FRANKLIN TELECOMMUNICATIONS CORP, S-1/A, 1998-10-09

FRANKLIN TELECOMMUNICATIONS CORP
S-1/A, 1998-10-09
COMPUTER COMMUNICATIONS EQUIPMENT

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1998
REGISTRATION NO. 333-41781
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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POST-EFFECTIVE 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)

<TABLE>
<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)

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.
HADDAN & ZEPFEL LLP
4675 MACARTHUR COURT, SUITE 710
NEWPORT BEACH, CALIFORNIA 92660
(949) 752-6100

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Amendment to 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 combined prospectus contained in this Registration Statement also
relates to the Registrant's Registration Statement on Form S-1 (File No.
333-24791).

THIS POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE UPON ORDER OF THE COMMISSION PURSUANT TO SECTION 8(C) OF THE
SECURITIES ACT.

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<PAGE> 2

PROSPECTUS

[LOGO]

6,740,172 SHARES

FRANKLIN TELECOMMUNICATIONS CORP.

COMMON STOCK

All of the 6,740,172 shares of Common Stock offered hereby are being sold
by certain shareholders (the "Selling Shareholders") of Franklin
Telecommunications Corp. (the "Company"). Of such shares, up to 3,905,215 shares
are issuable upon the exercise of warrants held by certain Selling Shareholders,
and up to 1,786,207 shares are issuable upon conversion of shares of the
Company's Series C Preferred Stock held by certain Selling Shareholders (the
"Convertible Preferred Stock"). The Company will not receive any of the proceeds
from the sale of shares by the Selling Shareholders; however, it will receive
proceeds from any exercise of the warrants, and an additional amount equal to
30% of the net proceeds received by those Selling Shareholders from the sale of
the shares issuable upon exercise of certain of the warrants, 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 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 IP telephony and 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.

THE DATE OF THIS PROSPECTUS IS OCTOBER , 1998.
<PAGE> 3

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

By Selling Shareholders....... 6,740,172 shares of the Company's Common Stock.

Common Stock Outstanding as of
September 15, 1998.......... 19,263,444 shares.

Risk Factors.................. The securities involve a high degree of risk
and limited liquidity. See "Risk Factors."

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SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
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1996 1997 1998
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<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER
SHARE DATA AND OUTSTANDING SHARES):
Net sales............................................. $ 430 1,735 1,377
Gross profit (loss)................................... (160) 745 543
Loss from operations.................................. (1,497) (3,085) (4,964)
Net loss.............................................. (1,467) (2,824) (4,507)
Net loss per common share............................. $ (0.14) (.23) (.29)
Weighted average common shares outstanding............ 10,279,281 12,267,991 15,524,556
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1998
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<S> <C> <C> <C>
BALANCE SHEET DATA (IN THOUSANDS):
Total assets.......................................... $ 3,514 8,892
Total liabilities..................................... $ 1,939 1,856
Accumulated deficit................................... $ (8,975) (13,482)
</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, 1998, of $13,482,000. 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 IP telephony and Internet services
business of its majority-owned subsidiary, FNet, and increasing sales and
marketing expenses to promote new products and services. During the years ended
June 30, 1998 and 1997, the Company's subsidiary, FNet, raised approximately
$398,000 and $1,950,000, respectively, in equity financing. Additionally, during
the year ended June 30, 1998, the Company received net proceeds of $10,150,000
from private equity financings. See "Business -- Recent Financings." The Company
has been dependent on these equity financings 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 Corp. ("FNet"). Subsequently, FNet expanded its
services to include IP telephony. The Company has devoted significant resources
and management time to the organization and development of FNet. As of June 30,
1998, the Company owned approximately 70% of the common stock of FNet, with the
balance owned by members of management, including the Company's CEO, 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, 1998 there were
options to purchase 5,999,000 shares and warrants to purchase 1,722,521 shares
of FNet outstanding, constituting approximately 26.6% and 7.7%, respectively, 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 CEO, 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 relatively insignificant assets and
revenues from operations; 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.

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. For the year ended June 30, 1997, the customers accounting for over
10% of revenues were Revco Drug Stores (29%) and Citibank (10%). For the year
ended June 30, 1998, the customers accounting for over 10% of revenues were JM
Best, Inc. (30%) and Auction Management Solutions (13%). 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.

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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 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 may grow rapidly with the Company's expanding customer base, and the
Company may occasionally experience difficulties satisfying the demand for its
IP telephony and Internet services. If such difficulties were to become
widespread, it could adversely impact operations by causing subscribers or
potential subscribers to utilize competitive long distance telephone service
providers and 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 certain
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. The
Company believes that existing cash and cash equivalents, cash flow from
operations, and cash 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.

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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 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 and telecommunications 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 experience 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 IP telephony and 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, Qwest and others; (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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cost of telephone and Internet access and significantly increasing pricing
pressures on FNet. For example, AT&T has recently expanded its Internet services
offerings and formed an IP telephony division. In addition, certain of FNet's
online competitors, including America Online, the Microsoft Network and Prodigy,
have 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.

The Company has recently entered the Internet telephony business, and plans
to sell hardware products and (through FNet) provide telephone service in this
new business area. There is no assurance that this new business venture will be
successful. The current and prospective competitors in this business include
many large companies that have substantially greater market presence and
financial, technical, marketing and other resources than the Company and FNet.
The Company and FNet compete (or in the future are expected to compete) directly
or indirectly with the following categories of companies in the Internet
telephony business: (i) PC software providers such as VocalTec, Inter-Tel and
ITXC Corp.; (ii) PC to PC telephony product suppliers such as VDONet, Inc. and
Netspeak; (iii) Internet telephony hardware product suppliers such as Micom,
Cisco Systems, Bay Networks and 3COM; (iv) telecommunications equipment vendors
such as Lucent Technologies, Siemens and Nortel; and (v) IP telephony service
providers such as Delta Three, Inc., Qwest, Networks Telephony Corp., IDT and
Concentric Networks.

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
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reason could cause interruptions in the services provided by FNet, which could
have a material adverse effect on the Company.

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 IP telephony 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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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. 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 IP telephony and 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 of its ISP segment of the business 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 resources in its infrastructure and customer and
technical support capabilities. However, there can be no

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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, as of
the date of this Prospectus, is not listed on any stock exchange or on NASDAQ.
Trading volume in the Common Stock has fluctuated considerably in the recent
past.

SHARES ELIGIBLE FOR FUTURE SALE; DILUTION

Due to the structure of the Company's Series C Preferred Stock (the
"Preferred Stock"), recent declines in the market price of the Company's Common
Stock have resulted in substantial dilution to holders of the Common Stock.
Under the terms of the Company's agreement with the holders of the Preferred
Stock, the shares of Preferred Stock are convertible into shares of the
Company's Common Stock at the lower of (i) $4.64 per share or (ii) between 80%
and 85% of the market price of the Common Stock, depending on the date of
conversion, but not below $1.00 per share. From March 25, 1998 (the date the
Preferred Stock became convertible into Common Stock) through September 15,
1998, of the 740 shares of Preferred Stock originally issued, 307 shares of
Preferred Stock, including accrued dividends, were converted into 1,718,697
shares of Common Stock, resulting in substantial dilution to the common
stockholders. Because the number of shares of Common Stock issuable upon
conversion of the Preferred Stock is dependent on the market price of the Common
Stock, the decline in the share price has caused more shares of Common Stock to
be issued upon conversion of the Preferred Stock. Accordingly, more shares of
Common Stock have become available for resale under this Registration Statement,
which has also had the effect of decreasing the market price. Sales,
particularly short selling, of substantial amounts of shares of Common Stock in
the public market may adversely affect the prevailing market price of the Common
Stock.

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

10
<PAGE> 12

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.

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 would
receive the proceeds of the exercise of the Warrants. If all of the Warrants
were exercised to purchase shares of the Company's Common Stock, the Company
would receive net proceeds of $11,213,747, plus an additional amount equal to
30% of the net proceeds of the sale of the shares issued upon exercise of
certain of the warrants, to the extent such proceeds exceed $4.00 per share. See
"Plan of Distribution -- 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> 13

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 IP Telephony and 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 and continuing
in the year ended June 30, 1998, 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 years, while the newly developed hardware
products and Internet services were not yet ready for market. Initial demand for
the Company's D-Mark Channel Bank, Cyclone and Data Voice Gateway hardware
product lines have yet to be established.

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. The Data Voice Gateway, or DVG, is a further
evolution of the D-Mark, which adds the capability of transmitting voice and fax
traffic over the Internet and Frame relay circuits.

Other features of the D-Mark series include FXO and, in the future, Ground
Start capabilities for the voice card integrated in the D-Mark systems. FXO
allows 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.) 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
modem technology.

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<PAGE> 14

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. 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, The Cyclone, DVG 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.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997

Net Sales. Net sales decreased by $358,000, or 21%, from $1,735,000 in the
year ended June 30, 1997 to $1,377,000 in the year ended June 30, 1998. The
overall decrease is due to reduced demand for wide area network products,
partially offset by increased demand for newly introduced hardware products and
Internet services. Three customers constituted 49% of total sales for the year
ended June 30, 1998. The revenue mix for the year ended June 30, 1998 consisted
of 13% wide area network products, including repair services, 43% DVG and D-Mark
hardware products, and 44% Internet services.

Gross Profit. Gross profit decreased as a percentage of net sales to 39%
for the year ended June 30, 1998, from a gross profit of 43% of net sales for
the corresponding period of 1997. The gross profit percentage decrease can be
attributed to decreased sales of higher margin products and a spreading of fixed
manufacturing overhead costs over a smaller sales base.

Operating Expenses. Operating expenses increased by $1,677,000, or 44%,
from $3,830,000 in the year ended June 30, 1997 to $5,507,000 in the year ended
June 30, 1998. The increase is attributable to increased product development
costs for the recently introduced hardware products, costs in developing the IP
telephony and Internet services infrastructure, increased sales and marketing
efforts, and costs in enhancing the general and administrative infrastructure.

Other Income (Expense). The gain on extinguishment of debt for both years
ended June 30, 1997 and 1998 were one time events and were attributable to
renegotiation and reclassification of certain debt. Interest income increased by
$250,000, from $-0- in the year ended June 30, 1997 to $250,000 in the year
ended June 30, 1998, due primarily to investment of equity funds in interest
bearing accounts. Other expense decreased by $6,000, from $6,000 in the year
ended June 30, 1997 to $-0- in the year ended June 30, 1998, due to various
non-operating items. Other income increased by $26,000, from $-0- in the year
ended June 30, 1997 to $26,000 in the year ended June 30, 1998, due to various
non-operating items.

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.

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<PAGE> 15

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.

Operating Expenses. Operating expenses increased by $2,493,000, or 186%,
from $1,337,000 in the year ended June 30, 1996 to $3,830,000 in the year ended
June 30, 1997. Approximately 64% 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). The gain on extinguishment of debt for the year
ended June 30, 1997 was a one time event and attributable to the
reclassification of certain debt. 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.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and net working capital totaled $5,750,000 and
$5,963,000, respectively, as of June 30, 1998. 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 $1,007,000, $1,109,000 and
$10,150,000 in equity financing, for the years ended June 30, 1996, 1997, and
1998, respectively. Its subsidiary, FNet, raised $1,950,000 for the year ended
June 30, 1997 and $398,000 for the year ended June 30, 1998. FNet recently
engaged an investment banking firm to seek additional private equity funding for
deployment of its planned worldwide IP Telephony network. FNet has continued to
experience losses, due to the expansion of infrastructure for the IP telephony
and Internet services business. In addition to the equity financing described
above, the Company's CEO 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 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 any 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.

