.

5. Conduct Pending Closing. Consummation of the transactions
-----------------------
contemplated hereby shall occur at a closing to be held on or after February 26,
1997 (the "Closing"). During the period between the date hereof and the
Closing, each party shall give to the other and its authorized representatives
full access, during reasonable business hours, in such a manner as not unduly to
disrupt normal business activities, to any and all of the disclosing party's
premises, properties, contracts, books, records and affairs, and shall cause its
officers to furnish any and all data and information pertaining to its business
that the other party or its representatives may from time to time reasonably
require. During the period between the date hereof and the Closing, each party
shall continue to conduct its operations on a basis consistent with past
practices. The Closing will be conditioned upon verification by each party that
the business, operations, prospects and condition, financial and otherwise, of
the other party are reasonably satisfactory to such party, and that there has
been no material adverse change in the business, operations, prospects, or
financial condition of the other party.

6. Confidentiality. Each party will hold in confidence all information
---------------
obtained from the other. This obligation of confidentiality shall not extend to
any information which is shown to have previously been (i) known to the party
receiving it, (ii) generally known to others engaged in the trade or business
of the party receiving it, (iii) part of public knowledge or literature, or (iv)
lawfully received from a third party. Without limiting the generality of the
foregoing, it is understood and agreed that certain information disclosed by
Franklin to CPR or its representatives may constitute "material inside
information" that has not previously been disclosed to the public generally. CPR
acknowledges that CPR and its representatives are aware of the restrictions on
the use of such information imposed by federal and state securities laws, agrees
to comply and cause its representatives to comply with such restrictions, and
agrees to indemnify and hold Franklin and each of its directors, officers and
employees free and harmless from any and all liability, cost or expense that any
of them may incur or suffer by reason of any breach by CPR or any of its
authorized representatives of any of such restrictions.

7. Expenses. Each party shall bear all of its own expenses incurred in
--------
connection with the transactions contemplated hereby, whether or not a
definitive agreement is executed or the transactions contemplated hereby are
consummated.

8. Announcements. No announcement shall be made by either party with
-------------
respect to the transaction without the prior written consent of the other
party, which consent shall not unreasonably

2
<PAGE>

be withheld.

If the foregoing accurately sets forth your understanding of our
agreements, please so indicate by signing the enclosed copy hereof and returning
it to the undersigned by no later than February 26, 1997.

Very truly yours,

Franklin Telecommunications Corp.

By: /s/ Frank W. Peters 2/26/97
------------------------------- -------
Frank W. Peters, President & CEO Date

AGREED TO AND ACCEPTED,
this 26 day of February 1997

CPR COMPUTER REPAIR, INC.

By: /s/ Neil Marc Wyenn 2-26-97
------------------------------- -------
Neil Marc Wyenn, President & CEO Date

3
<PAGE>

Appendix A

PROMISSORY NOTE

$117,062 FEB.26, 1997

Neil Marc Wyenn, an individual ("Maker"), for value received, hereby promises to
pay to FRANKLIN TELECOMMUNICATIONS CORP ("Holder") or order, the principal
amount of one hundred seventeen thousand sixty two Dollars ($117,062), with no
interest, payable by satisfaction of the outstanding debts ("Debts") of CPR
Computer Repair, Inc. as of February 26, 1996. If all of the Debts are not
satisfied by June 30, 1997, the remaining amounts shall become due and payable
to the Holder on July 1, 1997 ("Due Date").

1.1 Payments: Prepayment. - Payments hereunder shall be made in lawful money
--------------------
of the United States of America at such place as Holder shall have designated to
the Company in writing. This Promissory Note ("Note") may be prepaid, in whole
or in part, before the Due Date without penalty. Each payment received under
this Note shall be applied first to fees, costs or expenses due Holder as a
result of a default, if any, then to principal.

