FRANKLIN TELECOMMUNICATIONS CORP, S-1/A, 1997-10-01

FRANKLIN TELECOMMUNICATIONS CORP
S-1/A, 1997-10-01
COMPUTER COMMUNICATIONS EQUIPMENT

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997

REGISTRATION NO. 333-24791
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

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<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)
</TABLE>

733 LAKEFIELD ROAD, WESTLAKE VILLAGE, CALIFORNIA 91361 (805) 373-8688
(ADDRESS AND TELEPHONE NUMBER, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

COPY TO:

ROBERT J. ZEPFEL, ESQ.

PHILLIPS & HADDAN LLP

4675 MACARTHUR COURT, SUITE 710
NEWPORT BEACH, CALIFORNIA 92660
(714) 752-6100

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

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

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

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

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

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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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 September 26, 1997 was $3.56 per share.

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

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

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

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

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PROSPECTUS SUMMARY

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

THE COMPANY

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

THE OFFERING

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<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..................... 15,299,039 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."
</TABLE>

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SELECTED FINANCIAL DATA

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

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

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

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RISK FACTORS

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

OPERATING LOSSES

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

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

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

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

While the Company's revenues for the year ended June 30, 1997 showed a
significant increase over the revenues for the prior period, 38% of the
increase was due to sales of the Company's Wide Area Network products to a
single customer. 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 year ended June 30, 1997 two customers accounted for approximately 29%
and 10% of revenues, respectively. The loss of any of these major customers
could have a material adverse effect on the Company. The Company has no
ongoing supply contracts with any of these customers.

GENERAL RISKS OF BUSINESS

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

RISKS ASSOCIATED WITH MANAGEMENT OF POTENTIAL GROWTH

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

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

NEED FOR ADDITIONAL CAPITAL

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

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QUARTERLY OPERATING RESULTS

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

DEPENDENCE ON KEY PERSONNEL

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

COMPETITION; NEW PRODUCTS AND TECHNOLOGICAL CHANGES

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

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

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

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

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

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

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

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

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

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

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

PROPRIETARY TECHNOLOGY

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

REGULATORY MATTERS

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

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

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

POTENTIAL LIABILITIES ASSOCIATED WITH OPERATING AN INTERNET SERVICE PROVIDER

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

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

DEPENDENCE ON TELECOMMUNICATIONS CARRIERS

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

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

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

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

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. The
Company's Common Stock is covered by a Securities and Exchange Commission rule
that imposes additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by
the rule, the broker-dealer must make a special suitability determination for
the purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. Consequently, the rule may affect the ability of broker-
dealers to sell the Company's securities and also may affect the ability of
purchasers in this offering to sell their shares in the secondary market.

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.

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<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

OVERVIEW

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

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

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

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

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

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

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

13
<PAGE>

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

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

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

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

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

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

RESULTS OF OPERATIONS

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

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

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

14
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

15
<PAGE>

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

16
<PAGE>

SELECTED FINANCIAL DATA

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

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

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

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

17
<PAGE>

PRICE RANGE OF COMMON STOCK

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

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
First Quarter............................................... $ .39 $ .32
Second Quarter.............................................. 2.25 .98
Third Quarter............................................... 1.69 .74
Fourth Quarter.............................................. .75 .38
1996
First Quarter............................................... .81 .66
Second Quarter.............................................. 1.53 .72
Third Quarter............................................... 2.88 .97
Fourth Quarter.............................................. 2.25 1.25
1997
First Quarter............................................... 5.50 1.81
Second Quarter ............................................. 3.75 2.25
Third Quarter (through 9/17/97)............................. 3.25 1.56
</TABLE>

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

18
<PAGE>

BUSINESS

GENERAL

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

INDUSTRY BACKGROUND--COMMUNICATIONS PRODUCTS

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

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

COMMUNICATIONS PRODUCTS

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

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

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

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

19
<PAGE>

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

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

INDUSTRY BACKGROUND--INTERNET SERVICES

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

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

FNET STRATEGY

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

20
<PAGE>

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

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

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

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

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

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

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

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

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

MARKETING AND DISTRIBUTION OF COMMUNICATIONS PRODUCTS

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

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

21
<PAGE>

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

MARKETING OF INTERNET SERVICES

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

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

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

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

COMPETITION

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

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

22
<PAGE>

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

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

RECENT ACQUISITIONS AND TRANSACTIONS

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

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

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

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

23
<PAGE>

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

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

ASSEMBLY AND MANUFACTURING OPERATIONS

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

FACILITIES

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

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

PATENTS AND TRADEMARKS

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

24
<PAGE>

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

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

BACKLOG

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

RESEARCH AND DEVELOPMENT

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

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

GOVERNMENT REGULATION

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

25
<PAGE>

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

LEGAL PROCEEDINGS

On July 28, 1997 the Company was named as a defendant in an action brought
by AT&T Corp. ("AT&T") against Connect America, a reseller of "800" number
service, its officers and affiliates, and several Internet Service Providers,
including the Company. The action was brought in the U.S. District Court for
the Central District of California. In general, the complaint alleges that
Connect America and its officers fraudulently acquired 800 numbers from AT&T,
failed to pay for them, and resold them to the Company and the other Internet
Service Providers on a "flat rate" basis, notwithstanding the fact that AT&T's
charges for 800 service are typically based on time utilized. The claims
against the Company and the other Internet Service Providers are based on
unjust enrichment, on the theory that the Company and the other Internet
Service Providers knew or should have known that flat rate 800 service was
unavailable. In addition to injunctive relief against Connect America and its
officers, the complaint seeks damages of $7.4 million, punitive damages and
attorneys' fees. The Company has filed an answer to the complaint denying the
material allegations thereof, and plans to vigorously contest the action.

EMPLOYEES

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

26
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

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

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

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

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

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

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

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

27
<PAGE>

EXECUTIVE COMPENSATION

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

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

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

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

STOCK OPTIONS

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

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

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

28
<PAGE>

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

<TABLE>
<CAPTION>
OPTION VALUES AS OF JUNE 30, 1997
---------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JUNE 30, 1997 JUNE 30, 1997 (1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Frank W. Peters....... 3,008,695(2)/175,000 $6,620,477(2)/$273,000
Thomas Russell........ 100,000 /150,000 $ 103,000 /$247,000
</TABLE>
- --------

(1) Assumes that a share of Common Stock was valued at $2.34 per share on June
30, 1997. Amounts reflected are based on this assumed price minus the
exercise price and do not indicate that shares were sold.