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<PAGE> 16

SELECTED FINANCIAL DATA

The selected financial data set forth below for the fiscal years ended June
30, 1996, 1997 and 1998 have been derived from the Company's consolidated
financial statements, audited by Singer, Lewak, Greenbaum & Goldstein LLP (1997
and 1998) and Corbin & Wertz (1996), 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, 1994 and 1995 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,
-----------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales.................................. $1,241 $1,481 $ 430 $ 1,735 $ 1,377
Cost of sales.......................... 516 518 590 990 834
------ ------ ------- ------- -------
Gross profit (loss).................. 725 963 (160) 745 543
------ ------ ------- ------- -------
Operating expenses:
Research and development expenses.... 327 308 320 480 1,612
Selling, general and administrative
expenses.......................... 871 828 947 1,766 3,895
Write-off of goodwill................ -- -- 70 1,584 --
------ ------ ------- ------- -------
Total operating expenses.......... 1,198 1,136 1,337 3,830 5,507
------ ------ ------- ------- -------
Income (loss) from operations.......... (473) (173) (1,497) (3,085) (4,964)
------ ------ ------- ------- -------
Other income (expense):
Interest income...................... 250
Interest expense..................... (14) (10) (26) (41) (43)
Gain on extinguishment of debt....... 310 227
Loss on settlement of litigation.....
Other................................ 4 25 (5) (6) 26
------ ------ ------- ------- -------
Total other income (expense)...... (10) 15 (31) 263 460
------ ------ ------- ------- -------
Income (loss) before minority interest
and income taxes..................... (483) (158) (1,528) (2,822) (4,504)
Minority interest in loss of
subsidiary........................... -- -- 63 -- --
------ ------ ------- ------- -------
Income (loss) before income taxes...... (483) (158) (1,465) (2,822) (4,504)
Provision for income taxes............. 2 2 2 2 3
------ ------ ------- ------- -------
Net income (loss)...................... $ (485) $ (160) $(1,467) $(2,824) $(4,507)
====== ====== ======= ======= =======
Net income (loss) per common share..... $(0.08) $(0.02) $ (0.14) $ (.23) $ (.29)
====== ====== ======= ======= =======
Weighted average number of shares
outstanding.......................... 5,753,589 6,475,984 10,279,281 12,267,991 15,524,556
</TABLE>

BALANCE SHEET DATA (IN THOUSANDS):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash................................... $ 98 $ 135 $ 166 $1,464 $5,750
Working capital (deficit).............. (15) 98 (206) 809 5,963
Total assets........................... 769 998 712 3,514 8,892
Long-term debt......................... 50 161 238 360 404
Other liabilities...................... 543 508 503 183 --
Stockholder's equity (deficiency)...... (549) (386) (749) 1,575 7,036
</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.

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<PAGE> 17

PRICE RANGE OF COMMON STOCK

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

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
First Quarter............................................. $ .39 $ .32
Second Quarter............................................ 2.25 .98
Third Quarter............................................. 1.69 .74
Fourth Quarter............................................ .75 .38
1996
First Quarter............................................. .81 .66
Second Quarter............................................ 1.53 .72
Third Quarter............................................. 2.88 .97
Fourth Quarter............................................ 2.25 1.25
1997
First Quarter............................................. 5.50 1.81
Second Quarter............................................ 3.75 2.25
Third Quarter............................................. 3.25 1.56
Fourth Quarter............................................ 9.94 3.88
1998
First Quarter............................................. 6.69 4.50
Second Quarter............................................ 3.94 2.50
Third Quarter............................................. 1.09 .72
</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.

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<PAGE> 18

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 Corp., the Company is a provider of Internet
Protocol ("IP") telephony and 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 Computer
Telephone Integration (CTI), IP Telephony (IPT), Wide Area Networks (WAN) and
Local Area Networks (LAN), for which the Company provides proprietary hardware
and software.

The IPT, 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/multiplexer 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 prove to be a
significant cost savings for small networks and 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 without
interfering with the performance of the LAN. For those environments with large
network needs (more than 15 users), the Company also manufactures

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<PAGE> 19

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.

Customers 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
modem technology.

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.

IP Telephony Products ("IPT"). The recently introduced Data Voice Gateway
("DVG") allows the Company to provide 'telephone to telephone' long distance
telephone service over the Internet and frame relay circuits. From the end
user's standpoint, there is no hardware or software required, other than a
standard telephone. The functional use is similar to using a long distance
calling card today. The Company plans to market this platform to corporations
and local telephone companies, who wish to integrate the hardware and software
in their own systems. For a large multinational corporation, this device will
allow them to piggyback their international and national long distance telephone
calls over their existing data networks, and virtually eliminate the need for
long distance telephone carriers between their offices.

The Company's majority owned subsidiary, FNet Corp., is in the process of
establishing a service organization, including a 'long distance telephone
network', utilizing IP telephony hardware and software technology, including the
DVG systems manufactured by the Company. FNet plans to implement this network by
co-locating the DVG hardware platforms into existing data networks, and offering
long distance telephone service worldwide, via the Internet and private frame
relay. The use of the Internet and other data networks should be transparent to
the end user.

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 e-mail. 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

18
<PAGE> 20

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 private data networks and 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 addition to acting
as an Internet Service Provider, the Company operates a World Wide Web design
and hosting service.

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 to 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, FNet 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 e-mail. E-mail 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.

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 office. It also markets its products
through direct mail, participation in trade shows, telemarketing, and
advertising in trade

19
<PAGE> 21

and technical publications. The Company has expanded the sales and marketing
operation through acquisitions and the opening of field offices as well as
employing manufacturers 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 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 its home page
on the World Wide Web, and other targeted marketing strategies.

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

20
<PAGE> 22

AT&T, MCI and Sprint; (v) regional bell operating companies ("RBOCs"); (vi)
cable operators, such as Comcast, TCI and Time Warner; and (vii) nonprofit or
educational ISPs.

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, offer 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.

The Internet telephony field is a relatively new market, but already
includes a number of strong competitors, many of which have significantly
greater financial and technological resources than the Company. Competitors
include PC software providers, PC telephone product suppliers,
telecommunications equipment vendors, and Internet telephony service providers.
See "Risk Factors -- Competition; New Products and Technological Changes."

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

21
<PAGE> 23

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. During the year ended June 30, 1998, 160,000 shares
of the Company's common stock at a value of $650,000, were returned to the
Company, as provided under contract, thus reducing the initial purchase value.

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.

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 8,000 square feet, with a lease rate of $8,634 per
month, expiring in November 1998. The lease for this facility is renewable on a
year-to-year basis at the option of the Company. The Company plans to renew this
lease. The other facility houses the manufacturing and inventory warehouse. This
facility is 4,000 square feet, with a lease rate of $3,982 per month, expiring
in March, 1999, and has a one year option on renewal. The Company's subsidiary,
FNet, has a sublease arrangement for a 960 square foot facility at the rate of
$1,392 per month, expiring in January 1999.

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 Company relies
will be adequate to protect its interests. Nevertheless, the

22
<PAGE> 24

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, 1998 and 1997, the Company did not have any backlog of orders.
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, 1998 and 1997, the Company's
research and product development expenses were approximately $1,612,000 and
$480,000, 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.

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.

23
<PAGE> 25

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

LEGAL PROCEEDINGS

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

EMPLOYEES

As of June 30, 1998, the Company had 41 full time employees, including
employees of all subsidiaries. The Company's employees have never been covered
by a collective bargaining agreement. The Company has never experienced any work
stoppages, slowdowns, or other serious labor problems and considers its
relations with its employees to be excellent.

RECENT FINANCINGS

During September, October and November of 1997 the Company completed
private financings with net proceeds of $7,807,000. The financings included the
issuance by the Company of 333,333 shares of Common Stock and warrants to
purchase an additional 333,333 shares of Common Stock, at an exercise price of
$5.00 per share. In addition, the Company issued 740 shares of Series C
Preferred Stock at a purchase price of $10,000 per share, which shares are
convertible into shares of Common Stock at a conversion price of $4.64 per
share, subject to certain adjustments relating to the market price of the
underlying Common Stock. In connection with the issuance of the Series C
Preferred Stock, the Company also issued warrants which are exercisable to
purchase shares of Common Stock of the Company's subsidiary, FNet, and which
may, under certain circumstances, be exercisable to acquire shares of Common
Stock of the Company at an exercise price of $4.64.

24
<PAGE> 26

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...................... 60 Chief Executive Officer and Chairman of the
Board
Peter S. Buswell..................... 50 President and a Director
Robert S. Harp....................... 62 Director
Thomas Russell....................... 46 Chief Financial Officer and a Director
</TABLE>

Mr. Peters has been the Chief Executive Officer 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 President of the Company since June 1998. Between
1996 and 1998, he was President of Xantel Corp. and 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.

EXECUTIVE COMPENSATION

The following table sets forth certain compensation paid or accrued by the
Company during the years ended June 30, 1997 and June 30, 1998 to its CEO,
President and Chief Financial Officer (the "Named Executive Officers").

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND ----------------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
------------------ ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Frank W. Peters, CEO.................... 1997 $291,556(1) $100,000 -0-
1998 $309,048(1) -0- -0-
Peter Buswell, President(3)............. 1997 -0- -0- -0-
1998 $ 16,298 -0- -0-
Thomas Russell, Chief Financial
Officer(2)............................ 1997 $ 60,208 $ 10,000 -0-
1998 $109,167 $ 5,000 -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.

(3) Mr. Buswell was employed by the Company beginning in June 1998.

25
<PAGE> 27

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, 1997 and 1998 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.

During the year ended June 30, 1998, the Company adopted the 1998 Stock
Option Plan (the "1998 Plan"). The 1998 Plan provides for the granting of
options to purchase up to 2,000,000 shares of common stock that are intended to
qualify as incentive stock options within the meaning of Section 422A of the
Internal Revenue Code.

26
<PAGE> 28

The following table sets forth information with respect to ownership of
options and option values as of June 30, 1998 with respect to the Named
Executive Officers. The Company has no outstanding stock appreciation rights,
either freestanding or in tandem with options.

<TABLE>
<CAPTION>
OPTION VALUES AS OF JUNE 30, 1998
------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JUNE 30, 1998 JUNE 30, 1998(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Frank W. Peters......................... 1,550,000(2)/-0- $2,970,000(2)/-0-
Peter Buswell........................... -0-/400,000 -0-/$95,000
Thomas Russell.......................... -0-/200,000 -0-/-0-
</TABLE>

- ---------------
(1) Assumes that a share of Common Stock was valued at $2.56 per share on June
30, 1998. 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, 1997 and 1998. The following
table sets forth certain information regarding stock options granted to the
Named Executive Officers during the twelve months ended June 30, 1997 and 1998:

<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES
NAME YEAR GRANTED IN FISCAL YEAR EXERCISE PRICE EXERCISE DATE
---- ---- ---------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Frank W. Peters.................. 1997 500,000 40% $1.31 12/13/96
Frank W. Peters.................. 1998 -0- 0%
Peter Buswell.................... 1997 50,000 4% $1.31 12/13/96
Peter Buswell.................... 1998 350,000 32% $2.59 Various
Thomas Russell................... 1997 100,000 8% $1.31 12/13/96
Thomas Russell................... 1998 200,000 18% $2.69 Various
</TABLE>

Employment Arrangements. The Company's CEO is employed pursuant to a six
year Employment Agreement, effective January 1, 1998. The Employment Agreement
provides for compensation at the rate of $27,000 per month, with annual
increases of 6%. The Company's President is employed pursuant to a two year
Employment Agreement, commencing within June 1998. The Employment Agreement
provides for compensation at the rate of $18,750 per month, with annual
increases of 6%. The Company's Chief Financial Officer is employed pursuant to
Employment Agreement for a three year period, commencing on September 2, 1997,
providing monthly compensation at the rate of $10,000 per month.

