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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

        |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                                       OR

    |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                        FOR THE TRANSITION PERIOD FROM TO

                         COMMISSION FILE NUMBER: 1-9727

                          FRANKLIN CAPITAL CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                DELAWARE                                        13-3419202
        (STATE OF INCORPORATION)                             (I.R.S. EMPLOYER
                                                          IDENTIFICATION NUMBER)

   100 WILSHIRE BOULEVARD, SUITE 1500
        SANTA MONICA, CALIFORNIA                                  90401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 752-1416

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

       TITLE OF EACH CLASS             NAME OF EACH EXCHANGE ON WHICH REGISTERED
       -------------------             -----------------------------------------
     Common Stock, par value                  The American Stock Exchange
         $1.00 per share

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                      None

      Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) Yes |_| No |X|.

      The aggregate market value of common stock held by non-affiliates of the
Registrant on June 30, 2004, based on the closing price on that date of $4.00
on the American Stock Exchange, was $3,142,092. For the purposes of calculating
this amount only, all directors and executive officers of the Registrant have
been treated as affiliates. There were 1,758,776 shares of the Registrant's
common stock outstanding as of March 28, 2005.


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<PAGE>

                          FRANKLIN CAPITAL CORPORATION

                          FORM 10-K FOR THE FISCAL YEAR
                             ENDED DECEMBER 31, 2004

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                  PAGE
                                                                                                                  ----
<S>                                                                                                                 <C>
                                                          PART I

Item 1.    BUSINESS.............................................................................................     1
Item 2.    PROPERTIES...........................................................................................    38
Item 3.    LEGAL PROCEEDINGS....................................................................................    39
Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................    39

                                                          PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
             SECURITIES.........................................................................................    42
Item 6.    SELECTED FINANCIAL DATA..............................................................................    43
Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................    44
Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........................................    52
Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................    54
Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................    75
Item 9A.   CONTROLS AND PROCEDURES..............................................................................    75

                                                         PART III

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................................    75
Item 11.   EXECUTIVE COMPENSATION...............................................................................    78
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
             STOCKHOLDER MATTERS................................................................................    86
Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................................    89
Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES...............................................................    89

                                                          PART IV

Item 15.   EXHIBITS, FINANCIAL STATEMENT AND SCHEDULES..........................................................    89

Signatures
</TABLE>

<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

            Franklin  Capital  Corporation  ("Franklin",  or the "Company") is a
publicly  traded,  non-diversified  internally  managed,  closed-end  investment
company that  elected to be treated as a business  development  company  ("BDC")
under the  Investment  Company  Act of 1940,  as  amended  (the  "1940  ACT") on
November  18,  1997.  We were  incorporated  on  March  31,  1987 as a  Delaware
corporation  and have been listed on the American Stock Exchange  ("AMEX") since
October 1, 1987. We are currently  involved in providing  capital and managerial
assistance  to early  stage  companies  in the  medical  products,  health  care
solutions, financial services and real estate industries.

            In the first half of 2004, we focused our investment strategy on the
achievement of capital  appreciation  through  long-term  equity  investments in
start-up  and  early  stage  companies  in  the  radio  and   telecommunications
industries.   However,   beginning  in  June  2004,  we  undertook  a  strategic
restructuring  and  recapitalization   plan  (the  "RESTRUCTURING  PLAN")  which
ultimately  culminated in a subsequent change in control in our management and a
shift  in  our  business  focus  away  from  the  radio  and  telecommunications
industries  toward  the  medical  products,  health  care  solutions,  financial
services and real estate industries.  For more information SEE, "SUMMARY OF 2004
RESTRUCTURING PLAN AND CHANGE IN CONTROL."

OVERVIEW OF OUR BUSINESS PLAN AND RESTRUCTURING

            The Restructuring Plan shifted our primary investment focus from the
radio and  telecommunications  industry to  the  medical  products, health  care
solutions, financial services  and  real  estate  industries.  Accordingly,  our
primary investment  objective has also shifted  and is now focused on maximizing
long-term  capital  growth  through  the  appreciation  of  our  investments  in
health care and medical  products  related companies,  and  to  a lesser  extent
in  the   financial  services  and  real  estate  industries.  Franklin  Capital
Properties,  LLC, a real estate  development and management company and Franklin
Medical   Products,  LLC,  a   healthcare   consulting  services  company,  both
wholly-owned  subsidiaries of Franklin,  were created to augment our investments
in these industries.

            The Company and its operating  subsidiaries are currently engaged in
the  acquisition  of  controlling   interests  in  companies  and  research  and
development  of  products  and  services  focused on the health care and medical
products field,  particularly,  the  patient  safety  market,  as  well  as  the
financial services and real estate industries.