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

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

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

TRANSACTIONS WITH MANAGEMENT

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

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

During the year ended June 30, 1996, the Company transferred 4,200,000 of
its shares of FNet to 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
$117,000 in compensation, included in the table above, to its President, Frank
W. Peters, with his permission, for an undetermined time period.

29
<PAGE>

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

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

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

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

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

30
<PAGE>

PRINCIPAL SHAREHOLDERS

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

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
(INCLUDES EXERCISABLE OPTIONS)
-------------------------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- ------------------ ---------------
<S> <C> <C>
Frank W. Peters .................... 5,147,719(1) 39%
733 Lakefield Road
Westlake Village, CA 91361
Peter S. Buswell ................... 105,000 1%
733 Lakefield Road
Westlake Village, CA 91361
Robert S. Harp ..................... -0- -0-
733 Lakefield Road
Westlake Village, CA 91361
Thomas Russell...................... 150,000 1%
733 Lakefield Road
Westlake Village, CA 91361
Sparrow Marcioni ................... 600,000 5%
733 Lakefield Road
Westlake Village, CA 91361
All directors and executive officers
of the Company as a group (5
persons)........................... 6,002,719 45%
</TABLE>
- --------

(1) Does not include shares issuable upon conversion of 50% of the balance of
notes totalling $229,000 into shares at 50% of market value.

31
<PAGE>

SELLING SHAREHOLDERS

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

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

32
<PAGE>

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

33
<PAGE>

PLAN OF DISTRIBUTION

THE WARRANTS

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

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

SALES BY SELLING SHAREHOLDERS

The Selling Shareholders have informed the Company that they intend to sell
the shares of Common Stock offered by them hereby, from time to time in
transactions (which may include block transactions), in the over-the-counter
market, in negotiated transactions, or a combination of such methods of sale,
at fixed prices which may be changed, at market prices prevailing at the time
of sale, or at negotiated prices. The Selling Shareholders may effect such
transactions by selling their shares directly to purchasers or to or through
broker-dealers (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.

34
<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 13,487,289 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 two years ended June 30, 1996, included in this Prospectus,
have been audited by Corbin & Wertz, independent certified public accountants,
to the extent and for the periods indicated in their report appearing
elsewhere herein. The consolidated financial statements of the Company as of
June 30, 1997, and for the year then ended, included in this Prospectus, have
been audited by Singer Lewak Greenbaum & Goldstein LLP, independent certified
public accountants, to the extent and for the period indicated in their report
appearing elsewhere herein. The financial statements of Internet Passport, LLC
as of June 30, 1996 and for the period from February 16, 1996 to June 30, 1996
have been audited by Corbin & Wertz, independent certified public accountants,
to the extent and for the period indicated in their report appearing elsewhere
herein. The consolidated financial statements included herein are included in
reliance upon the reports of Corbin & Wertz and Singer Lewak Greenbaum &
Goldstein LLP, given upon the authority of such firms as experts in auditing
and accounting.

CHANGE IN ACCOUNTANTS

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

Corbin & Wertz ("C&W") was dismissed by the Company on August 15, 1997. C&W
had acted as the Company's independent accountants since 1992. The independent
auditors' reports issued by C&W on the Company's consolidated financial
statements for the years ended June 30, 1996 and 1995 did not contain an
adverse opinion or disclaimer of opinion, and such reports were not modified
for any departure from generally accepted accounting principles or for any
limitation of audit scope. C&W's independent auditors' report, dated September
20, 1996, on the consolidated financial statements of the Company for the
years ended June 30, 1996 and 1995 was modified as to the uncertainty of the
Company to continue as a going concern. There were no disagreements with C&W,
resolved or unresolved, on any matter of accounting principles or practices,
financial disclosure, or auditing scope or procedure, which, if not resolved
to C&W's satisfaction, would have caused it to make reference to the subject
matter of the disagreement in connection with its reports. C&W was not
retained to report on the Company's 1997 financial statements.

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

35
<PAGE>

ADDITIONAL INFORMATION

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

36
<PAGE>

INDEX TO FINANCIAL STATEMENTS

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

INTERNET PASSPORT, LLC

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

F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheet of Franklin
Telecommunications Corp. and subsidiaries as of June 30, 1997, and the related
consolidated statements of operations, shareholders' equity (deficit), and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

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

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company has incurred operating losses
and has had negative cash flows from operations for the last three years.
These factors, among others, as discussed in Note 1 to the consolidated
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California

September 17, 1997

F-2
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors

Franklin Telecommunications Corp.

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

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Franklin Telecommunications Corp., and subsidiaries as of June 30, 1996,
and the results of their operations and their cash flows for each of the years
in the two-year period ended June 30, 1996 in conformity with generally
accepted accounting principles.

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

CORBIN & WERTZ

Irvine, California

September 20, 1996

F-3
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

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

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

F-4
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

F-5
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

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

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

F-6
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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

F-7
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED

Supplemental schedule of non-cash investing and financing activities:

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

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

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

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

F-8
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

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

Business and Organization

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

Going Concern and Basis of Presentation

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

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

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

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

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

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

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

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

Acquisitions

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

F-9
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

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

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

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

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

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

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

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

F-10
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

Joint Venture

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

Principles of Consolidation

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

Concentrations of Credit Risk

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

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

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

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

Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements. Such estimates affect the reported amounts of revenues and
expenses during the reported period. Actual results could materially differ
from these estimates.

F-11
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Fair Value of Financial Instruments

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

Cash and Cash Equivalents

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

Inventories

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

Property and Equipment

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

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

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

Stock Options and Warrants

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

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

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

F-12
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

Patents

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

Minority Interest

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

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

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

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

Revenue Recognition

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

Warranties

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

F-13
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Research and Development Costs

Research and development costs are expensed as incurred.