1.2 Security Agreement. - This Note is secured by a security interest granted
------------------
by Maker to Holder in all of Maker's assets, as set forth in that certain
"Security Agreement" between the parties both of even date herewith. Any breach
or default in the terms of the Security Agreement or the Stock Pledge Agreement
shall constitute a default hereunder. In such event, all of the obligations
evidenced by this Note, irrespective of the maturity dates expressed herein, at
the option of the Holder hereof and without demand or notice, shall immediately
become due and payable. The waiver of any default, or the remedying of any
default in a reasonable manner, shall not operate as a waiver of the default
remedies for any other prior or subsequent default. Holder remedies for any
other prior or subsequent default.

1.3 Default. - In the event Maker fails to pay any sum provided herein, after
-------
five (5) days written notice from Holder to Maker, Maker agrees to pay Holder,
in addition to the payments required hereunder, all reasonable charges Holder
may incur as a result of such default. If default occurs in the payment of any
installment under this Note when due, or in the performance of any of the
promises or covenants contain in the Note or the Stock Pledge Agreement or the
Security Agreement, the entire principal and all other amounts due hereunder
shall become at once due and payable without presentment, notice, protest or
demand of any kind, at the sole option of the Holder of this Note. Failure to
exercise this option to accelerate upon default shall not constitute a waiver of
the right to exercise such right in the event of any subsequent default or
continuing default.

1.4 Miscellaneous.
-------------
<PAGE>

(a) NOTICES. - Any notice required or permitted under this Note shall be
given in writing and shall be deemed effectively given upon personal delivery to
the party to be notified, upon transmission of fax to the fax numbers set forth
in the Security Agreement, or upon deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed to the party at
the address set forth below for such party, or at such other address as either
party may designate by ten (10) day advance written notice to the other party.

(b) BINDING EFFECT. - This Note shall bind and inure to the benefit of the
parties, their successors and assigns.

(c) AMENDMENTS AND WAIVERS. - Any term of this Note may be amended and the
observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of both the Company and Holder hereof Any amendment or waiver
effected in accordance with this paragraph shall be binding upon Holder and the
Company and their successors and assigns.

(d) DUE AUTHORIZATION. - The execution and delivery of this Note has been
duly authorized by all necessary corporate action on behalf of the Company.

(e) GOVERNING LAW. - this Note shall be governed by and construed and
enforced in accordance with the laws of the State of California without giving
effect to conflicts of law principles.

(f) ATTORNEY FEES. - Maker agrees to pay all costs, expenses, and
attorney's fees paid or incurred by Holder of this Note, or adjudged by a court
including without limitation; (1) reasonable costs of collection and attorney's
fees paid or incurred in connection with the collection and attorney's fees paid
or incurred in connection with the collection or enforcement of this Note,
whether or not suit is filed or foreclosure instituted; and (2) costs of suit
and such sums as the court may adjudge as attorney's fees in any action to
enforce payment of this Note or any part of it.

Maker:

By: /s/ Neil Marc Wyenn
---------------------------
Neil Marc Wyenn
<PAGE>

PROMISSORY NOTE

$40,000 FEB.26, 1997

Neil Marc Wyenn, an individual ("Maker"), for value received, hereby promises to
pay to FRANKLIN TELECOMMUNICATIONS CORP ("Holder") or order, the principal
amount of forty thousand Dollars ($40,000), with simple interest on the unpaid
balance thereof from the date hereof at the annual rate of six percent (6%),
payable in variable installments from time to time. The entire principal amount,
and any accrued interest and any other amounts due under this Note, if any,
shall be due and payable in any event on July 1, 1997 ("Due Date").

1.2 Security Agreement. - This Note is secured by a security interest granted
-------- ---------
by Maker to Holder in all of Maker's assets, as set forth in that certain
"Security Agreement" between the parties both of even date herewith. Any breach
or default in the terms of the Security Agreement or the Stock Pledge Agreement
shall constitute a default hereunder. In such event, all of the obligations
evidenced by this Note, irrespective of the maturity dates expressed herein, at
the option of the Holder hereof and without demand or notice, shall immediately
become due and payable. The waiver of any default, or the remedying of any
default in a reasonable manner, shall not operate as a waiver of the default
remedies for any other prior or subsequent default. Holder remedies for any
other prior or subsequent default.