TRANSACTIONS WITH MANAGEMENT

During the year ended June 30, 1996, the Company issued notes for an
aggregate of $217,000 payable to its CEO, 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 CEO, Frank W. Peters, upon exercise of options previously granted. The
exercise price was paid by the cancellation of notes in the amount of $92,000
and accrued interest in the amount of $42,000.

During the year ended June 30, 1996, the Company transferred 4,200,000 of
its shares of FNet to its CEO, Frank W. Peters, and to Colin Patterson, who was
a director of the Company at the time, in cancellation

27
<PAGE> 29

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 CEO, Frank W.
Peters, with his permission, for an undetermined time period.

On September 20, 1995, the Company issued a promissory note for $100,000,
bearing interest at the rate of 8%, to its CEO, 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
CEO 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 CEO, 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 CEO, 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.

On October 7, 1997, the Company's CEO exercised an option to convert a note
for $133,000 into 1,333,695 shares of the Company's Common stock at the exercise
price of $.10 per share.

On October 14, 1997, the Company's CEO exercised an option to purchase
300,000 shares of the Company's Common stock at the exercise price of $.10 per
share.

On November 3, 1997, the Company's Chief Financial Officer exercised
options to purchase 150,000 shares of the Company's Common stock at exercise
prices ranging from $.69 to $1.31.

On May 11, 1998, the Company's Chief Financial Officer exercised options to
purchase 100,000 shares of the Company's Common stock at an exercise price of
$.69 per share.

As of June 30, 1998, the deferred compensation of $129,000 for the CEO was
converted into a promissory note. One half of the principal balance of the note
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.

28
<PAGE> 30

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1998 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............................................. 4,755,893(1) 26%
733 Lakefield Road
Westlake Village, CA 91361
Peter S. Buswell............................................ 75,000 .4%
733 Lakefield Road
Westlake Village, CA 91361
Robert S. Harp.............................................. -0- -0-
733 Lakefield Road
Westlake Village, CA 91361
Thomas Russell.............................................. 148,000 .8%
733 Lakefield Road
Westlake Village, CA 91361
All directors and executive officers of the Company as a
group
(5 persons)............................................... 4,978,893 27%
</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.

29
<PAGE> 31

SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 25, 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 in this table and conversion of all Convertible Preferred Stock
underlying shares included in this table). Under certain circumstances the
number of shares issuable upon conversion of the Convertible Preferred Stock and
the number of shares issuable upon exercise of warrants may be increased due to
adjustments in the conversion price or the exercise price, as the case may be,
and pursuant to penalty provisions, designed to protect the holders against
dilution and against decreases in the market price of the underlying Common
Stock. In such event, the number of shares to be sold by the Selling
Shareholders and covered by the Registration Statement of which this Prospectus
is a part is increased appropriately pursuant to Rule 416 under the Securities
Act of 1933, as amended.

<TABLE>
<CAPTION>
SHARES
TO BE SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED SOLD OWNED AFTER OFFERING
-------------------------- --------- --------------------
NAME NUMBER PERCENT NUMBER NUMBER PERCENT
---- ----------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
M.H. Meyerson & Co., Inc............ 595,000 2.7% 595,000 -0- -0-
Wilson Davis........................ 30,000 0.1% 30,000 -0- -0-
Sam Wilson.......................... 50,000 0.2% 50,000 -0- -0-
Paul Davis.......................... 60,000 0.3% 50,000 10,000 *
Lyle Davis.......................... 120,000 0.5% 60,000 60,000 0.3%
Byron Barkley....................... 40,000 0.2% 40,000 -0- -0-
Bollard Investment Co............... 80,000 0.3% 40,000 40,000 0.2%
Bruce Whaley........................ 40,000 0.2% 40,000 -0- -0-
E. Bryan Bagley..................... 40,000 0.2% 40,000 -0- -0-
Joe Fisher.......................... 132,000 0.6% 110,000 22,000 0.1%
Gary Nelson......................... 128,000 0.6% 64,000 64,000 0.3%
Gary Nelson Transcorp C/F........... 11,000 * 11,000 -0- -0-
Raleigh Baughman.................... 87,300 0.4% 50,000 37,300 0.2%
Blair Holder........................ 135,000 0.6% 50,000 85,000 0.4%
Vince Clements...................... 100,000 0.5% 50,000 50,000 0.2%
Terry Widner........................ 135,175 0.6% 50,000 85,175 0.4%
Mike Peters......................... 498,568 2.2% 190,000 308,568 1.4%
Delaware Charter Guaranty & Trust
Co., FBO Ronald Heller............ 303,000 1.4% 303,000 -0- -0-
Delaware Charter Guaranty & Trust
Co., FBO David Nagelberg.......... 303,000 1.4% 303,000 -0- -0-
Martan & Co......................... 146,000 0.7% 146,000 -0- -0-
Michael and Linda Silvestri......... 28,000 0.1% 28,000 -0- -0-
Jeffrey Barber...................... 14,000 0.1% 14,000 -0- -0-
Joel Marcus......................... 12,000 0.1% 12,000 -0- -0-
Rocco Vezza......................... 12,000 0.1% 12,000 -0- -0-
Joanne Gioia........................ 12,000 0.1% 12,000 -0- -0-
Joseph Schmidt...................... 10,000 * 10,000 -0- -0-
Eileen Rouse........................ 60,000 0.3% 10,000 50,000 0.2%
Kevin Charos........................ 10,000 * 10,000 -0- -0-
Marcia Joedicker.................... 20,000 0.1% 20,000 -0- -0-
Frederick I. Camerer................ 161,647 0.7% 17,500 144,147 0.7%
Paul Sper........................... 60,000 0.3% 60,000 -0- -0-
</TABLE>

30
<PAGE> 32

<TABLE>
<CAPTION>
SHARES
TO BE SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED SOLD OWNED AFTER OFFERING
-------------------------- --------- --------------------
NAME NUMBER PERCENT NUMBER NUMBER PERCENT
---- ----------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Sparrow Marcioni.................... 440,000 2.0% 300,000 140,000 0.6%
Mark Milhollan...................... 12,000 0.1% 12,000 -0- -0-
Neil Wyenn.......................... 25,000 0.1% 25,000 -0- -0-
Dianne Oliver....................... 10,000 * 8,000 2,000 *
Peter Buswell....................... 30,000 0.1% 30,000 -0- -0-
John Calderwood..................... 6,250 * 6,250 -0- -0-
Kristin Peters...................... 138,127 0.6% 10,000 128,127 0.6%
Terry Lee........................... 20,000 0.1% 20,000 -0- -0-
Steve Sullivan...................... 20,000 0.1% 20,000 -0- -0-
Garry Fredericksen.................. 190,000 0.9% 190,000 -0- -0-
Larry Kupferberg.................... 2,500 * 2,500 -0- -0-
Jacqueline Knapp.................... 2,500 * 2,500 -0- -0-
The Matthew Fund, N.V............... 83,483(1) 0.4% 84,483(1) -0- -0-
75,431(2) 0.3% 75,431(2) -0- -0-
Ellis AG............................ 24,138(1) 0.1% 24,138(1) -0- -0-
21,552(2) 0.1% 21,552(2) -0- -0-
Triton Capital Investments, Ltd..... 84,483(1) 0.4% 84,483(1) -0- -0-
75,431(2) 0.3% 75,431(2) -0- -0-
JMG Capital Partners, L.P........... 84,483(1) 0.4% 84,483(1) -0- -0-
75,431(2) 0.3% 75,431(2) -0- -0-
Banque Edouard Constant S.A......... 120,690(1) 0.5% 120,690(1) -0- -0-
107,759(2) 0.5% 107,759(2) -0- -0-
Lakeshore International, Ltd........ 362,069(1) 1.6% 362,069(1) -0- -0-
323,276(2) 1.5% 323,276(2) -0- -0-
Elara Ltd........................... 362,069(1) 1.6% 362,069(1) -0- -0-
323,276(2) 1.5% 323,276(2) -0- -0-
Banque Franck S.A................... 181,034(1) 0.8% 181,034(1) -0- -0-
161,639(2) 0.7% 161,639(2) -0- -0-
JNC Opportunity Fund Ltd.(4)........ 482,758(1) 2.2% 482,758(1) -0- -0-
431,034(2) 2.0% 431,034(2) -0- -0-
Swartz Family Partnership, L.P...... 58,000(3) 0.3% 58,000(3) -0- -0-
Kendrick Family Partnership, L.P.... 58,000(3) 0.3% 58,000(3) -0- -0-
Frank Mauro......................... 58,000(3) 0.3% 58,000(3) -0- -0-
John M. Harris...................... 17,600(3) 0.1% 17,600(3) -0- -0-
Carlton M. Johnson, Jr.............. 6,000(3) * 6,000(3) -0- -0-
Davis C. Holden..................... 5,000(3) * 5,000(3) -0- -0-
P. Bradford Hathorn................. 10,000(3) * 10,000(3) -0- -0-
Charles M. Whiteman................. 10,000(3) * 10,000(3) -0- -0-
Michael E. Stough................... 4,000(3) * 4,000(3) -0- -0-
H. Nelson Logan..................... 4,000(3) * 4,000(3) -0- -0-
David Kern Peteler.................. 16,786(3) 0.1% 16,786(3) -0- -0-
Stephanie E. Flamm.................. 4,000(3) * 4,000(3) -0- -0-
Dwight D. Bronnum................... 2,000(3) * 2,000(3) -0- -0-
Robert L. Hopkins................... 2,000(3) * 2,000(3) -0- -0-
--------- --- --------- --------- ---
Total..................... 7,966,489 37% 6,740,172 1,226,317 5.5%
========= === ========= ========= ===
</TABLE>

31
<PAGE> 33

- ---------------
* Less than .1%

(1) Common Stock issuable upon conversion of Series C Preferred Stock.

(2) Common Stock conditionally issuable upon exercise of warrants. These
warrants are primarily exercisable to purchase shares of Common Stock of
FNet Corp., a subsidiary of the Company. However, if FNet has not completed
a public offering by September 30, 1998, the holder may elect to convert the
warrants into warrants to purchase shares of the Company's Common Stock.

(3) Common Stock issuable upon exercise of warrants. 50% of the warrants are
primarily exercisable to purchase shares of Common Stock of FNet Corp., a
subsidiary of the Company. However if, FNet has not completed a public
offering by September 30, 1998, the holder may elect to convert the warrants
into warrants to purchase shares of the Company's Common Stock. The
remaining 50% are exercisable only to purchase shares of the Company's
Common Stock.

(4) JNC Opportunity Fund Ltd. has agreed to restrict its ability to convert its
Convertible Preferred Stock and exercise Warrants to the extent that the
number of shares of Common Stock held by it and its affiliates after such
conversion and/or exercise exceeds 4.999% of the then issued and outstanding
shares of Common Stock following such conversion and/or exercise.