Advertising Costs

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

Net Loss Per Common Share

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

Income Taxes

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

Reclassifications

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

Recently Issued Accounting Pronouncements

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

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

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

F-14
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2--INVENTORIES

Inventories at June 30 consisted of the following:

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

NOTE 3--ACCRUED LIABILITIES

Accrued liabilities at June 30 consisted of the following:

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

NOTE 4--LONG-TERM DEBT

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

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

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

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

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

F-15
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

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

NOTE 5--SHAREHOLDERS' EQUITY (DEFICIT)

Stock Option Plans

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

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

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

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

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

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

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

F-16
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

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

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

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

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

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

F-17
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

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

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

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

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

Warrants

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

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

F-18
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

Stock Issuances

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

F-19
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

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

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

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

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

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

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

NOTE 6--INCOME TAXES

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

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

F-20
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

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

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

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

NOTE 7--RELATED PARTY TRANSACTIONS

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

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

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

NOTE 8--COMMITMENTS AND CONTINGENCIES

Operating Leases and Capital Lease Obligations

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

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

F-21
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

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

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

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

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

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

Litigation

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

Dealer Agreement

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

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

F-22
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

LICENSE AGREEMENTS

Satellite Services

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

800 Service Agreement

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

Private Placement Exemptions

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

NOTE 9--OTHER LIABILITIES

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

F-23
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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

NOTE 10--401(k) PLAN

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

NOTE 11--LINES OF BUSINESS

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

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

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

F-24
<PAGE>

FRANKLIN TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Pro Forma Information (unaudited)

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

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

NOTE 12--SUBSEQUENT EVENT (UNAUDITED)

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

NOTE 13--FOURTH QUARTER ADJUSTMENTS

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

F-25
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors

Internet Passport, LLC

We have audited the accompanying balance sheet of Internet Passport, LLC
(the "Company") as of June 30, 1996, and the related statements of operations,
member's deficit and cash flows for the period from February 16, 1996 (date
operations commenced) to June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

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

CORBIN & WERTZ

Irvine, California

June 6, 1997

F-26
<PAGE>

INTERNET PASSPORT, LLC

BALANCE SHEET

JUNE 30, 1996

ASSETS

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

LIABILITIES AND MEMBER'S DEFICIT

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

See independent auditors' report and

accompanying notes to financial statements

F-27
<PAGE>

INTERNET PASSPORT, LLC

STATEMENTS OF OPERATIONS

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

See independent auditors' report and

accompanying notes to financial statements

F-28
<PAGE>

INTERNET PASSPORT, LLC

STATEMENTS OF MEMBER'S DEFICIT

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

See independent auditors' report and

accompanying notes to financial statements

F-29
<PAGE>

INTERNET PASSPORT, LLC

STATEMENTS OF CASH FLOWS

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

Supplemental disclosure of non-cash investing activities--

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

See independent auditors' report and accompanying notes to financial statements

F-30
<PAGE>

INTERNET PASSPORT, LLC

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM FEBRUARY 16, 1996 (DATE OPERATIONS

COMMENCED) TO JUNE 30, 1996

NOTE 1--GENERAL AND BASIS OF PRESENTATION

General

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

Basis of Presentation

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

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Risks and Uncertainties

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

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

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements. Such estimates also affect the reported amounts of revenues and
expenses during the reported period. Actual results could materially differ
from those estimates.

Fair Value of Financial Instruments

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

Property

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

Revenue Recognition

Revenues are recognized in the month of service.

F-31
<PAGE>

INTERNET PASSPORT, LLC

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Advertising Costs

Advertising costs are expensed as incurred.

Income Taxes

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

NOTE 2--LOANS TO RELATED PARTIES

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

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

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

NOTE 4--CAPITAL LEASE OBLIGATIONS

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

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

F-32
<PAGE>

INTERNET PASSPORT, LLC

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5--AMOUNTS BORROWED FROM FRANKLIN

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

NOTE 6--CONTRIBUTED SERVICES

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

F-33
<PAGE>

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

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

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

TABLE OF CONTENTS

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

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

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

3,103,750 SHARES

FRANKLIN TELECOMMUNICATIONS CORP.

COMMON STOCK

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

PROSPECTUS

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

, 1997

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

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

<TABLE>
<S> <C>
Printing and duplication expenses.............................. $
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 and Rule 701 promulgated thereunder. The
securities were issued for cash, upon exercise of employee stock options and
in connection with certain acquisitions by the Company.

<TABLE>
<CAPTION>
SHARE
NAME DATE SHARES CONSIDERATION
---- --------- ------- -------------
<S> <C> <C> <C>
John Costello................................ 7/31/97 207,066 $453,475
Thomas Russell............................... 6/13/97 50,000 34,500
Eileen Rouse................................. 6/13/97 50,000 45,000
Alan London.................................. 6/13/97 25,000 17,500
Dianne Oliver................................ 6/13/97 2,000 200
Helen West................................... 6/17/97 12,000 10,800
Alice Amanet................................. 6/24/97 6,250 4,375
1996 Private Placement....................... 8/1/96 890,595 737,500
28 Individuals
Len Bartz.................................... 6/30/96 23,350 20,000
Michael C. Peters............................ 3/1/96 380,000 190,000
Eileen Rouse................................. 3/1/96 10,000 5,000
Michael Parkhurst............................ 8/26/96 5,000 500
Patrick Klos................................. 10/1/96 15,000 1,500
Dianne Oliver................................ 10/8/96 8,000 800
Michael Klos................................. 10/10/96 5,000 500
Terry Lee.................................... 12/2/96 20,000 25,000
Steve Sullivan............................... 12/2/96 20,000 25,000
Millhollan/Ellis............................. 3/96-2/97 12,000 26,246
Charles & Barb Arledge....................... 12/4/96 5,808 8,131
Brew & Shirley Arms.......................... 12/4/96 5,808 8,131
</TABLE>

II-1
<PAGE>

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

II-2
<PAGE>

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

II-3
<PAGE>

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

II-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
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters
10.2* Confidential Agreement dated June 3, 1996 between Malibu Internet
Services and Franklin Telecommunications Corp.
10.3* Joint Venture Agreement dated May 23, 1996 between StarComm Products
Inc. and Franklin Telecommunications Corp.
10.4* Letter Agreement dated February 28, 1997 between Internet Passport
LLC and Franklin Telecommunications Corp.
10.5* Subscriber Agreement dated January 2, 1997 between LaserVend, Inc and
Franklin Telecommunications Corp.
10.6* Subscriber Agreement dated January 28, 1997 between A-Online
Information Services, Inc. and Franklin Telecommunications Corp.
10.7* Subscriber Agreement dated January 17, 1997 between WebTV Networks,
Inc. and Franklin Telecommunications Corp.
10.8* Letter Agreement dated February 26, 1997 between CPR Computer Repair,
Inc. and Franklin Telecommunications Corp.
10.9* Letter Agreement dated December 2, 1996 between Number 1 Internet
Services and Franklin Telecommunications Corp.
10.10* Warrant Agreement dated May 18, 1995 between M. H. Myerson & Co. and
Franklin Telecommunications Corp.
10.11* Form of Letter Agreement dated March 17, 1997 between M. H. Myerson &
Co. and Franklin Telecommunications Corp.
10.12 Form of Indemnity Agreement for all Directors of Franklin
Telecommunications Corp.
10.13 Memorandum of Understanding, dated March 13, 1997, between Internet
Passport and DigitalXPress LLC.
10.14 Agreement, dated May 16, 1997, between StarComm and Franklin
Telecommunications Corp.
10.15 Agreement, dated May 15, 1997, between Peak Technologies, Inc. and
Franklin Telecommunications Corp.
16.1 Letter from Corbin & Wertz, Certified Public Accountants
23.1 Consent of Corbin & Wertz, Certified Public Accountants
23.2 Consent of Phillips & Haddan LLP (included as part of Exhibit 5.1)
23.3 Consent of Singer, Lewak, Greenbaum & Goldstein LLP
</TABLE>
- --------

*Previously filed

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

II-6
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Westlake
Village, State of California, on October 1, 1997.