1.4 Miscellaneous.
-------------

with the United States Post Office, by registered or certified mail, postage
prepaid and addressed to the party at the address set forth below for such
party, or at such other address as either party may designate by ten (10) day
advance written notice to the other party.

(b) BINDING EFFECT. - This Note shall bind and inure to the benefit of the
parties, their successors and assigns.

(c) AMENDMENTS AND WAIVERS. - Any term of this Note may be amended and the
observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of both the Company and Holder hereof. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon Holder and the
Company and their successors and assigns.

(d) DUE AUTHORIZATION. - The execution and delivery of this Note has been
duly authorized by all necessary corporate action on behalf of the Company.

(e) GOVERNING LAW. - this Note shall be governed by and construed and
enforced in accordance with the laws of the State of California without giving
effect to conflicts of law principles.

(f) ATTORNEY FEES. - Maker agrees to pay all costs, expenses, and
attorney's fees paid or incurred by Holder of this Note, or adjudged by a court
including without limitation; (1) reasonable costs of collection and attorney's
fees paid or incurred in connection with the collection and attorney's fees paid
or incurred in connection with the collection or enforcement of this Note,
whether of not suit is filed or foreclosure instituted; and (2) costs of suit
and such sums as the court may adjudge as attorney's fees in any action to
enforce payment of this Note or any part of it.

Maker:

By: /s/ Neil Marc Wyenn
---------------------------
Neil Marc Wyenn

<PAGE>

EXHIBIT 10.9

FRANKLIN TELECOMMUNICATIONS CORP.
733 LAKEFIELD ROAD
WESTLAKE VILLAGE, CALIFORNIA 91361

December 2, 1996

Number 1 Internet Services
60 West Easy #1
Simi Valley, CA 93065

Dear Sirs:

In connection with our recent discussions, this is to confirm our mutual
agreements as to the terms and conditions upon which Franklin Telecommunications
Corp., a California corporation ("Franklin"), wlll acquire 100% ownership of
Number 1 Internet Services ("NO.1"), a Partnership, in exchange for 40,000
newly issued, unregistered shares of the Common Stock of Franklin
Telecommunications Corp. ("Franklin Common Stock"), and granted options
("Franklin Options") to purchase 10,000 shares of Franklin Common Stock at
$1.25, which is the fair market value on December 2, 1996, exercisable on
January 1, 1998. Additional compensation will include 20,000 newly issued,
unregistered shares of the Common Stock of Fnet Corp. ("Fnet Common Stock"), and
granted options ("Fnet Options") to purchase 80,000 shares of Fnet Common Stock,
exercisable at the rate of 20,000 per year in each of the years on January 1,
1998, 1999, 2000 and 2001, respectively. The above aforementioned shares and
options will be issued equally to and directly in the names of the owners Steven
Sullivan and Terry Lee.

1. As of the date hereof, ALL of the ownership in NO.1 is owned,
beneficially and of record, equally by Steven Sullivan and Terry Lee ("Owners"),
and are free of any liens, encumbrances or claims by any third party. As of the
date hereof, there are no outstanding rights to purchase options and other
rights to purchase any equity basis of NO.1. Prior to the Closing, and as a
condition thereto, each right to purchase equity currently outstanding shall
have been exercised, converted or exchanged, as the case may be, for equity in
NO.1, such that this additional equity of NO.1 shall be included among the
ownership to be purchased by Franklin at the Closing for the aggregate
consideration, as outlined above.

2. As a condition to this agreement, the existing Owners of NO.1 agrees
to personally satisfy all outstanding debt of NO.1, as additional
consideration, and agree to mitigate all of the NO.1 outstanding debt.

3. Registration Rights and Lock-Up. At the Closing Franklin will use its
-------------------------------
best efforts to gain registration rights by including the Franklin Common Shares
in a planned 5-1 Registration filing with the Securities and Exchange
Commission, and to file a related Application for Qualification under the
California Corporate Securities Law of 1968, allowing the NO. 1 shareholders to
offer their Franklin Common Shares to the public through registered broker-
dealers or through privately negotiated

<PAGE>

transactions. Franklin will also undertake to keep the Registration Statement
current for a period of at least 45 days from its effective date, and to pay all
costs (other than brokerage discounts and commissions) associated with the
Registration Statement. LOCKUP: NO.1 owners agree not to sell more than the
lessor of 1,000 shares each per day, or five (5) percent of the average daily
volume.