32
<PAGE> 34

PLAN OF DISTRIBUTION

SALES BY SERIES C SELLING SHAREHOLDERS

Of the Shares covered by this Prospectus, up to 3,636,422 are issuable to
the purchasers of shares of the Company's Series C Preferred Stock and
associated warrants (which persons, along with their pledgees, donees,
transferees and other successors-in-interest, are referred to herein as the
"Series C Selling Shareholders") upon conversion or exercise thereof, as the
case may be. Of such warrants, 1,755,522 are primarily exercisable to purchase
shares of Common Stock of FNet Corp., a subsidiary of the Company; however, if
FNet Corp. fails to complete a public offering by September 30, 1998, then the
holders of these warrants have the option to convert them into warrants to
purchase Common Stock of the Company. If so converted, the exercise price is
$4.64 per share, subject to certain adjustments.

The Series C Selling Shareholders have informed the Company that they (and
their pledgees, donees, transferees and other successors-in-interest) 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 shares of Common Stock offered hereby may be
sold by the Series C Selling Shareholders, their pledgees, donees, transferees
and other successors in interest by any one or more of the following methods,
without limitation: (a) block trades in which the broker or dealer so engaged
will attempt to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction, (b) purchase by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus, (c) an exchange distribution, (d) ordinary
brokerage transactions and transactions in which the broker solicits purchasers,
(e) short sales, including short sales against the box, and (f) a combination of
the foregoing. Broker-dealers who acquire shares offered hereby as principal may
thereafter resell such shares from time to time under this Prospectus in
transactions including those described above.

From time to time the Series C Selling Shareholders may engage in short
sales, including short sales against the box, puts and calls and other
transactions in securities of the Company or derivatives thereof, and may sell
and deliver the shares offered in this Prospectus in connection therewith or in
settlement of securities loans. If the Series C Selling Shareholders engage in
such transactions, the market price of the Common Stock (and, accordingly, the
conversion price of the Series C Preferred Stock) could be affected. See "Risk
Factors -- Shares Eligible for Future Sale; Dilution." From time to time the
Series C Selling Shareholders may pledge the shares offered by them hereby
pursuant to the margin provisions of its customer agreements with brokers. Upon
a default by the Series C Selling Shareholders, the broker may offer and sell
the pledged shares from time to time under this Prospectus.

SALES BY OTHER SELLING SHAREHOLDERS

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 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
these warrants were between $1.25 and $1.35 per share.

The Selling Shareholders (other than the Series C 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. Such
other Selling Shareholders may effect such transactions by selling their shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals.

In consideration for registering the Common Stock issuable upon exercise of
these warrants, the holders of these 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 these warrants, to the extent such net proceeds
exceed $4.00 per share. Also, the largest holder of these warrants, M.H.
Meyerson & Co., Inc., has agreed to
33
<PAGE> 35

reimburse the Company for up to $70,000 in legal and accounting fees incurred in
connection with such registration.

GENERAL

Each Selling Shareholder 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 the Prospectus, subject
to the reimbursement described above. 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. The Company and some of the Selling Shareholders have
agreed to indemnify the other against certain liabilities arising out of the
Registration Statement of which this Prospectus is a part, including liabilities
under the Securities Act of 1933.

DESCRIPTION OF CAPITAL STOCK

The Company is authorized to issue up to 90,000,000 shares of Common Stock,
without par value, of which 19,263,444 shares of Common Stock have been issued
and are outstanding. Holders of the Common Stock are entitled to one vote per
share on all matters to be voted upon by the shareholders, and to cumulate votes
in the election of directors. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor. See "Dividend Policy." Upon the
liquidation, dissolution, or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets of the Company which are
legally available for distribution, after payment of all debts and other
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights.

The Company is authorized to issue 10,000,000 shares of Preferred Stock,
issuable in one or more series, each with such designations, preferences,
rights, and restrictions as the Board of Directors may determine. In accordance
with such authorization, the Board of Directors has designated 740 shares as
Series C Preferred Stock, of which 548 shares are issued and outstanding, as of
June 30, 1998. The Series C Preferred Stock is not redeemable, and has no
dividend preference. Each share of Series C Preferred Stock has a liquidation
preference of $10,000 per share, and accrues a premium at the rate of 8% per
annum. The Series C Preferred Stock has no voting rights, except as required by
law, and was convertible into Common Stock commencing in March 1998 at a
conversion price equal to the lesser of (a) $4.64 per share or (b) between 80%
and 85% of the fair market value of the Common Stock, based on closing prices
during a measuring period prior to conversion, with a minimum of $1.00 per
share. The Series C Preferred Stock is automatically converted into Common Stock
in May of 1999.

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 Company by
Haddan & Zepfel LLP, Newport Beach, California.

EXPERTS

The consolidated statement of operations, shareholders' equity (deficit)
and cash flow for the year ended June 30, 1996, included in this Prospectus, has
been audited by Corbin & Wertz, independent certified public accountants, to the
extent and for the period indicated in their report appearing elsewhere herein.
The
34
<PAGE> 36

consolidated financial statements of the Company as of June 30, 1998, and for
the two years 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 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, 1995 and 1994 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 statement of operations, shareholders' equity (deficit) and
cash flow for the year ended June 30, 1996 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.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"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 Commission, 450 Fifth Street, N.
W., Washington, D. C. 20549, or by way of the Commission's Internet address,
http://www.sec.gov.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith is required to file reports, proxy statements and other information
with the Commission. Such reports and other information may be inspected and
copied at the Commission's Public Reference Section, Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, where copies can be obtained at prescribed
rates, as well as at the Commission's regional offices at Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. The Commission also
maintains a website that contains reports, proxy and other information filed
electronically with the Commission, the address of which is http://www.sec.gov.

35
<PAGE> 37

FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1998, 1997, AND 1996
<PAGE> 38

FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

CONTENTS
JUNE 30, 1998

<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........... F-6
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-9
</TABLE>

F-1
<PAGE> 39

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Franklin
Telecommunications Corp. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years 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, 1998 and 1997, and the
results of consolidated their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.

SINGER LEWAK GREENBAUM
& GOLDSTEIN LLP

Los Angeles, California
September 14, 1998

F-2
<PAGE> 40

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Franklin Telecommunications Corp.

We have audited the consolidated statement of operations, shareholders'
equity (deficit) and cash flow for the year ended June 30, 1996 of Franklin
Telecommunications Corp. and subsidiaries (the "Company"). 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 audit.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of the Company's
operations and their cash flows for year 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. 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. 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, except
as to note 12 which is as
of October 31, 1996

F-3
<PAGE> 41

FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 5,750,000 $ 1,464,000
Accounts receivable, less allowance for doubtful accounts
of $8,000 and $34,000.................................. 91,000 80,000
Other receivables......................................... 107,000 199,000
Current portion of note receivable........................ 241,000 --
Inventories............................................... 671,000 394,000
Prepaid expenses.......................................... 555,000 68,000
------------ -----------
Total current assets.............................. 7,415,000 2,205,000
------------ -----------
Property and equipment, net................................. 778,000 567,000
Excess of cost over fair value of net assets of companies
acquired,
net of accumulated amortization of $0 and $40,000......... -- 591,000
Note receivable, net of current portion..................... 276,000 --
Other assets................................................ 423,000 151,000
------------ -----------
Total assets...................................... $ 8,892,000 $ 3,514,000
============ ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of obligations under capital lease
obligations............................................ $ -- $ 361,000
Current portion of long-term debt (majority due to a
related party)......................................... 252,000 301,000
Accounts payable.......................................... 173,000 175,000
Accrued liabilities....................................... 1,027,000 559,000
------------ -----------
Total current liabilities......................... 1,452,000 1,396,000
Long-term debt, (majority due to a related party) less
current portion........................................... 404,000 360,000
Other liabilities........................................... -- 183,000
------------ -----------
Total liabilities................................. 1,856,000 1,939,000
------------ -----------
Commitments and contingencies
Shareholders' equity
Series C Convertible Preferred stock, no par value
10,000,000 shares authorized
548 and 0 shares issued and outstanding................ 4,856,000 --
Common stock, no par value
90,000,000 shares authorized
18,344,178 and 13,191,223 shares issued and
outstanding............................................ 15,571,000 9,971,000
Common stock committed, no par value
77,336 and 296,066 shares committed but not yet
issued................................................. 91,000 579,000
Accumulated deficit....................................... (13,482,000) (8,975,000)
------------ -----------
Total shareholders' equity........................ 7,036,000 1,575,000
------------ -----------
Total liabilities and shareholders' equity........ $ 8,892,000 $ 3,514,000
============ ===========
</TABLE>

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

F-4
<PAGE> 42

FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales
Product........................................... $ 778,000 $ 1,337,000 $ 397,000
Internet services................................. 599,000 398,000 33,000
----------- ----------- -----------
Total sales............................... 1,377,000 1,735,000 430,000
----------- ----------- -----------
Cost of sales
Product........................................... 749,000 681,000 549,000
Internet services................................. 85,000 309,000 41,000
----------- ----------- -----------
Total cost of sales....................... 834,000 990,000 590,000
----------- ----------- -----------
Gross profit (loss)................................. 543,000 745,000 (160,000)
----------- ----------- -----------
Operating expenses
Research and development expenses................. 1,612,000 480,000 320,000
Selling, general, and administrative expenses..... 3,895,000 1,766,000 947,000
Write-down of goodwill............................ -- 1,584,000 70,000
----------- ----------- -----------
Total operating expenses.................. 5,507,000 3,830,000 1,337,000
----------- ----------- -----------
Loss from operations................................ (4,964,000) (3,085,000) (1,497,000)
----------- ----------- -----------
Other income (expense)
Gain on extinguishment of debt.................... 227,000 310,000 --
Interest income................................... 250,000 -- --
Other income...................................... 26,000 -- --
Interest expense.................................. (43,000) (41,000) (26,000)
Other expense..................................... -- (6,000) (5,000)
----------- ----------- -----------
Total other income (expense).............. 460,000 263,000 (31,000)
----------- ----------- -----------
Loss before minority interest and provision for
income taxes...................................... (4,504,000) (2,822,000) (1,528,000)
Minority interest in loss of subsidiary............. -- -- 63,000
----------- ----------- -----------
Loss before provision for income taxes.............. (4,504,000) (2,822,000) (1,465,000)
Provision for income taxes.......................... 3,000 2,000 2,000
----------- ----------- -----------
Net loss............................................ $(4,507,000) $(2,824,000) $(1,467,000)
=========== =========== ===========
Net loss per common share........................... $ (0.29) $ (0.23) $ (0.14)
=========== =========== ===========
Weighted-average common shares outstanding.......... 15,524,556 12,267,991 10,279,281
=========== =========== ===========
</TABLE>

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

F-5
<PAGE> 43

FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
---------------------------------------------------------------------------------------------------
COMMON STOCK
PREFERRED STOCK COMMON STOCK COMMITTED
-------------------- ------------------------ -------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------ ----------- ---------- ----------- -------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
receivable............. 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 subsidiaries'
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
Sale of preferred stock.... 740 7,400,000 7,400,000
Repurchase of common stock
from related parties..... (23,818) (161,000) (161,000)
Common stock issued for
Cash..................... 333,333 1,060,000 1,060,000
Notes receivable......... 345,500 --
Stock options/warrants... 1,838,748 2,518,000 11,000 14,000 2,532,000
Exchange of common shares
with related parties... 400,000 161,000 161,000
Conversion of notes
payable by a related
party.................. 1,333,695 133,000 133,000
Conversion of preferred
stock.................. (192) (1,702,000) 799,431 1,702,000 --
Issuance of committed
shares................. 286,066 573,000 (286,066) (573,000) --
Services rendered........ 56,336 71,000 71,000
Common stock of subsidiary
issued for
Cash................... 362,000 362,000
Stock options.......... 36,000 36,000
Services rendered...... 8,000 8,000
Offering costs............. (842,000) (142,000) (984,000)
Cancellation of shares..... (160,000) (650,000) (650,000)
Net loss................... (4,507,000) (4,507,000)
---- ----------- ---------- ----------- -------- --------- ------------ -----------
BALANCE, JUNE 30, 1998..... 548 $ 4,856,000 18,344,178 $15,571,000 77,336 $ 91,000 $(13,482,000) $ 7,036,000
==== =========== ========== =========== ======== ========= ============ ===========
</TABLE>