Franklin Telecommunications Corp.

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

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

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

/s/ Frank W. Peters President and a Director October 1, 1997
____________________________________
Frank W. Peters

(2) Principal Financial and Accounting Officer

/s/ Thomas Russell Chief Financial Officer and October 1, 1997
____________________________________ a Director
Thomas Russell

(3) Directors

/s/ Peter S. Buswell* Director October 1, 1997
____________________________________
Peter S. Buswell

/s/ Robert S. Harp* Director October 1, 1997
____________________________________
Robert S. Harp
</TABLE>

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

II-7
<PAGE>

EXHIBIT INDEX

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

*Previously filed

<PAGE>

Exhibit 5.1

Phillips & Haddan LLP
4675 MacArthur Court, Suite 710
Newport Beach, CA 92660
(714) 752-6100
(714) 752-6161 (facsimile)
e-mail: [email protected]

October 1, 1997

Franklin Telecommunications Corp.
733 Lakefield Road
Westlake Village, CA 91361

Dear Sirs:

You have requested our opinion in connection with the Registration
Statement on Form S-1 (the "Registration Statement") being filed by you with the
Securities and Exchange Commission for the purpose of registering under the
Securities Act of 1933, as amended, 3,103,750 shares of your Common Stock,
without par value (the "Shares"), to be sold by the selling shareholders
identified therein (the "Selling Shareholders").

On the basis of such investigation as we have deemed necessary, we are of
the opinion that the Shares will be, when sold by the Selling Shareholders,
fully-paid and non-assessable shares of Common Stock of the Company.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under "Legal Matters."

Very truly yours,

Phillips & Haddan LLP

<PAGE>

Exhibit 10.12

Franklin Telecommunications Corp.
Indemnification Agreement

THIS INDEMNIFICATION AGREEMENT is entered into as of ___________ ____, 1997
between Franklin Telecommunications Corp. a California corporation ("the
Company"), and ______________________________ ("Indemnitee").

RECITALS

A. The Company believes that it is essential to its best interests to
attract and retain highly capable persons to serve as directors and officers of
the Company.

B. Indemnitee is or has been selected to be a director and/or officer of
the Company.

C. The Company and Indemnitee recognize the increased risk of litigation
and other claims being asserted against directors, officers, and other agents of
corporations.

D. In recognition of Indemnitee's need for substantial protection against
personal liability, in order to enhance Indemnitee's continued service to the
Company, and in order to induce Indemnitee to continue to provide services to
the Company as a director and/or officer, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the fullest extent permitted by law and as set forth in this Agreement and,
to the extent applicable insurance is maintained, for the coverage of Indemnitee
under the Company's policies of directors' and officers' liability insurance.

NOW THEREFORE, IN CONSIDERATION of the foregoing and of Indemnitee's
continuing to provide services to the Company directly or, at its request, with
another enterprise, the parties agree as follows:

1. DEFINITIONS. The following terms shall have the following meanings when
used in this Agreement:

1.1 The term "Board" shall mean the board of directors of the Company.

1.2 The term "Change in Control" shall mean a state of affairs that
shall be deemed to have occurred if :
<PAGE>

(i) any person is or becomes the "beneficial owner" (as that term is
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), directly or indirectly, of securities representing 20 percent
or more of the total voting power of the Company's then-outstanding voting
securities;

(ii) during any period of two consecutive years, individuals who, at the
beginning of such period, constitute the board, together with any new director
whose election by the board or nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds (2/3) of the
directors then in office who either were directors at the beginning of the two-
year period, or whose election or nomination was previously so approved, cease
for any reason to constitute a majority of the board;

(iii) the shareholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or a
consolidation that would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 80 percent of the total voting
power represented by the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation; or

(iv) the shareholders of the Company approve a plan of complete
liquidation of the Company, or an agreement for the sale or disposition by the
Company (whether in one transaction or a series of transactions), of all or
substantially all of the Company's assets.

1.3 The term "Expenses" shall mean:

(i) any expense, liability, or loss, including attorney fees, judgments,
fines, ERISA excise taxes and penalties, and amounts paid or to be paid in
settlement;

(ii) any interest, assessments, or other charges imposed on any of the
items in part (i) of this subsection 1.3; and

(iii) any federal, state, local, or foreign taxes imposed as a result of
the actual or deemed receipt of any payments under this Agreement paid or
incurred in connection with investigating, defending, being a witness in,
participating in (including on appeal), or preparing for any of the foregoing in
any proceeding relating

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<PAGE>

to any Indemnifiable Event.

1.4 The term "Indemnifiable Event" shall mean any event or occurrence that
takes place either before or after the execution of this Agreement and that is
related to:

(i) the fact that Indemnitee is or was a director or an officer of the
Company, or while a director or officer is or was serving at the request of the
Company as a director, officer, employee, trustee, agent, or fiduciary of
another foreign or domestic corporation, partnership, joint venture, employee
benefit plan, trust, or other enterprise, or was a director, officer, employee,
or agent of a foreign or domestic corporation that was a predecessor corporation
of the Company or another enterprise at the request of such predecessor
corporation; or

(ii) anything done or not done by Indemnitee in any such capacity,
whether or not the basis of the proceeding is an alleged action in an official
capacity as a director, officer, employee, or agent, or in any other capacity
while serving as a director, officer, employee, or agent of the Company, as
described in this subsection 1.4.

1.5 The term "Independent Counsel" shall mean the person or firm appointed
in connection with Section 3 of this Agreement

1.6 The term "Person" shall mean any person (as that term is used in
sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company
acting in such capacity, or a corporation owned directly or indirectly by the
shareholders of the Company in substantially the same proportions as their
ownership of shares of the Company at the date of this Agreement.

1.7 The term "Participant" shall mean a person who is a party to, or a
witness or a participant (including on appeal) in, a Proceeding.