4. Conduct Pending Closing. Consummation of the transactions
-----------------------
contemplated hereby shall occur at a closing to be held on or after December
2, 1996 (the "Closing"). During the period between the date hereof and the
Closing, each party shall give to the other and its authorized representatives
full access, during reasonable business hours, in such a manner as not unduly to
disrupt normal business activities, to any and all of the disclosing party's
premises, properties, contracts, books, records and affairs, and shall cause its
officers to furnish any and all data and information pertaining to its business
that the other party or its representatives may from time to time reasonably
require. During the period between the date hereof and the Closing, each party
shall continue to conduct its operations on a basis consistent with past
practices. The Closing will be conditioned upon verification by each party that
the business, operations, prospects and condition, financial and otherwise, of
the other party are reasonably satisfactory to such party, and that there has
been no material adverse change in the business, operations, prospects, or
financial condition of the other party.

5. Confidentiality. Each party will hold in confidence all information
---------------
obtained from the other. This obligation of confidentiality shall not extend to
any information which is shown to have previously been (i) known to the party
receiving it, (ii) generally known to others engaged in the trade or business of
the party receiving it, (iii) part of public knowledge or literature, or (iv)
lawfully received from a third party. Without limiting the generality of the
foregoing, it is understood and agreed that certain information disclosed by
Franklin to NO.1 or its representatives may constitute "material inside
information" that has not previously been disclosed to the public generally.
NO.1 acknowledges that NO.1 and its representatives are aware of the
restrictions on the use of such information imposed by federal and state
securities laws, agrees to comply and cause its representatives to comply with
such restrictions, and agrees to indemnify and hold Franklin and each of its
directors, officers and employees free and harmless from any and all liability,
cost or expense that any of them may incur or suffer by reason of any breach by
NO.1 or any of its authorized representatives of any of such restrictions.

6. Expenses. Each party shall bear all of its own expenses incurred in
--------
connection with the transactions contemplated hereby, whether or not the
transactions contemplated hereby are consummated.

7. Announcements. No announcement shall be made by either party with
-------------
respect to the transaction without the prior written consent of the other party,
which consent shall not unreasonably be withheld.

8. Attorney's Fees. If any lawsuit or arbitration is commenced to
---------------
interpret or enforce any term or condition of the Agreement, the prevailing
party shall be entitled to reasonable costs and attorneys fees.

9. Governing Law. This Agreement is made and delivered within the City
-------------
of Westlake Village, California in the State of California and shall be
construed and enforced in accordance

2
<PAGE>

with the laws of the State of California, County of Ventura.

10. No Waiver. No failure by either party to insist upon the strict
---------
performance under this Agreement shall constitute a waiver of any breach of any
term or condition of this Agreement. No waiver of any breach shall affect or
alter this Agreement with respect to any other then existing or subsequent
breach.

11. Partial Invalidity. If any term, covenant, condition or provision of
------------------
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the provisions shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.

12. Definitive Agreement. This agreement constitutes a mutually
--------------------
acceptable definitive agreement between Franklin and NO.1. At the time of
execution of this final agreement, by and on behalf of NO.1 and Franklin, each
party endorsing this document personally certifies that they have previously
received approval and the authority from any governing bodies of their
respective companies to execute this document and that they are authorized to
execute this document on behalf of their respective companies. Once executed,
both NO.1 & Franklin shall honor all of the terms and covenants contained in
this document.

Very truly yours,

Franklin Telecommunicatins Corp.