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

F-6
<PAGE> 44

FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................... $(4,507,000) $(2,824,000) $(1,467,000)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization.................. 167,000 110,000 45,000
Compensation expense........................... 71,000 -- --
Provision for loss on obsolete inventory....... -- -- 226,000
Provision for loss on doubtful accounts........ -- -- (2,000)
Write-down of goodwill......................... -- 1,584,000 70,000
Notes payable for services rendered............ -- 329,000 --
Stock issued for services rendered............. -- 106,000 11,000
Loss on disposal of property................... -- 37,000 1,000
(Increase) decrease in
Accounts receivable............................ (11,000) 14,000 (34,000)
Other receivables.............................. 92,000 -- --
Inventories.................................... (277,000) (132,000) 131,000
Prepaid expenses............................... (487,000) (63,000) 9,000
Increase (decrease) in
Accounts payable............................... (2,000) (96,000) (97,000)
Accrued liabilities............................ 468,000 71,000 175,000
Accrued other liabilities...................... -- -- (24,000)
Other liabilities.............................. -- (310,000) --
----------- ----------- -----------
Net cash used in operating activities............... (4,486,000) (1,174,000) (956,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............... (378,000) (324,000) (58,000)
Cash received in connection with business
acquisitions................................... -- 4,000 3,000
Issuance of notes receivable...................... (517,000) (100,000) --
Proceeds from notes receivable.................... -- 32,000 --
Other assets...................................... (272,000) (100,000) 1,000
Other liabilities................................. (183,000) (38,000) --
----------- ----------- -----------
Net cash used in investing activities............... (1,350,000) (526,000) (54,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable....................... 129,000 $ -- $ --
Payments on notes payable......................... (1,000) -- --
Payments on other liabilities..................... -- (10,000) (5,000)
Proceeds from sale of preferred stock, net of
offering costs................................. 6,558,000 -- --
Proceeds from sale of common stock................ 3,797,000 1,109,000 1,007,000
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)
Payments on capital lease obligation.............. (361,000) (51,000) --
----------- ----------- -----------
Net cash provided by financing activities........... 10,122,000 2,998,000 1,041,000
----------- ----------- -----------
Net increase in cash and cash equivalents........... 4,286,000 1,298,000 31,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........ 1,464,000 166,000 135,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.............. $ 5,750,000 $ 1,464,000 $ 166,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid..................................... $ -- $ -- $ 12,000
=========== =========== ===========
Income taxes paid................................. $ 3,000 $ 2,000 $ 2,000
=========== =========== ===========
</TABLE>

F-7
<PAGE> 45

FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

During the year ended June 30, 1998, the Company completed the following:

- Reduced goodwill valued at $591,000 to $0 as part of the repurchase of
160,000 shares of the Company's common stock.

- Issued 1,333,695 shares of common stock upon the conversion of a note
payable by an officer of the Company for $133,000.

- Issued 799,431 shares of common stock upon the conversion of 192 shares
of its Series C preferred stock.

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>
JUNE 30,
-----------------------
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 $ -0-
=========== ========
</TABLE>

See Notes 1 and 7 for additional non-cash investing and financing activities.

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

F-8

<PAGE> 46

FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998

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

Business and Organization

Franklin Telecommunications Corp. ("Franklin") and its subsidiaries
(collectively the "Company") design, manufacture, and market 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 Corp. ("FNet"), the Company is a provider of Internet Protocol
("IP") telephony and Internet access and services to businesses and individuals.
FNet also distributes the equipment manufactured by the Company to corporations,
including Internet Service Providers.

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 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 excess of
cost over fair value of net assets of companies acquired. 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 (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 excess of cost over
fair value of net assets of companies acquired.

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 excess of cost over fair value of net assets of companies acquired.
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. Pro forma results for the year ended June 30, 1997, as if the acquisitions
had taken place as of the beginning of the 1997 fiscal year, are 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

F-9
<PAGE> 47
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 1 -- GENERAL AND SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

excess of approximately $74,000 of the total acquisition cost over the net
assets acquired and liabilities assumed being allocated to excess of cost over
fair value of net assets of companies acquired. 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, are 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 the
excess of approximately $61,000 of the total acquisition costs over the net
assets acquired and liabilities assumed being allocated to excess of cost over
fair value of net assets of companies acquired. 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, are 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 excess of cost over fair value of net assets acquired 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 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 excess of cost over fair value of net assets of companies acquired.
Pro forma net loss and net loss per share of the years 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 14.

During the year ended June 30, 1998, 160,000 shares of the Company's common
stock at a value of $650,000 were returned to the Company and cancelled, as
provided under contract. The remaining excess of cost over fair value of net
assets acquired related to the acquisition of $591,000 was reduced to $0.

During April 1998, FNet entered into a joint venture with LibertyOne
Limited, an Australian limited liability corporation that provides project
management services and marketing and sales of telecommunications services in
New Zealand. The joint venture is to provide voice and data communications
through an FNet network to customers in New Zealand, Australia, Asia, and the
South Pacific. The joint venture is for an initial term of five years with an
option to extend at the expiration date. As of June 30, 1998, the joint venture
had not commenced operations.

During June 1998, FNet entered into a joint venture agreement with
Megaburst, Inc. to operate an 11-site satellite telephone network in Bosnia used
by NATO troops. The joint venture will operate a network that was purchased by
Megaburst, Inc. from a third party for $150,000. FNet advanced funds to
Megaburst, Inc. for the purchase of the assets. Megaburst, Inc. will
subsequently transfer the assets to FNet.

F-10
<PAGE> 48
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 1 -- GENERAL AND SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

During June 1998, FNet purchased all of the assets of LDNet, Inc. for
$20,000. These assets consisted of equipment.

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 intercompany balances and transactions have been eliminated.

Concentrations of Credit Risk

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.

Three customers accounted for 30%, 13%, and 6%, respectively, of the
Company's product sales for the year ended June 30, 1998. 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.
At June 30, 1998, amounts due from two customers amounted to 35% and 25%,
respectively, of accounts receivable. At June 30, 1997, amounts due from two
customers amounted to 20% and 10%, respectively, of accounts receivable. One
customer, a related party, accounted for 0%, 5%, and 1% of product sales for the
years ended June 30, 1998, 1997, and 1996, respectively, and comprised 0% and 0%
of accounts receivable at June 30, 1998 and 1997, respectively.

Export sales, primarily to Canada, Australia, Poland, and England,
represented 1%, 6%, and 15% of net sales for the years ended June 30, 1998,
1997, and 1996, 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.

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,

F-11
<PAGE> 49
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 1 -- GENERAL AND SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

and accounts payable and accrued expenses, the carrying amounts approximate fair
value due to their short maturities. The amounts shown for notes receivable,
notes payable, and capital lease obligations also approximate fair value because
current interest rates and terms offered by and 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>
Computers and software 5 years
Machinery and equipment 7 years
Furniture and fixtures 7 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 ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 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

Excess of cost over fair value of net assets of companies acquired arising
in connection with the aforementioned business acquisitions is amortized using
the straight-line method over five years. The

F-12
<PAGE> 50
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 1 -- GENERAL AND SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

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 projected undiscounted future cash flows. The amount of
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 year ended June 30, 1997, management of the Company
determined that $1,584,000 had been impaired and, accordingly, the Company
charged this amount to operations. Amortization of excess of cost over fair
value of net assets of companies acquired for the years ended June 30, 1998,
1997, and 1996 amounted to $0, $40,000, and $22,000, 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.

During the year ended June 30, 1998, FNet sold approximately 362,000 shares
of its stock to outside investors at $1.00 per share. It also issued 35,500
shares upon the exercise of 35,500 stock options and 8,000 shares for services
rendered valued at $8,000. 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. In addition, FNet converted a
payable for $311,000 to its parent, FTEL, into 310,718 shares of its stock.
After the issuance of these shares, Franklin's ownership percentage remained at
71% as of June 30, 1998.

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, 1998 and 1997 as FNet, on a
stand-alone basis, had a shareholders' deficit as of such dates. The
accompanying consolidated statements of operations for the years ended June 30,
1998 and 1997 do not reflect the minority interest's share of FNet's losses for
said years 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.

F-13
<PAGE> 51
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 1 -- GENERAL AND SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

Warranties

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

Research and Development Costs

Research and development costs are expensed as incurred.

Advertising Costs

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

Earnings per Share

For the year ended June 30, 1998, the Company adopted SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding. Diluted earnings per share is computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
Because the Company has incurred net losses, basic and diluted loss per share
are the same.

Income Taxes

The Company accounts for income taxes under the asset and liability method
of accounting. Under this method, 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. 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 consolidated financial statements have been
reclassified to conform to the 1998 and 1997 presentations.

Recently Issued Accounting Pronouncements

The FASB issued SFAS 130, "Reporting Comprehensive Income," which 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 FASB 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

F-14
<PAGE> 52
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 1 -- GENERAL AND SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

anticipate any material change in the manner that it reports its segment
information under this new pronouncement.

NOTE 2 -- CASH AND CASH EQUIVALENTS

The Company maintains cash deposits at banks located in California.
Deposits at each bank are insured by the Federal Deposit Insurance Corporation
up to $100,000. At times, the Company holds cash with these banks in excess of
amounts insured by federal agencies. Excess cash is invested in money market
accounts, certificates of deposit, and United States Government agency notes. As
of June 30, 1998, the uninsured portions of these balances held at financial
institutions aggregated to $5,534,000.

Income from these investments consists entirely of interest income in the
amount of $250,000. The aggregate carrying amount of cash and short-term
investments by major types is as follows:

<TABLE>
<S> <C>
Cash..................................................... $ 338,000
Money market accounts.................................... 1,796,000
Certificates of deposit.................................. 1,362,000
United States Government agency notes.................... 2,054,000
----------
Total.......................................... $5,750,000
==========
</TABLE>

NOTE 3 -- INVENTORIES

Inventories at June 30 consisted of the following:

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Raw materials............................................ $260,000 $155,000
Work in process.......................................... 164,000 152,000
Finished goods........................................... 247,000 87,000
-------- --------
Total.......................................... $671,000 $394,000
======== ========
</TABLE>

NOTE 4 -- PROPERTY AND EQUIPMENT

Property and equipment at June 30 consisted of the following:

<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Computers and software................................. $ 997,000 $713,000
Machinery and equipment................................ 184,000 163,000
Furniture and fixtures................................. 168,000 97,000
---------- --------
1,349,000 973,000
Less accumulated depreciation.......................... 571,000 406,000
---------- --------
Total property and equipment................. $ 778,000 $567,000
========== ========
</TABLE>

F-15
<PAGE> 53
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 5 -- NOTES RECEIVABLE

Notes receivable at June 30, 1998 consisted of the following:

<TABLE>
<S> <C>
Note receivable from customer, bearing interest at 11.5% per
annum, secured by certain equipment, and due in August
2001. .................................................... $367,000
Note receivable from joint venture partner, bearing interest
at 10% per annum, secured by a personal guarantee from the
president of the joint venture partners, and due in June
1999. .................................................... 150,000
--------
517,000
Less current portion........................................ 241,000
--------
Long-term portion................................. $276,000
========
</TABLE>

NOTE 6 -- ACCRUED LIABILITIES

Accrued liabilities at June 30 consisted of the following:

<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Salaries and related expenses.......................... $ 421,000 $277,000
Accrued offering costs................................. 153,000 --
Accrued interest payable, primarily to related party... 130,000 88,000
Other accrued liabilities.............................. 323,000 194,000
---------- --------
Total........................................ $1,027,000 $559,000
========== ========
</TABLE>

NOTE 7 -- LONG-TERM DEBT

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

<TABLE>
<CAPTION>
1998 1997
-------- --------
<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 2001. ...................... 632,000 637,000
-------- --------
656,000 661,000
Less current portion..................................... 252,000 301,000
-------- --------
Long-term portion.............................. $404,000 $360,000
======== ========
</TABLE>

The Company is past due on certain payments under its notes payable to its
chief executive officer/majority shareholder. The chief executive
officer/majority shareholder has waived the default provisions of the past due
notes payable and does not intend to demand payment until after June 30, 1999.