1.8 The term "Potential Change in Control" shall mean a state of affairs
that shall be deemed to exist if:

(i) the Company enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a change in control;

(ii) any person (including the Company) announces publicly an

-3-
<PAGE>

intention to take or to consider taking actions that, if consummated, would
constitute a change in control;

(iii) any person who is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 10 percent or more of the
combined voting power of the Company's then-outstanding voting securities,
increases his or her beneficial ownership of such securities by 5 percent or
more over the percentage owned by such person on the date of this Agreement; or

(iv) the board adopts a resolution to the effect that, for purposes of
this Agreement, a potential change in control has occurred.

1.9 The term "Proceeding" shall mean any threatened, pending, or completed
action, suit, or proceeding, or any inquiry, hearing, or investigation, whether
conducted by the Company or any other party, that Indemnitee in good faith
believes might lead to the institution of any such action, suit, or proceeding,
whether civil, criminal, administrative, investigative, or other.

1.10 The term "Reviewing Party" shall mean the person or firm appointed in
accordance with Section 3 of this Agreement.

1.11 The term "Voting Securities" shall mean any securities of the Company
that have the right to vote generally in the election of directors.

2. AGREEMENT TO INDEMNIFY.

2.1 General Agreement. In the event Indemnitee was, is, or becomes a
participant in, or is threatened to be made a participant in, a proceeding by
reason of (or arising in part out of) an Indemnifiable Event, the Company shall
indemnify Indemnitee from and against any and all expenses to the fullest extent
permitted by law, as the same exists or may hereafter be amended or interpreted
(but in the case of any such amendment or interpretation, only to the extent
that such amendment or interpretation permits the Company to provide broader
indemnification rights than were permitted prior thereto). The parties hereto
intend that this Agreement shall provide for indemnification in excess of that
expressly permitted by statute, including, without limitation, any
indemnification provided by the Company's articles of incorporation, its bylaws,
a vote of its shareholders or disinterested directors, or applicable law.

2.2 Initiation of Proceeding. Notwithstanding anything in this Agreement to

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<PAGE>

the contrary, Indemnitee shall not be entitled to indemnification under this
Agreement in connection with any proceeding initiated by Indemnitee against the
Company or any director or officer of the Company unless:

(i) the Company has joined in or the Board has consented to the
initiation of such proceeding;

(ii) the proceeding is one to enforce indemnification rights under
Section 5; or

(iii) the proceeding is instituted after a change in control and
independent counsel has approved its initiation.

2.3 Expense Advances. If so requested by Indemnitee, the Company shall,
within 10 business days after such request, advance all Expenses to Indemnitee
(an "Expense Advance"). Notwithstanding the foregoing, to the extent that the
reviewing party determines that Indemnitee would not be permitted to be so
indemnified under applicable law, the Company shall be entitled to be reimbursed
by Indemnitee for all such amounts, and Indemnitee hereby agrees to reimburse
the Company promptly for the same. If Indemnitee has commenced legal proceedings
in a court of competent jurisdiction to secure a determination that Indemnitee
should be indemnified under applicable law, as provided in Section 4, any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding, and Indemnitee
shall not be required to reimburse the Company for any expense advance until a
final judicial determination is made with respect thereto and all rights of
appeal therefrom have been exhausted or have lapsed. Indemnitee's obligation to
reimburse the Company for expense advances shall be unsecured, and no interest
shall be charged thereon.

2.4 Mandatory Indemnification. Notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits in
defense of any proceeding relating in whole or in part to an indemnifiable event
or in defense of any issue or matter in such proceeding, Indemnitee shall be
indemnified against all expenses incurred in connection therewith.

2.5 Partial Indemnification. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for a portion of Expenses,
but not for the total amount of Expenses, the Company shall indemnify Indemnitee
for the portion to which Indemnitee is entitled.

2.6 Prohibited Indemnification. No indemnification under this Agreement

-5-
<PAGE>

shall be paid by the Company on account of any proceeding in which judgment is
rendered against Indemnitee for an accounting of profits made from the purchase
or sale by Indemnitee of securities of the Company under section 16(b) of the
Exchange Act, or similar provisions of any federal, state, or local laws.

3. REVIEWING PARTY.

Before any change in control occurs, the Reviewing Party shall be any
appropriate person or body consisting of a member or members of the Board or any
other person or body appointed by the Board who is not a party to the proceeding
for which Indemnitee is seeking indemnification; after a change in control, the
reviewing party shall be the independent counsel. On all matters arising after a
change in control (other than a change in control approved by a majority of the
directors of the Board who were directors immediately before such change in
control) concerning the rights of Indemnitee to indemnity payments and expense
advances under this Agreement, any other agreement, applicable law, or the
Company's articles of incorporation or bylaws now or hereafter in effect
relating to indemnification for indemnifiable events, the Company shall seek
legal advice only from independent counsel selected by Indemnitee and approved
by the Company (which approval shall not be unreasonably withheld), and who has
not otherwise performed services for the Company or Indemnitee (other than in
connection with indemnification matters) within the last five years. The
independent counsel shall not include any person who, under the applicable
standards of professional conduct then prevailing, would have a conflict of
interest in representing either the Company or Indemnitee in an action to
determine Indemnitee's rights under this Agreement. Such counsel, among other
things, shall render a written opinion to the Company and Indemnitee on whether
and to what extent Indemnitee should be permitted to be indemnified under
applicable law. The Company agrees to pay the reasonable fees of the independent
counsel and to indemnify fully such counsel against any and all expenses,
including attorney fees, claims, liabilities, loss, and damages arising out of
or relating to this Agreement or the engagement of independent counsel under
this Agreement.

4. INDEMNIFICATION PROCESS AND APPEAL.

4.1 Indemnification Payment. Indemnitee shall receive indemnification of
Expenses from the Company in accordance with this Agreement as soon as
practicable after Indemnitee has made written demand on the Company for
indemnification, unless the Reviewing Party has given a written opinion to the
Company that Indemnitee is not entitled to indemnification under this Agreement
or applicable law.

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<PAGE>

4.2 Suit To Enforce Rights. Regardless of any action by the reviewing
party, if Indemnitee has not received full indemnification within 30 days after
making a demand in accordance with Section 4.1, Indemnitee shall have the right
to enforce its indemnification rights under this Agreement by commencing
litigation in any court in the State of California seeking an initial
determination by the court or challenging any determination by the reviewing
party or any aspect thereof. The Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the reviewing party
not challenged by Indemnitee shall be binding on the Company and Indemnitee. The
remedy provided for in this Section 4 shall be in addition to any other remedies
available to Indemnitee in law or equity.