By: /s/ Frank W. Peters 12/2/96
---------------------------------- ------------------------------
Frank W. Peters, President & CEO Date

AGREED TO AND ACCEPTED,
this 2nd day of December 1996

NO.1 Internet Services

By: /s/ Steven Sullivan 12-2-96
---------------------------------- ------------------------------
Steven Sullivan, Owner Date

By: /s/ Terry Lee 12-2-96
---------------------------------- ------------------------------
Terry Lee, Owner Date

<PAGE>

EXHIBIT 10.10

[LETTERHEAD OF M.H. MEYERSON & CO., INC.]

May 18, 1995

Mr. Frank W. Peters
Chairman and
President
Franklin Telecommunications Corp.
733 Lakefield Road
Westlake Village, CA 91316

Dear Mr. Peters:

THIS AGREEMENT (the "AGREEMENT") is made as of May 18, 1995 between
Franklin Telecommunications Corp. -- NASDAQ Symbol: FTEL ("Franklin") and M.H.
Meyerson & Co., Inc. ("MEYERSON").

In consideration of the mutual covenants contained herein and intending
to be legally bound thereby, FRANKLIN and MEYERSON hereby agree as follows:

1. MEYERSON will perform investment banking services for FRANKLIN on the
terms set forth below for a period four years from the date hereof. If both
parties, FRANKLIN and MEYERSON, mutually agree, this agreement may be extended
for an additional two years. Such services will be performed on a best efforts
basis and will include, without limitation, assistance to FRANKLIN in mergers,
acquisitions, and internal capital structuring and the placement of new debt and
equity issues of FRANKLIN, all with the objective of accomplishing FRANKLIN's
business and financial goals. In each instance, MEYERSON shall endeavor, subject
to market conditions, to assist FRANKLIN in identifying corporate candidates for
mergers and acquisitions and sources of private and institutional funds;
to provide planning, structuring, strategic and other advisory services to
FRANKLIN; and to assist in negotiations on behalf of FRANKLIN. In each instance,
MEYERSON will render such services as to which FRANKLIN and MEYERSON mutually
agree and MEYERSON will exert its best efforts to accomplish the goals agreed to
by MEYERSON and FRANKLIN.

2. In connection with the performance of this AGREEMENT, MEYERSON and
FRANKLIN shall comply with all applicable laws and regulations, including,
without limitation, those of the National Association of Securities Dealers,
Inc. and the Securities and Exchange Commission.

<PAGE>

Franklin Telecommunications Corp.
May 18, 1995
Page Two

3. Your company is aware that Mr. Joseph Schmidt is a principal of our
firm and had visited your offices in Westlake Village, California during the
month of November in 1994.

4. In consideration of the services previously rendered and to be
rendered by MEYERSON hereunder, MEYERSON is hereby granted Warrants to purchase
a total of 200,000 Shares of Common Stock with an exercise price of $1.35 per
Warrant with demand and piggy back registration rights after 24 months from the
date of this AGREEMENT. These Warrants shall be vested as follows: 1/2 of the
Warrants upon signing this AGREEMENT, and the balance of the Warrants 12 months
thereafter. These Warrants and/or Underlying shares may be sold anytime after
two years and for a period of four years from the date of this AGREEMENT.

5. During the period of the exercise, as defined in paragraph four, the
holders of at least 51% of the Shares of Common Stock and Warrants constituting
the TOTAL MEYERSON EQUITY may demand, on one occasion only (but not within 180
days of an underwritten public offering), at MEYERSON's expense, including all
expenses incurred by FRANKLIN (auditing, legal fees, etc.) agreed to by FRANKLIN
and MEYERSON within reason, for the MEYERSON's shares of Common Stock only,
FRANKLIN shall promptly file a Registration Statement under the Securities Act
of 1933, as amended ("ACT"), to permit a public offering of the MEYERSON
Warrants and the shares of Common Stock issued and issuable pursuant to exercise
of the MEYERSON Warrants (the "MEYERSON SHARES"). Additionally, if FRANKLIN,
during the period of the exercise, as defined in paragraph four, files a
Registration Statement covering the sale of any of FRANKLIN Common Stock then
FRANKLIN, on each such occasion, at the request of the holders of at least 51%
of the Shares of Common Stock and Warrants constituting the TOTAL MEYERSON
EQUITY, shall include in any such Registration Statement, at FRANKLIN's expense,
the MEYERSON SHARES, provided that, if the sale of Common Stock by FRANKLIN is
being made through an underwriter and the underwriter objects to inclusion of
the MEYERSON SHARES of Common Stock in the Registration Statement, the MEYERSON
SHARES of Common Stock shall not be so included.