F-16
<PAGE> 54
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 7 -- LONG-TERM DEBT (CONTINUED)

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

<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
- ----------------------------------------------------------
<S> <C>
1999.................................................... $225,000
2000.................................................... 136,000
2001.................................................... 43,000
--------
Total........................................... $404,000
========
</TABLE>

Included in the $632,000 due to the Company's president are three notes in
the amount of $129,000, $117,000, and $112,000 which can be converted into
$179,000 of the Company's common stock at a rate of 50% of the fair value of the
common stock at the date of conversion and/or FNet stock at $1.00.

NOTE 8 -- 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 was no expiration date on
the revised agreement. On November 29, 1994, the agreement was further modified.
The modified terms are $10 per Franklin board sold for $300 and $2 per board
sold for $300 or less. The modified agreement was effective through June 1995
and no new modification has been entered into. At June 30, 1998 and 1997, the
Company estimated its future obligation to this supplier to be $183,000 and
$2,000, respectively, under the modified agreement based on the number of boards
expected to be sold. Accordingly, management reduced this obligation to $183,000
and $0, respectively, and the Company recognized a gain of $310,000 and
$182,000, respectively. Amounts paid under these agreements totaled
approximately $2,000, $10,000, and $5,000 during the years ended June 30, 1998,
1997, and 1996, respectively.

NOTE 9 -- COMMITMENTS AND CONTINGENCIES

Operating Leases and Capital Lease Obligations

The Company leases its production, warehouse and administrative facilities
under various 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. All leases have various renewal
features. Rent expense related to the operating lease was $170,000, $88,000, and
$51,000 for the years ended June 30, 1998, 1997, and 1996, 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. At June 30, 1997, all six capital
leases were in default because of provisions in the leases that prohibited 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 were also
prohibited under the terms of the leases and the lessors had not been informed
of such sales. As a result, the lessors had the right to accelerate the payments
under all of the leases due to such defaults. During the year ended June 30,
1998, the Company paid off the six leases and recognized a gain of $45,000.

F-17
<PAGE> 55
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 9 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

Future minimum lease payments under non-cancelable operating and capital
leases with initial or remaining terms of one year or more at June 30, 1998 are
as follows:

<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30,
-----------
<S> <C>
1999....................................... $ 90,000
2000....................................... 15,000
--------
$105,000
========
</TABLE>

Litigation

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
services, its officers and affiliates, and several Internet Service Providers,
including the Company. The action was brought in the United States 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 the flat rate 800 service was unavailable.
In addition to injunctive relief against Connect America and its officers, the
complaint seeks damages of $7,400,000, 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.

The Company is also 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-18
<PAGE> 56
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 9 -- COMMITMENTS AND CONTINGENCIES (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. In December 1997, the Memorandum of
Understanding was cancelled.

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.

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 yet
to perform in accordance with the agreement. Accordingly, the Company has
withheld issuance of the aforementioned shares and options.

Software

During November 1997, the Company entered into a contract for software
development and a worldwide license agreement with a software development
company which was amended in May 1998 to include additional software. The
license agreement provides for a three year term and may be extended on a
year-to-year basis thereafter. In addition to the fixed fee of $285,000, there
is a royalty of $0.75 per port for each PC board sold containing the licensed
software. As of June 30, 1998, $500 had been paid under the terms of the license
agreement.

During January 1998, the Company entered into a worldwide license and
manufacturing and sales agreement with a third party for certain DSP board
designs. The license fee consists of an up-front fixed payment of $30,000 plus a
royalty of $100 per board manufactured directly, or by contract, up to a maximum
total royalty of $200,000. In addition, the Company licensed certain software to
the third party at a royalty rate is $1.00 per port. As of June 30, 1998,
$20,000 had been paid and $0 had been received under the terms of the license
agreement.

During March 1998, the Company entered into a five-year, worldwide license
agreement with a company to use certain software of this company to create
software for sale to third parties. The Company must pay a

F-19
<PAGE> 57
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 9 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

license fee of $35,000, a royalty of $10 per port, and an annual program
maintenance and support services fee of $10,000. At June 30, 1998, $0 had been
paid under the license agreement.

Private Placement Exemptions

The Company 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.

Employment Agreements

The Company has entered into employment agreements with certain
officers/directors/shareholders of FTEL and FNet for terms from two to six
years. A portion of the compensation paid pursuant to these agreements is paid
semi-monthly, and a portion is deferred and is therefore included in accrued
salaries and related expenses in the accompanying consolidated balance sheets.
Certain officers/directors/shareholders have been given the option to convert up
to 50% of their compensation into stock options at fair market value less 50%
for FTEL common stock and at $1.00 per share for FNet common stock. The stock
issued is restricted from trading for one year from issuance.

NOTE 10 -- SHAREHOLDERS' EQUITY

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.

F-20
<PAGE> 58
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 10 -- SHAREHOLDERS' EQUITY (CONTINUED)

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 five 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 one year beyond 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.

On April 24, 1998 and May 26, 1998, the Company granted options to purchase
300,000 and 165,000 shares, respectively, of the Company's common stock to key
management employees which vest from two to four years from the date of grant.
The option price was set at $2.59 and $2.69 per share, respectively, 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.

Activity for the 1986 Plans, 1988 Plan, 1993 Plan, 1994 Plan, and 1998 Plan
is as follows:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding, June 30, 1995....................... 1,965,000 $0.10
Granted........................................ 1,052,000 $0.76
Exercised...................................... (44,500) $0.10
Canceled....................................... (225,000) $0.10
---------
Outstanding, June 30, 1996....................... 2,747,500 $0.35
Granted........................................ 248,000 $1.59
Exercised...................................... (335,000) $0.39
Canceled....................................... (150,000) $0.10
---------
Outstanding, June 30, 1997....................... 2,510,500 $0.49
Granted........................................ 626,500 $2.66
Exercised...................................... (934,250) $0.40
Canceled....................................... (37,520) $1.19
---------
Outstanding, June 30, 1998....................... 2,165,250 $1.14
=========
Exercisable at June 30, 1998..................... 1,192,375
=========
</TABLE>

The exercise prices for the options outstanding at June 30, 1998 ranged
from $0.10 to $3.66.

F-21
<PAGE> 59
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 10 -- SHAREHOLDERS' EQUITY (CONTINUED)

The Company's majority-owned subsidiary, FNet, established a 1996 stock
option plan (the "FNet Plan") which was amended in 1998. The FNet Plan, as
amended, provides for the granting of options to purchase up to 7,000,000 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. Activity for the FNet Plan is as follows:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding, June 30, 1995....................... -- $ --
Granted........................................ 448,000 $1.00
---------
Outstanding, June 30, 1996....................... 448,500 $1.00
Granted........................................ 2,106,000 $1.00
---------
Outstanding, June 30, 1997....................... 2,554,000 $1.00
Expired/cancelled.............................. (532,500) $1.00
Granted........................................ 3,633,000 $1.00
Exercised...................................... (35,500) $1.00
---------
Outstanding, June 30, 1998....................... 5,619,000 $1.00
=========
Exercisable at June 30, 1998..................... 1,435,250
=========
</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,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net loss
As reported....................... $(4,507,000) $(2,824,000) $(1,467,000)
Pro forma......................... $(4,804,000) $(3,925,000) $(1,513,000)
Loss per common share
As reported....................... $ (0.29) $ (0.23) $ (0.14)
Pro forma......................... $ (0.31) $ (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

F-22
<PAGE> 60
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 10 -- SHAREHOLDERS' EQUITY (CONTINUED)

model with the following weighted-average assumptions for the years ended June
30, 1998, 1997, and 1996: dividend yields of 0%, 0%, and 0%, respectively;
expected volatility of 60%, 100%, and 100%, respectively; risk-free interest
rates of 5.54%, 6.2%, and 3%, respectively; and expected lives of 4, 4, and 2 to
4 years, respectively. For options granted during the year ended June 30, 1998,
the weighted-average fair value and weighted-average exercise price for options
granted whose exercise price exceeded the market price of the stock on the grant
date were $1.34 and $2.95, respectively, and the weighted-average fair value and
weighted-average exercise price for options granted whose exercise price equaled
the market price of the stock on the grant date were $1.30 and $2.54,
respectively.

The fair value of the FNet options described above was estimated at the
date of grant using the minimum value method with the following weighted-average
assumptions for the year ended June 30, 1998: 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, 1998 was $0.99 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.

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, 1998, 1997, and 1996, 600,000, 0, and 0 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 2,380,000 and 220,000 warrants,
respectively, to purchase shares of the Company's common stock. The exercise
price of the warrants was $0.50, as amended, if exercised on or before March 24,
1996 and $1.25 if exercised after March 24, 1996 but on or before September 30,
1998 (the expiration date). There was no additional expense recorded in
connection with the issuance of the warrants as the exercise price approximated
the fair value at the date of issuance, as determined by management of the
Company, of the underlying stock at the date of issuance. For the years ended
June 30, 1998, 1997, and 1996, 1,841,750, 400,000, and 145,000 warrants were
exercised leaving a remaining balance of 213,250 unexercised as of June 30,
1998.

F-23
<PAGE> 61
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 10 -- SHAREHOLDERS' EQUITY (CONTINUED)

Stock Issuances

During the year ended June 30, 1998, the Company completed the following
significant common stock transactions of previously unissued common shares:

- Received 23,818 shares of its common stock valued at $161,000 from
certain officers of the Company as consideration to exercise stock
options for 400,000 shares also valued at $161.000.

- In connection with the 1997 Private Placement, the Company sold 333,333
units for $1,000,000. The units consist of one share and one warrant to
purchase one share of the Company's common stock at an exercise price of
$5.00 per share, exercisable after October 1, 1998. The warrants expire
October 2, 2001. The Company paid no commissions or fees in connection
with this private placement.

- Issued 345,500 shares in connection with the exercise of stock options
whereby the option holders issued notes receivable in favor of the
Company for $315,950.

- Issued 63,750 shares in connection with the exercise of stock options for
cash of $66,000.

- Issued or committed to issue 1,761,000 shares in connection with the
exercise of warrants for $2,261,000.

- Committed to issue 56,336 shares for services valued at $71,000.

- Issued 1,333,695 shares upon the conversion of a note payable by an
officer for the Company for $133,000.

- Issued 799,431 shares valued at $1,702,000 upon the conversion of 192
shares of its Series C preferred stock valued at $1,702,000.