4.3 Defense to Indemnification, Burden of Proof, and Presumptions. It
shall be a defense to any action brought by Indemnitee against the Company to
enforce this Agreement (other than an action brought to enforce a claim for
expenses incurred in defending a proceeding in advance of its final disposition
when the required undertaking has been tendered to the Company) that it is not
permissible, under this Agreement or applicable law, for the Company to
indemnify Indemnitee for the amount claimed. In connection with any such action
or any determination by the Reviewing Party or otherwise on whether Indemnitee
is entitled to be indemnified under this Agreement, the burden of proving such a
defense or determination shall be on the Company. Neither the failure of the
Reviewing Party or the Company (including its board, independent legal counsel,
or its shareholders) to have made a determination before the commencement of
such action by Indemnitee that indemnification is proper under the circumstances
because Indemnitee has met the standard of conduct set forth in applicable law,
nor an actual determination by the reviewing party or the Company (including its
board, independent legal counsel, or its shareholders) that Indemnitee had not
met such applicable standard of conduct, shall be a defense to the action or
create a presumption that Indemnitee has not met the applicable standard of
conduct. For purposes of this Agreement, the termination of any claim, action,
suit, or proceeding, by judgment, order, settlement (whether with or without
court approval), conviction, or on a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not permitted by applicable law.

5. INDEMNIFICATION FOR EXPENSES INCURRED IN ENFORCING RIGHTS

The Company shall indemnify Indemnitee against any and all expenses. If
requested by Indemnitee, the Company shall, within 10 business days after such

-7-
<PAGE>

request, advance to Indemnitee such expenses as are incurred by Indemnitee in
connection with any claim asserted against or action brought by Indemnitee for:

(a) indemnification of expenses or advances of expenses by the Company
under this Agreement, or any other agreement, or under applicable law, or the
Company's articles of incorporation or bylaws now or hereafter in effect
relating to indemnification for indemnifiable events, and/or

(b) recovery under directors' and officers' liability insurance policies
maintained by the Company, for amounts paid in settlement if the independent
counsel has approved the settlement.

The Company shall not settle any proceeding in any manner that would impose
any penalty or limitation on Indemnitee without Indemnitee's written consent.
Neither the Company nor Indemnitee will unreasonably withhold its consent to any
proposed settlement. The Company shall not be liable to indemnify the Indemnitee
under this Agreement with regard to any judicial award if the Company was not
given a reasonable and timely opportunity, at its expense, to participate in the
defense of such action; however, the Company's liability under this Agreement
shall not be excused if participation in the proceeding by the Company was
barred by this Agreement.

6. ESTABLISHMENT OF TRUST.

In the event of a change in control or a potential change in control, the
Company shall, on written request by Indemnitee, create a trust for the benefit
of Indemnitee ("the Trust") and from time to time on written request of
Indemnitee shall fund the Trust in an amount sufficient to satisfy any and all
expenses reasonably anticipated at the time of each such request to be incurred
in connection with investigating, preparing for, participating in, and/or
defending any proceeding relating to an indemnifiable event. The amount or
amounts to be deposited in the Trust under the foregoing funding obligation
shall be determined by the reviewing party. The terms of the Trust shall provide
that on a change in control:

(a) The Trust shall not be revoked or the principal invaded without the
written consent of Indemnitee.

(b) The Trustee shall be chosen by Indemnitee subject to approval by the
Company. The Trustee shall advance, within 10 business days of a request by
Indemnitee, all expenses to Indemnitee (provided that Indemnitee hereby agrees
to

-8-
<PAGE>

reimburse the Trust under the same circumstances for which Indemnitee would
be required to reimburse the Company under Section 2.3 of this Agreement).

(c) The Trust shall continue to be funded by the Company in accordance with
the funding obligation set forth in this Section 6.

(d) The Trustee shall promptly pay to Indemnitee all amounts for which
Indemnitee shall be entitled to indemnification under this Agreement or
otherwise.

(e) All unexpended funds in the Trust shall revert to the Company on a
final determination by the reviewing party or a court of competent jurisdiction
that Indemnitee has been fully indemnified under the terms of this Agreement.

Nothing in this Section 6 shall relieve the Company of any of its
obligations under this Agreement. All income earned on the assets held in the
Trust shall be reported as income by the Company for federal, state, local, and
foreign tax purposes. The Company shall pay all costs of establishing and
maintaining the Trust and shall indemnify the Trustee against any and all
expenses, including attorneys' fees, claims, liabilities, losses, and damages
arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.

7. NONEXCLUSIVITY.

The rights of Indemnitee under this Agreement shall be in addition to any
other rights Indemnitee may have under the Company's articles of incorporation,
bylaws, applicable law, or otherwise. To the extent that a change in applicable
law (whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Company's articles of
incorporation, bylaws, applicable law, or this Agreement, it is the intent of
the parties that Indemnitee enjoy by this Agreement the greater benefits
afforded by such change.

8. LIABILITY INSURANCE.

To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance, Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director or
officer.

9. PERIOD OF LIMITATIONS.

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<PAGE>

No legal action shall be brought, and no cause of action shall be asserted,
by or on behalf of the Company or any affiliate of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors, or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, or such longer period as may be required by state law
under the circumstances. Any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such period; provided, however, that if
any shorter period of limitations is otherwise applicable to any such cause of
action, the shorter period shall govern.

10. AMENDMENT OF THIS AGREEMENT.

No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this Agreement shall operate as a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver. Except as specifically provided herein, no failure to
exercise or any delay in exercising any right or remedy hereunder shall
constitute a waiver thereof.

11. SUBROGATION.

In the event of payment under this Agreement, the Company shall be
subrogated to the extent of such payment to all rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.

12. NO DUPLICATION OF PAYMENTS.

The Company shall not be liable under this Agreement to make any payment in
connection with any claim made against Indemnitee to the extent Indemnitee has
otherwise received payment (under any insurance policy, bylaw, or otherwise) of
the amounts otherwise indemnifiable under this Agreement.

13. BINDING EFFECT.

This Agreement shall be binding on and inure to the benefit of and be
enforceable by the parties hereto and their respective successors (including any
direct or indirect successor by purchase, merger, consolidation, or otherwise to
all or

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<PAGE>

substantially all of the business and/or assets of the Company), assigns,
spouses, heirs, and personal and legal representatives. The Company shall
require and cause any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all, substantially all, or a substantial
part of the business and/or assets of the Company, by written agreement in form
and substance satisfactory to Indemnitee, expressly to assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place. The
indemnification provided under this Agreement shall continue for Indemnitee for
any action taken or not taken while serving in an indemnified capacity
pertaining to an indemnifiable event even though Indemnitee may have ceased to
serve in such capacity at the time of any proceeding.