6. This AGREEMENT constitutes the entire Warrant Agreement between the
parties and when a copy is presented to FRANKLIN's transfer agent, together with
a certified check and a request that all or part of the MEYERSON Warrants be
exercised, the certificates for the requested number of shares of Common Stock
will be promptly issued.

<PAGE>

Franklin Telecommunications Corp.
May 18, 1995
Page Three

7. FRANKLIN agrees to indemnify and hold MEYERSON and its associates
harmless from and against any and all losses, claims, damages, liabilities,
costs or expenses arising out of MEYERSON entering into or rendering services
under this AGREEMENT except for any losses, claims, damages, liabilities, costs
or expenses resulting from any violation by MEYERSON of applicable laws and
regulations including, without limitation, those of the National Association of
Securities Dealers, Inc. and the Securities and Exchange Commission or any act
of MEYERSON involving intentional misconduct.

8. MEYERSON agrees to indemnify and hold FRANKLIN and its associates
harmless from and against any all losses, claims, damages, liabilities, costs or
expenses resulting from any violation by MEYERSON of applicable laws and
regulations including, without limitation, those of the National Association of
Securities Dealers, Inc. and the Securities and Exchange Commission or any act
of FRANKLIN involving intentional misconduct.

9. Nothing contained in this AGREEMENT shall be construed to constitute
MEYERSON as a partner, employee, or agent of FRANKLIN; nor shall either party
have any authority to bind the other in any respect, it being intended that each
shall remain an independent contractor.

10. This AGREEMENT may not be assigned by either party hereto, shall be
interpreted in accordance with the laws of the State of New York, and shall be
binding upon the successors of the parties.

11. If any paragraph, sentence, clause of phrase of this Agreement is
for any reason declared to be illegal, invalid, unconstitutional, void or
unenforceable, all other paragraphs, sentences, clauses or phrases hereof not so
held shall be and remain in full force and effect.

12. None of the terms of this AGREEMENT shall be deemed to be waived or
modified except by an express agreement in writing signed by the party against
whom enforcement of such waiver or modification is sought. The failure of either
party at any time to require performance by the other party of any provision
hereof shall in no way effect the full right to require such performance at any
time thereafter. Nor shall the waiver by either party of a breach of any
provision hereof be taken or held to be a waiver of any succeeding breach of
such provision or as a waiver of the provision itself.

<PAGE>

Franklin Telecommunications Corp.
May 18, 1995
Page Four

13. Any dispute, claim or controversy arising out of or relating to this
AGREEMENT, or the breach thereof, shall be settled by arbitration in New York
City, in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. The parties hereto agree that they will abide by and
perform any award rendered by the arbitrator(s) and that judgment upon any such
award may be entered in any Court, state, or federal, having jurisdiction over
the party against whom the judgment is being entered. Any arbitration demand,
summons, complaint, other process, notice of motion or other application to an
arbitration panel, Court or Judge, and any arbitration award or judgment may be
served upon any party hereto by registered or certified mail, or by personal
service, provided a reasonable time for appearance or answer is allowed.

14. For purposes of compliance with laws pertaining to potential inside
information being distributed unauthorized to anyone, all communications
regarding the Company's confidential information should only be directed to
Martin H. Meyerson, Chairman, Michael Silvestri, President and Leonard Parker,
Senior Vice President, Compliance. If information is being faxed, our
confidential compliance fax number is 1 (201) 332-1263 for communication use.

IN WITNESS WHEREOF, the parities hereto have executed this AGREEMENT as of the
day and year first above written.

M.H. MEYERSON & CO., INC FRANKLIN TELECOMMUNICATIONS CORP.