- 160,000 shares of the Company's common stock at a value of $650,000 were
returned to the Company and cancelled, as provided under the contract,
thus reducing the initial purchase price of Passport.

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.

- 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 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.

- In connection with the acquisition of CPR, committed to issued 25,000
shares of common stock for a value of $65,000 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

F-24
<PAGE> 62
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 10 -- SHAREHOLDERS' EQUITY (CONTINUED)

an additional 7,900 shares of common stock, valued at $14,000, to satisfy
certain obligations of Passport.

- 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.

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.

- 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.

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, 1998.

Convertible Preferred Stock

During the year ended June 30, 1998, the Company issued 740 shares of its
Series C convertible preferred stock in a private placement for $7,400,000. 20%
of the shares held may be converted to common stock four months after issuance
with an additional 20% eligible for conversion each month thereafter, in which
the limitation on conversion ends nine months after issuance. Any unconverted
shares will be automatically converted to common shares at the later of either
18 months from issuance, the Company's common stock being traded on a national
exchange, or the filing of a registration statement covering the resale of the
common shares issued upon conversion. Series C shares do not pay dividends and
do not have voting rights. The shares are convertible into shares of common
stock at a conversion price of $4.64 per share, subject to certain adjustments
relating to the market price of the underlying common stock. Each preferred
share is

F-25
<PAGE> 63
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 10 -- SHAREHOLDERS' EQUITY (CONTINUED)

accompanied by a warrant that is exercisable to purchase shares of common stock
of the Company's subsidiary, FNet, and which, under certain circumstances, may
be exercisable to acquire shares of common stock of the Company at the exercise
price of $4.64.

Form S-1

During the year ended June 30, 1998, the Company filed a Form S-1 with the
Securities and Exchange Commission to register certain shares of common stock of
the Company including the following:

- The shares of common stock issued as part of the acquisitions of No. 1,
CPR, and Passport.

- The common shares to be issued upon the conversion of the Series C
convertible preferred stock.

- The common shares to be issued upon the exercise of the warrants issued
in the 1995 Private Placement.

NOTE 11 -- INCOME TAXES

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

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets
Accounts receivable, principally due to
allowance for doubtful accounts........................ $ 3,000 $ 13,000
Goodwill.................................................. 317,000 --
Compensated absences and deferred salaries, principally
due to accrual for financial reporting purposes........ 146,000 87,000
Bad debt.................................................. 3,000 --
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax Reform
Act of 1986 and
allowance for inventory obsolescence................... 34,000 128,000
Accrued warranty.......................................... 5,000
General business tax credit carryforwards................. 335,000 335,000
Net operating loss carryforwards.......................... 4,972,000 3,027,000
---------- ----------
Total gross deferred tax assets........................... 5,815,000 3,590,000
Less valuation allowance.................................. 5,763,000 3,586,000
---------- ----------
Net deferred tax assets................................... 52,000 4,000
Deferred tax liabilities
Plant and equipment, principally due to differences in
depreciation........................................... 52,000 4,000
---------- ----------
Net deferred tax liability........................ $ -- $ --
========== ==========
</TABLE>

The valuation allowance increased by approximately $2,177,000 and $441,000
during the years ended June 30, 1998 and 1997, respectively. No provision for
income taxes for the years ended June 30, 1998, 1997, and 1996 is required,
except for minimum state taxes, since the Company incurred losses during such
years.

F-26
<PAGE> 64
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 11 -- INCOME TAXES(CONTINUED)

Income tax expense was $4,000 and differs from the amounts computed by
applying the U.S. federal income tax rate of 34% to loss before minority
interest and income taxes as a result of the following:

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Computed "expected" tax benefit.............. $(1,572,000) $(1,450,000) $(520,000)
Increase in income taxes resulting from
Other...................................... 4,000 -- --
Change in the beginning-of-the-year balance
of the valuation allowance for deferred
tax assets allocated to income tax
expense................................. 1,568,000 1,450,000 520,000
State income taxes......................... 4,000 2,000 2,000
----------- ----------- ---------
Total.............................. $ 4,000 $ 2,000 $ 2,000
=========== =========== =========
</TABLE>

As of June 30, 1998 the Company had consolidated net operating loss
carryforwards of approximately $13,368,000 and $4,827,000 for Federal and state
income tax reporting purposes, respectively, which expire in varying amounts
through 2013. 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
2013. 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 12 -- RELATED PARTY TRANSACTIONS

The Company recorded sales of approximately $0, $82,000, and $3,000 to an
entity affiliated with a shareholder of the Company during the years ended June
30, 1998, 1997, and 1996, respectively.

During the years ended June 30, 1998, 1997, and 1996, the Company issued
notes payable to the chief executive officer/majority shareholder for $129,000,
$212,000, and $217,000, respectively, for accrued compensation.

At June 30, 1998, 1997, and 1996, certain officers/directors/shareholders
of the Company had been granted 1,352,500, 1,600,000, and 1,650,000 stock
options, respectively, in the FTEL stock option plans, of which 1,050,000,
1,200,000, and 500,000 stock options were exercisable, respectively, at exercise
prices between $0.10 and $3.66 per share. In addition, the same
officers/directors/shareholders had been granted 965,000, 650,000, and 0 stock
options outside the FTEL plans at June 30, 1998, 1997, and 1996, respectively,
of which 500,000, 650,000, and 0 stock options were exercisable, respectively,
at exercise prices between $1.31 and $2.69.

At June 30, 1998, 1997, and 1996, certain officers/directors/shareholders
of the Company held 2,300,000, 650,000, and 300,000 stock options, respectively,
in the FNet stock option plan, of which 512,525, 300,000, and 0 stock options
were exercisable, respectively, at an exercise price of $1.00. In addition, the
same officers/directors/shareholders had been granted 300,000, 0, and 0 stock
options outside the FNet plan at June 30, 1998, 1997, and 1996, respectively, of
which 0, 0, and 0 stock options were exercisable, respectively, at an exercise
price of $1.00.

NOTE 13 -- 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

F-27
<PAGE> 65
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 13 -- 401(k) PLAN (CONTINUED)

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 the years ended June 30, 1998, 1997, or 1996.

NOTE 14 -- 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,
1998 1997
----------- -----------
<S> <C> <C>
Net sales
Franklin........................................ $ 771,000 $ 1,337,000
FNet............................................ 606,000 398,000
----------- -----------
Total................................... $ 1,377,000 $ 1,735,000
=========== ===========
Operating losses
Franklin........................................ $(3,257,000) $(1,867,000)
FNet............................................ (1,707,000) (957,000)
----------- -----------
Total................................... $(4,964,000) $(2,824,000)
=========== ===========
Identifiable assets
Franklin........................................ $ 7,175,000 $ 3,163,000
FNet............................................ 1,717,000 351,000
----------- -----------
Total................................... $ 8,892,000 $ 3,514,000
=========== ===========
Capital expenditures
Franklin........................................ $ 315,000 $ 204,000
FNet............................................ 54,000 120,000
----------- -----------
Total................................... $ 369,000 $ 324,000
=========== ===========
Depreciation and amortization
Franklin........................................ $ 81,000 $ 52,000
FNet............................................ 86,000 58,000
----------- -----------
Total................................... $ 167,000 $ 110,000
=========== ===========
</TABLE>

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

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; therefore, no pro
forma consolidated balance sheet has been

F-28
<PAGE> 66
FRANKLIN TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998

NOTE 14 -- LINES OF BUSINESS (CONTINUED)

reflected below. In the opinion of management, there are no pro forma
adjustments necessary to the historical statements of operations for the years
ended June 30, 1997 and 1996, assuming that the acquisition occurred at the
beginning of each of those years, except for showing the effects of the addition
of the goodwill and its 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 for the year ended June 30, 1997:

<TABLE>
<S> <C>
Historical net loss......................................... $(2,824,000)
Add goodwill write-down related to Passport................. 835,000
-----------
Adjusted historical net loss................................ (1,989,000)
Add Passport losses prior to acquisition.................... (171,000)
-----------
Pro forma net loss exclusive of goodwill.......... $(1,260,000)
===========
Adjusted historical net loss per share exclusive of goodwill
write-down................................................ $ (.16)
Impact of Passport loss..................................... (.01)
-----------
Pro forma net loss per share exclusive of
goodwill........................................ $ (.17)
===========
</TABLE>

NOTE 15 -- SUBSEQUENT EVENTS

Subsequent to June 30, 1998, 115 shares of Series C preferred stock valued
at $1,046,000 were converted into 919,266 shares of common stock.

Subsequent to June 30, 1998, two officers/directors/shareholders of the
Company purchased 50,000 and 1,000 shares, respectively, of the Company's common
stock on the open market.

Subsequent to June 30, 1998, the Company granted 20,000 options under the
FNet plan.

Subsequent to June 30, 1998, FNet entered into a joint venture agreement
with a third party to provide telecommunications service to Guatemala, El
Salvador, and Honduras. The joint venture is for an initial term of five years
with an option to renew at the expiration date. In addition, FNet purchased
certain assets in Guatemala from the third party for $215,000.

F-29
<PAGE> 67

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

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.................... 2
Risk Factors.......................... 4
Dividend Policy....................... 11
Use of Proceeds....................... 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 12
Selected Financial Data............... 15
Price Range of Common Stock........... 16
Business.............................. 17
Management............................ 25
Principal Shareholders................ 29
Selling Shareholders.................. 30
Plan of Distribution.................. 33
Description of Capital Stock.......... 34
Legal Matters......................... 34
Experts............................... 34
Available Information................. 35
Index to Financial Statements......... F-1
</TABLE>

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

- ------------------------------------------------------
- ------------------------------------------------------
6,740,172 SHARES

LOGO

FRANKLIN
TELECOMMUNICATIONS
CORP.

COMMON STOCK

PROSPECTUS

OCTOBER , 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 68

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........................... $20,000
Registration fee............................................ 2,620
Legal fees and expenses..................................... 20,000
Accounting fees and expenses................................ 25,000
Transfer Agent fees......................................... 2,000
Miscellaneous............................................... 2,380
-------
Total............................................. $72,000
=======
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

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

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

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

<TABLE>
<CAPTION>
SHARE
NAME DATE SHARES CONSIDERATION
---- --------- --------- -------------
<S> <C> <C> <C>
Swartz Investments, LLC........................ 11/25/97 255,386 N/A
(warrants)
Triton Capital Investments, Ltd.*.............. 10/31/97 35* $ 350,000
Banque Edouard Constant SA*.................... 10/31/97 50* 500,000
Banque Franck S.A.*............................ 10/31/97 75* 750,000
Elara Ltd.*.................................... 10/31/97 150* 1,500,000
Ellis AG*...................................... 10/31/97 10* 100,000
JMG Capital Partners, L.P.*.................... 10/31/97 35* 350,000
Lakeshore International, Ltd.*................. 10/31/97 150* 1,500,000
JNC Opportunity Fund*.......................... 11/25/97 200* 2,000,000
The Matthew Fund, N.V.*........................ 10/31/97 35* 350,000
Frank W. Peters................................ 10/7/97 1,333,695 133,370
E. Bryan Bagley................................ 10/15/97 40,000 50,000
Bruce Whaley................................... 10/15/97 13,000 16,250
Wilson-Davis Company........................... 10/15/97 30,000 37,500
Tom Russell.................................... 11/3/97 150,000 165,500
Vic Klimpl..................................... 9/22/97 22,000 66,000
Blair Holder................................... 9/22/97 30,000 90,000
Raleigh Baughman............................... 9/22/97 30,000 90,000
</TABLE>