14. SEVERABILITY.

If any portion of this Agreement shall be held by a court of competent
jurisdiction to be invalid, void, or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitation, each portion of this Agreement containing any
provision held to be invalid, void, or otherwise unenforceable, that is not
itself invalid, void, or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, void, or unenforceable.

15. GOVERNING LAW.

This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of California applicable to contracts made
and to be performed in such State without giving effect to the principles of
conflicts of laws.

16. NOTICES.

All notices, demands, and other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand, against receipt, or mailed, postage prepaid, certified or
registered mail, return receipt requested, and addressed to the Company at:

733 Lakefield Road
Westlake Village, CA 91361
and to Indemnitee at:

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<PAGE>

________________________________

Notice of change of address shall be effective only when given in
accordance with this section. All notices complying with this section shall be
deemed to have been received on the date of delivery or on the third business
day after mailing.

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day specified above.

Franklin Telecommunications Corp.

By:_____________________________

________________________________

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<PAGE>

EXHIBIT 10.13

A MEMORANDUM OF UNDERSTANDING
Between
DigitalXpress and Internet PassPort

This memorandum of understanding has been drawn to establish a strategic
alliance between Internet Passport LLC (Internet Passport) and their associated
partners and DigitalXpress LLC. The purpose of this relationship is to combine
development and sales efforts of both entities to develop new technologies and
thus increase profit centers for both entities. The primary business of
DigitalXpress is selling video and data network satellite services. The primary
business of Internet Passport is developing, selling and reselling Internet
technologies many of which require the purchase of products provided by
DigitalXpress (DXP) and their partners.

Goal A) To share resources to develop a new product line to be referred to as
XpressNet which will allow current DigitalXpress products to have
Internet connectivity. Additional product performance is defined
herein.

Goal B) To create a reciprocal business relationship between DigitalXpress
and Internet Passport to design and execute certain sales contracts
with clients of both companies through the combined products of both
entities.

Goal C) To further expand the product base of both entities.

This MOU governs the overall business and financial agreement for the operation
of the business to be called XpressNet. Mutual VAR contracts shall be setup
between the Entities to establish the exact costs to be used for calculation of
profit and loss.

This agreement is a 5 year commitment on both parties part to provide the
products and services agreed to in the VAR contracts.

The business operation will be mutually reviewed quarterly. Business decision
may be made at these times to expand or contract the joint business, as deemed
reasonable by both parties.

This agreement is an exclusive agreement, with the condition that each entity
will have a "First Right of Refusal" for any customer proposal which may be
outside the scope or intent of this agreement. The First Right of Refusal shall
be required within 15 days of the written proposal from the other entity.
<PAGE>

I. DEVELOPMENT ACTIVITIES AND EXPENSES

1. The development costs for the XpressNet product will be shared between the
Entities. The total joint development expense will not exceed $60,000
without written approval of both Entities. The anticipated development cost
elements are:

A) Internet PassPort will install and provide the necessary high speed land
lines between the DXP Uplink in St. Paul and Internet Passport via frame
relay during development and prior to service commencement at no cost to the
project.

B) DigitalXpress will provide high speed satellite time during product
development and prior to service commencement at no cost to the project.

C) Each entity will contribute approximately equal resources to the
development of mutually defined products on a mutually agreeable schedule.
Should outside assistance be necessary which will incur unanticipated
expense, both entities must agree to the additional cost.

It is anticipated that Internet PassPort will contribute the following to
the product development:

Software development of the XpressNet Product:
Broadcast Shim
Receive Site Software Shim
Browser Interface To Store And Forward System
Testing Support For DigitalXpress Alpha and Beta Product Testing

It is anticipated that DigitalXpress will contribute the following to the
product development:

MPT Software and Related NT Computer System
Receive Site Hardware and Software
DXP Receiver and Antenna
DXP Computer Card
Necessary Documentation
Installation Of Receive Site Equipment and Software @ IPP
Consulting Help For Software Interfaces To IPP
Testing Support

2. Both entities will share the cost of mutually agreed upon product
development by using in-house resources. Products to be developed will be
mutually defined and approved in a product description document before
development begins. Undefined development will not be mutually supported.

3. Each entity will provide product development facilities required at the
other's location, if necessary.

2
<PAGE>

II. COST OF SALES/BUSINESS RELATIONSHIP

The cost of Sales relationship will not begin until the first revenue paying
customer is using the service. Each Entity will offer the joint business and the
other entity discount pricing, as expressed in the related VAR contracts.

1. All profits and losses from the sale of the XpressNet products and
services shall be shared equally between DigitalXpress and Internet
Passport.

2. DigitalXpress agrees to utilize Internet Passport for Internet access
for the XpressNet products.

3. Internet PassPort agrees to utilize DigitalXpress for satellite
services for the XpressNet or XpressNet like products.

4. Prices quoted in the VAR contracts may be used by each Entity for
business outside of the XpressNet product operation.

5. Accounting for the business will be defined in a separated document,
which will become attachment B to this document. The following elements
will serve as guide lines to the accounting of the business:

a) Internet PassPort will bill DigitalXpress on a monthly basis one
half of the agreed upon operational expenses incurred (at the rate
defined in the VAR contract) which will include, as a minimum:
. Internet Subscriptions
. Dedicated Communication Line Cost Required From Atlanta To
Minneapolis
. Other preagreed costs

b) DigitalXpress will bill Internet PassPort on a monthly basis one
half of the agreed upon operational expenses incurred (at the rate
defined in the VAR contract) which will include, as a minimum:

. Satellite Service
. Other Preagreed upon costs

a) Internet PassPort shall reconcile the profit and loss of the
XpressNet product on a monthly basis. It shall do this by
calculating the XpressNet profit generated, as follows:

. Adding the revenue generated. XpressNet revenue shall be defined
as the revenue generated by data transmitted over the dedicated
XpressNet satellite channels and the associated Internet
subscription service. It does not include DXP equipment,
installation services, DXP site access fees, or equipment
warranties.

. Subtracting the XpressNet bills exchanged between the entities

. Subtracting sales expenses of the selling organization (calculated
as 10% of selling entity revenue)

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. Calculation of the profit will result in one of the Entities owing
money to the other. If the profit calculation determines that
Internet PassPort owes DigitalXpress money, then it will send a
check to DigitalXpress for the profit plus sales expenses.

If DigitalXpress Owes Internet PassPort money, then Internet
PassPort will send DigitalXpress an invoice for the profit.

. Internet PassPort will provide DigitalXpress a monthly report of
all revenue generated by all XpressNet clients so that
DigitalXpress may bill its clients for the service.