By: /s/ MICHAEL SILVESTRI By: /s/ FRANK W. PETERS
---------------------- --------------------
Michael Silvestri Frank W. Peters
President Chairman
President
<PAGE>

[LETTERHEAD OF M.H. MEYERSON & CO., INC]

AMENDMENT

This is an amendment to our original investment banking contract dated May 18,
1995. Your board of directors has approved the increasing of our investment
banking contract from 200,000 warrants to 600,000 warrants at a price of $1.35
per warrant.

Please sign below indicating your agreement to the above.

Sincerely,

M.H. MEYERSON & CO., INC Franklin Telecommunications Corp.

/s/ MICHAEL SILVESTRI /s/ FRANK W. PETERS
- --------------------------- ---------------------------------
Michael Silvestri Mr. Frank W. Peters
President Chairman and President

SWORN AND SUBSCRIBED before me this ___ day of ________________ 1996.

--------------------------------
Notary Public

My Commission Expires:

<PAGE>

EXHIBIT 10.11

[LETTERHEAD OF FRANKLIN TELECOM]

17 March, 1997

Mr. Ron Heller
M.H. Meyerson & Company
30 Montgomery Street
P.O. Box 360
Jersey City, NJ 07302

As consideration for including the 2,055,000 warrants as selling shareholders in
the S-1 registration statement to be filed the first week of April, 1997, the
warrant holders agree to increase the warrant exercise price by the following
formula. The warrant holders agree to increase their current per share exercise
price at the rate of 30% of the amount by which the Market Price (as that term
is defined below) in effect on the date of exercise exceeds $4.00. As used
herein, the term "Market Price" shall mean the average of the closing prices, as
reported on the OTC Bulletin Board, for the five trading days ending on the
third trading day before the date of exercise.

In addition, M.H. Meyerson & Co., Inc., being the holder of 600,000 warrants to
purchase the Company's common stock, hereby agrees to compensate the Company in
the amount of $70,000 towards the cost of legal and accounting fees associated
with the aforementioned S-1 registration statement. The amount will become due
and payable upon notification by the Company that the registration statement has
gone effective, as defined by the Securities and Exchange Commission.
<PAGE>

The warrant holders and M.H. Meyerson & Co., hereby agree by signing below.

<TABLE>
<CAPTION>
Warrants Signature Date
<S> <C> <C> <C>
M.H. Meyerson & Co. 600,000 ______________ ____________
Wilson Davis 30,000 ______________ ____________
Sam Wilson 50,000 ______________ ____________
Paul Davis 50,000 ______________ ____________
Lyle Davis 60,000 ______________ ____________
Byron Barkley 20,000 ______________ ____________
Bollard Investment 40,000 ______________ ____________
Bruce Whaley 40,000 ______________ ____________
Joe Fisher 40,000 ______________ ____________
Gary Nelson 75,000 ______________ ____________
Gary Conrad 200,000 ______________ ____________
Ron Heller 303,000 ______________ ____________
Dave Nagelberg 303,000 ______________ ____________
Martin & Co. 146,000 ______________ ____________
Michael & Linda 28,000 ______________ ____________
Jeffery Barber 14,000 ______________ ____________
Joel Marcus 12,000 ______________ ____________
Rocco Vezza 12,000 ______________ ____________
Joann Giola 12,000 ______________ ____________
Joe Schmidt 10,000 ______________ ____________
Kevin Charos 10,000 ______________ ____________

Total 2,055,000
</TABLE>

Agreed for and behalf of
Franklin Telecommunications, Corp.

- --------------------------------------- -----------------------
Frank Peters, President Date

-2-

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated September 20, 1996,
except as to Notes 1 and 12 which are as of February 28, 1997, relating to the
consolidated financial statements of Franklin Telecommunications Corp. and
subsidiaries, which appears in such Prospectus. We also consent to the
references to us under the headings "Experts" and "Selected Financial Data" in
such Prospectus. However, it should be noted that Corbin & Wertz has not
prepared or certified such "Selected Financial Data."

CORBIN & WERTZ

Irvine, California
March 31, 1997