II-1
<PAGE> 69

<TABLE>
<CAPTION>
SHARE
NAME DATE SHARES CONSIDERATION
---- --------- --------- -------------
<S> <C> <C> <C>
Mark Jenkins................................... 9/22/97 11,000 $ 33,000
Dale Berman.................................... 9/22/97 10,000 30,000
Cindy Cannon................................... 9/22/97 15,000 45,000
Clay & Bobbie Lasiter.......................... 9/22/97 10,000 30,000
Scott Holder................................... 9/22/97 10,000 30,000
Terry Widner................................... 9/22/97 33,333 99,999
Roberto Alvarez................................ 9/22/97 20,000 60,000
Mike & Marcia Marino........................... 9/22/97 7,000 21,000
George Willse.................................. 9/22/97 10,000 30,000
Frank Culker................................... 9/22/97 7,000 21,000
Gary Nelson.................................... 9/22/97 16,000 48,000
Gary Nelson IRA acct........................... 9/22/97 45,000 135,000
Doug Best...................................... 9/22/97 7,000 21,000
Martin Smith................................... 9/22/97 7,000 21,000
Bob Zimdar..................................... 9/22/97 10,000 30,000
Anthony Chan................................... 9/23/97 9,000 27,000
Tim LaFrance................................... 9/23/97 7,000 21,000
Marvin Mansky.................................. 9/24/97 10,000 30,000
Richard & Lorna Valentine...................... 9/24/97 7,000 21,000
John Costello.................................. 7/31/97 207,066 453,475
Thomas Russell................................. 6/13/97 50,000 34,500
Eileen Rouse................................... 6/13/97 50,000 45,000
Alan London.................................... 6/13/97 25,000 17,500
Dianne Oliver.................................. 6/13/97 2,000 200
Helen West..................................... 6/17/97 12,000 10,800
Alice Amanet................................... 6/24/97 6,250 4,375
1996 Private Placement (28 Individuals)........ 8/1/96 890,595 737,500
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
Milhollan/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>

- ---------------
* Series C Preferred

II-2
<PAGE> 70

<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
Joe Fisher............................... 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
Martin & Co.............................. 10/1/95 146,000
Michael and Linda Silvestri.............. 10/1/95 28,000
Jeffrey Barber........................... 10/1/95 14,000
Joel Marcus.............................. 10/1/95 12,000
Rocco Vezza.............................. 10/1/95 12,000
Joanne Gioia............................. 10/1/95 12,000
Joseph Schmidt........................... 10/1/95 10,000
Kevin Charos............................. 10/1/95 10,000
Frederick I. Camerer..................... 5/11/94 30,000 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
</TABLE>

II-3
<PAGE> 71

<TABLE>
<CAPTION>
SHARE EXERCISABLE
NAME DATE SHARES CONSIDERATION WARRANTS
---- ---------- --------- ------------- -----------
<S> <C> <C> <C> <C>
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
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> 72

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.

The following exhibits are filed with this Registration Statement:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
<C> <S>
3.1* Restated Articles of Incorporation of Franklin
Telecommunications Corp.
3.2* Bylaws of Franklin Telecommunications Corp.
3.3* Certificate of Determination of Preferences of Series C
Preferred Stock.
5.1* Opinion of Haddan & Zepfel LLP.
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters.
10.2* Confidential Agreement dated June 3, 1996 between Malibu
Internet Services and Franklin Telecommunications Corp.
10.3* Joint Venture Agreement dated May 23, 1996 between StarComm
Products Inc. and Franklin Telecommunications Corp.
10.4* Letter Agreement dated February 28, 1997 between Internet
Passport LLC and Franklin Telecommunications Corp.
10.5* Subscriber Agreement dated January 2, 1997 between
LaserVend, Inc and Franklin Telecommunications Corp.
10.6* Subscriber Agreement dated January 28, 1997 between A-Online
Information Services, Inc. and Franklin Telecommunications
Corp.
10.7* Subscriber Agreement dated January 17, 1997 between WebTV
Networks, Inc. and Franklin Telecommunications Corp.
10.8* Letter Agreement dated February 26, 1997 between CPR
Computer Repair, Inc. and Franklin Telecommunications Corp.
10.9* Letter Agreement dated December 2, 1996 between Number 1
Internet Services and Franklin Telecommunications Corp.
10.10* Warrant Agreement dated May 18, 1995 between M. H. Myerson &
Co. and Franklin Telecommunications Corp.
10.11* Form of Letter Agreement dated March 17, 1997 between M. H.
Myerson & Co. and Franklin Telecommunications Corp.
10.12* Form of Indemnity Agreement for all Directors of Franklin
Telecommunications Corp.
10.13* Memorandum of Understanding, dated March 13, 1997, between
Internet Passport and DigitalXPress LLC.
10.14* Agreement, dated May 16, 1997, between StarComm and Franklin
Telecommunications Corp.
10.15* Agreement, dated May 15, 1997, between Peak Technologies,
Inc. and Franklin Telecommunications Corp.
10.16* Form of Regulation D Subscription Agreement between Franklin
Telecommunications Corp. and certain purchasers of Series C
Preferred Stock.
10.17* Form of Series C Registration Rights Agreement between
Franklin Telecommunications Corp. and certain purchasers of
Series C Preferred Stock.
10.18* Form of Warrant issued to purchasers of Series C Preferred
Stock.
10.19* Form of Letter Agreement, dated January 23, 1998, among
Franklin Telecommunications Corp. and certain
warrantholders.
16.1* Letter from Corbin & Wertz, Certified Public Accountants.
23.1 Consent of Corbin & Wertz, Certified Public Accountants.
</TABLE>

II-5
<PAGE> 73

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
------- ------------
<C> <S>
23.2* Consent of Haddan & Zepfel LLP (included as part of Exhibit
5.1).
23.3 Consent of Singer, Lewak, Greenbaum & Goldstein LLP.
27.1 Financial Data Schedule.
</TABLE>

- ---------------
* Previously filed

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 registration 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> 74

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Post-Effective 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 9, 1998.

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
--------- ----- ----
<C> <S> <C>
(1) Principal Executive Officer

/s/ FRANK W. PETERS Chief Executive Officer and a October 9, 1998
- ----------------------------------------------------- Director
Frank W. Peters

(2) Principal Financial and Accounting Officer

/s/ THOMAS RUSSELL Chief Financial Officer and a October 9, 1998
- ----------------------------------------------------- Director
Thomas Russell

(3) Directors

/s/ PETER S. BUSWELL* President and a Director October 9, 1998
- -----------------------------------------------------
Peter S. Buswell

/s/ ROBERT S. HARP* Director October 9, 1998
- -----------------------------------------------------
Robert S. Harp

*By: /s/ FRANK W. PETERS
------------------------------------------------
Frank W. Peters,
Attorney-In-Fact
</TABLE>

II-7
<PAGE> 75

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
- ------- -------------------- ------------
<C> <S> <C>
3.1* Restated Articles of Incorporation of Franklin
Telecommunications Corp.....................................
3.2* Bylaws of Franklin Telecommunications Corp. ................
3.3* Certificate of Determination of Preferences of Series C
Preferred Stock.............................................
5.1* Opinion of Haddan & Zepfel LLP..............................
10.1* Employment Agreement, dated March 1, 1993 between Franklin
Telecommunications Corp. and Frank W. Peters................
10.2* Confidential Agreement dated June 3, 1996 between Malibu
Internet Services and Franklin Telecommunications Corp. ....
10.3* Joint Venture Agreement dated May 23, 1996 between StarComm
Products Inc. and Franklin Telecommunications Corp. ........
10.4* Letter Agreement dated February 28, 1997 between Internet
Passport LLC and Franklin Telecommunications Corp. .........
10.5* Subscriber Agreement dated January 2, 1997 between
LaserVend, Inc and Franklin Telecommunications Corp. .......
10.6* Subscriber Agreement dated January 28, 1997 between A-Online
Information Services, Inc. and Franklin Telecommunications
Corp. ......................................................
10.7* Subscriber Agreement dated January 17, 1997 between WebTV
Networks, Inc. and Franklin Telecommunications Corp. .......
10.8* Letter Agreement dated February 26, 1997 between CPR
Computer Repair, Inc. and Franklin Telecommunications
Corp. ......................................................
10.9* Letter Agreement dated December 2, 1996 between Number 1
Internet Services and Franklin Telecommunications Corp. ....
10.10* Warrant Agreement dated May 18, 1995 between M. H. Myerson &
Co. and Franklin Telecommunications Corp. ..................
10.11* Form of Letter Agreement dated March 17, 1997 between M. H.
Myerson & Co. and Franklin Telecommunications Corp. ........
10.12* Form of Indemnity Agreement for all Directors of Franklin
Telecommunications Corp. ...................................
10.13* Memorandum of Understanding, dated March 13, 1997, between
Internet Passport and DigitalXPress LLC.....................
10.14* Agreement, dated May 16, 1997, between StarComm and Franklin
Telecommunications Corp. ...................................
10.15* Agreement, dated May 15, 1997, between Peak Technologies,
Inc. and Franklin Telecommunications Corp. .................
10.16* Form of Regulation D Subscription Agreement between Franklin
Telecommunications Corp. and certain purchasers of Series C
Preferred Stock.............................................
10.17* Form of Series C Registration Rights Agreement between
Franklin Telecommunications Corp. and certain purchasers of
Series C Preferred Stock....................................
10.18* Form of Warrant issued to purchasers of Series C Preferred
Stock.......................................................
10.19* Form of Letter Agreement, dated January 23, 1998, among
Franklin Telecommunications Corp. and certain
warrantholders..............................................
16.1* Letter from Corbin & Wertz, Certified Public Accountants....
</TABLE>
<PAGE> 76

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
- ------- -------------------- ------------
<C> <S> <C>
23.1 Consent of Corbin & Wertz, Certified Public Accountants.....
23.2* Consent of Haddan & Zepfel LLP (included as part of Exhibit
5.1)........................................................
23.3 Consent of Singer, Lewak, Greenbaum & Goldstein LLP.........
27.1 Financial Data Schedule.....................................
</TABLE>

- ---------------
* Previously filed

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We hereby consent to the use in the post-effective Amendment No. 1 to the
Registration Statement on Form S-1 of our report dated September 20, 1996,
relating to the 1996 consolidated financial statements of Franklin
Telecommunications Corp. and subsidiaries, which appears in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
and "Change in Accountants" in such Registration Statement.

/s/ CORBIN & WERTZ
CORBIN & WERTZ

Irvine, California
October 8, 1998

<PAGE> 1

EXHIBIT 23.3

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated September 14, 1998, accompanying the
consolidated financial statements of Franklin Telecommunications Corp. contained
in the Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."

/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
October 8, 1998

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 5,750,000
<SECURITIES> 0
<RECEIVABLES> 447,000
<ALLOWANCES> 8,000
<INVENTORY> 671,000
<CURRENT-ASSETS> 7,415,000
<PP&E> 1,349,000
<DEPRECIATION> 571,000
<TOTAL-ASSETS> 8,892,000
<CURRENT-LIABILITIES> 1,452,000
<BONDS> 0
4,856,000
0
<COMMON> 15,662,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,892,000
<SALES> 1,377,000
<TOTAL-REVENUES> 1,377,000
<CGS> 834,000
<TOTAL-COSTS> 834,000
<OTHER-EXPENSES> 5,004,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,000
<INCOME-PRETAX> (4,504,000)
<INCOME-TAX> 3,000
<INCOME-CONTINUING> (4,507,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,507,000)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)

</TABLE>