All development expenses incurred by either entity, other than in house
resources, shall be reimbursed from the sale of the XpressNet product line
over a minimum twelve month period. All expenses expended by the joint
project must be approved by both parties prior to the occurrence of the
expense. Each entity shall report its share of the expenses monthly.
Expenses not reported in the month of occurrence shall not be allowed as a
part of the joint business expense.

III. MARKETING/SALES

1. Each entity will assist the other in collaborative proposal writing
and sales solicitation when products from each company are needed by
potential client(s).

2. Each entity will provide product development capabilities and
demonstration area for the other.

3. Each entity will refer potential clients to the "partnership" for
potential sales.

4. Each entity will offer in house marketing resources to develop the
sales/marketing strategy for XpressNet products.

5. Internet Passport will resell DigitalXpress, XpressVideo, XpressData
and XpressAudio products.

6. Internet Passport will bundle DigitalXpress products into corporate
Internet designs and resellers programs for Internet Passport
products.

7. Additional demonstration areas will be set up as each Internet
Passport expands to other offices.

IV. OTHER AREAS OF POSSIBLE JOINT INTEREST

1. Socrates Groupware, NetCarta Web "Cartography" Software for resale.
2. Web site Design and Development for DigitalXpress or for resale.
3. Web site and server hosting services for DigitalXpress or for resale.
4. Franklin Telecom Product And Services.

V. PRODUCT DEFINITION--XpressNet

XpressNet is a fast Internet service using DXP satellite technology.
XpressNet is a cooperative service offering between DigitalXpress and
Internet PassPort. The user subscribes to an XpressNet Internet
subscription at a monthly rate and installs DXP receive site equipment and
software.

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The user browser interface is the Microsoft Internet Explore browser.
The system operates as a normal Internet system, but has an Xpress mode which
allows direction of large data transfers through the satellite, which occurs at
a rate of up to 500 kbs. Files are "Zipped" before down load; the effective down
load rate is over 1 mbs second.

Optionally, prior to down loading a file, the IE browser user may select a
broadcast option. With this option, XpressNet does not return the downloaded
data to the IE browser, but sends it to the DigitalXpress Store And Forward
System for immediate broadcast. The down loaded data is then broadcast to any
number of designated receive sites.

The broadcast option can be configured to broadcast files over the XpressNet
Internet Satellite channel or to a private customer specific channel. Charges
for files that are broadcast over the XpressNet Satellite channel are included
in the XpressNet monthly subscription fee. Files broadcast over a private
customer specific channel are billed at the normal DigitalXpress Store And
Forward service charges.

The XpressNet user may elect to broadcast files by:

Subscribing to the conventional XpressNet Internet subscription and
broadcast files over a private customer specific channel.

Subscribe to a XpressNet subscription and broadcast and download files over
the XpressNet Satellite channel.

This service makes it practical to quickly transfer large files via the Internet
or an XpressNet established Intranet. More importantly, it allows users to
connect data bases to XpressNet, and to allow fast data base access to a
distributed user base on a demand basis.

XpressNet also allows a "push" or broadcast of data files to a distributed user
base. Files broadcast are transferred at the rate of 1.3 megabits per second.
Since files are "zipped", the average transfer rate is over 2.6 megabits per
second.

XpressNet is offered on a subscription basis. The basic service offers an
unlimited amount of conventional Internet or Internet time and 100 megabytes of
high speed prime time down load per month and 100 megabytes of non prime time
download per month. The user may operate in either the Xpress or conventional
Internet modes.

Files are automatically "zipped" before they are down loaded. Zipping provides
both compression and security to the data broadcast. Zipped files are encrypted
and provide an average of 50% reduction in data that to be broadcast.

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Figure 1.0 depicts the overall architecture of the XpressNet system. It has
eight major components:

The Internet
Grid Net Dial Up Network
Internet PassPort Internet Service Provider
XpressNet Subscriber Computer
DigitalXpress Uplink Center
Store And Forward Service
XpressNet Service
Customer Data Base

XpressNet uses the nation wide capability of Grid Net to provide either local
dial up access or direct 1-800 service to any location in the U.S.

Corporate data bases may be connected to XpressNet via three methods:

. Through the Internet via a dedicated high speed communication line
. Directly to the Internet PassPort via a dedicated high speed
communication line
. Directly to the DigitalXpress Uplink Center

Internet Data Base Connection:

. Data is accessible from any Internet Service Provider, World Wide in
conventional with conventional Internet connections.
. XpressNet speed Of data down load is restrained by the path taken by the
Internet connection to Internet PassPort, the communication line from
Internet PassPort to DigitalXpress and the 500 kbs broadcast capability
of XpressNet.
. Security of data is more vulnerable: However, used with an encryption
system, data is relatively secure.
. Files may be either downloaded via the DigitalXpress Store And Forward
broadcast service or to the Internet user via the IE browser.

ISP Internet PassPort Data Base Connection:

. Data is accessible through the XpressNet service.
. Speed of data down load is restrained by the communication line
established to the ISP, the communication line from Internet PassPort to
DigitalXpress and the 500 kbs broadcast capability of XpressNet.
. Data transfers to Internet PassPort are very secure: if this data is
broadcast over a private DigitalXpress Satellite channel, it is a very
secure end to end communication system. Data broadcast or downloaded over
the XpressNet Satellite channel are protected by the encryption system
used in the "zipping" process.
. Files may be either broadcast via the Store And Forward service or down
line loaded to IE browser.

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DIGITALXPRESS UPLINK CENTER DATA BASE CONNECTION:

. Speed of data broadcast is limited only by the communication line
established to the DXP Uplink Center and the 500 kbs broadcast capability
of XpressNet.
. Data transfers to the DXP are very secure: if this data is broadcast over
a private DigitalXpress Satellite channel, it is a very secure end to end
communication system.
. Files may be selected for broadcast by the conventional XpressNet
Internet connection, but can not be delivered to the IE browser: however
they can be broadcast via the Store And Forward service through either
the Xpress Satellite channel or a private customer channel.

Internet PassPort is an Internet Service Provider equipped with special
equipment that provides the intelligence of the XpressNet service. It provides
the connection from the Internet and the XpressNet subscriber. In Xpress mode,
it receives data from subscriber via the dial up network and delivers data to
the subscriber via the satellite. It also can divert data that is normally down
loaded to the IE browser to the DXP Store And Forward Service for broadcasting
to many sites.

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[DIAGRAM OF XPRESSNET SYSTEM]

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PROJECT SCHEDULE:

Each entity will expend the resources necessary to bring to market a fully
tested product for beta release to customers no later than May 1, 1997.