            On February 25, 2005, in  furtherance of the  implementation  of the
Company's Restructuring Plan the Company purchased SurgiCount, a privately held,
California-based  developer  of  patient  safety  devices.   SurgiCount  is  the
Company's  first  major  acquisition  in its  plan to  become  a  leader in what
it  believes  to  be  the multi-billion  dollar patient  safety field market and
management  believes that  the  acquisition  is a  significant  milestone in the
Company's plan to shift its focus from radio and telecommunications  to products
and  services  targeting patient safety.

            Given the changing nature of our business and investment  focus from
investing,  reinvesting, owning, holding, or trading in investment securities in
the radio and telecommunications  industries toward that of an operating company
whose focus will be on  acquisitions  of  controlling  investments  in operating
companies and assets in the healthcare and medical products industries,  as well
as the  financial  services  and real  estate  industries,  we believe  that the
regulatory  regime governing BDC's is no longer  appropriate and will hinder our
future  growth.  Accordingly,  among other  things,  we are seeking  shareholder
approval at the upcoming  annual  meeting to withdraw our election to be treated
as a BDC. For more information see,  "WITHDRAWAL OF THE COMPANY'S ELECTION TO BE
TREATED AS A BDC."

            Milton  "Todd" Ault III and Louis  Glazer,  M.D.,  Ph. G.  currently
serve as the principal  executives in the management  group  responsible for the
operations and allocation of the resources of the Company and its  subsidiaries.
Messrs. Ault and Glazer  oversee and  coordinate the activities of the Company's
health care, medical products, financial services and real estate companies.


                                       1
<PAGE>

            Our capital is generally used to finance research and development of
products  in the  health  care  and  patient  safety  markets,  organic  growth,
acquisitions,  recapitalizations  and working capital.  Our investment decisions
are based on  extensive  analysis of  potential  portfolio  companies'  business
operations  supported  by an  in-depth  understanding  of the  quality  of their
revenues and cash flow potential, variability of costs and the inherent value of
their assets, including proprietary intangible assets and intellectual property.

            Our current target  industries are heavily  regulated.  In the U.S.,
the principal  authority  regulating the operations of our medical  companies is
the Food and Drug  Administration  ("FDA").  The FDA  regulates  the  safety and
efficacy of the  products we offer,  our  research  quality,  our  manufacturing
processes and our promotion and advertising.  In addition, we are also currently
subject  to the  requirements  of the 1940 Act  applicable  to  BDC's.  For more
information see "BDC AND HEALTHCARE REGULATION" below.

WITHDRAWAL OF THE COMPANY'S ELECTION TO BE TREATED AS A BDC

General

            On December 30, 2004, the Board  unanimously  approved a proposal to
authorize the Board to withdraw the Company's election to be treated as a BDC as
soon as  practicable  so that it may begin  conducting  business as an operating
company rather than an investment company subject to the 1940 Act. Such proposal
is  scheduled  to be voted upon by  stockholders  at the  company's  2004 Annual
Meeting.

            The Board  believes that given the changing  nature of the Company's
business and investment focus from investing,  reinvesting,  owning, holding, or
trading in investment securities in the radio and telecommunications  industries
toward  that of an  operating  company  whose focus will be on  acquisitions  of
controlling  investments in operating companies and assets in our current target
industries,  that the regulatory regime governing BDC's is no longer appropriate
and will hinder the Company's  future  growth.  In addition,  the Board believes
that the Company will not be required to be  regulated  under the 1940 Act under
these circumstances.

            Over the years, since the Company commenced  operating as a BDC, the
business,  regulatory and financial climates have shifted gradually but greatly,
making operations as a BDC more challenging and difficult.  Given the investment
focus,  asset mix,  business and operations of the Company that will result from
the  implementation  of the  Restructuring  Plan,  the Board believes that it is
prudent for the Company to withdraw its election as a BDC as soon as practicable
to eliminate many of the regulatory,  financial reporting and other requirements
and restrictions imposed by the 1940 Act discussed below. For example:

      o     BUSINESS FOCUS. As a result of the Restructuring Plan, the nature of
            the  Company's  business  is  changing  from  a  business  that  has
            historically been in the business of investing, reinvesting, owning,
            holding,  or  trading  in  investment  securities  in the  radio and
            telecommunications  industry  toward  that of an  operating  company
            whose  primary  focus  is  on  acquiring  controlling  interests  in
            companies in the medical products and health care industries, and to
            a  lesser  extent  in  the   financial   services  and  real  estate
            industries.   The  Board  believes  that  BDC  regulation  would  be
            inappropriate for such activities.

      o     ISSUANCE OF COMMON STOCK. By virtue of its BDC election, the Company
            may not issue new shares of Common  Stock at a per share  price less
            than the then net asset value per share of outstanding  Common Stock
            without prior stockholder approval.  Historically, the market prices
            for BDC stocks that invest primarily in equity  securities have been
            lower than net asset value,  making it much more  difficult for such
            BDC's to raise  equity  capital.  While  this  restriction  provides
            stockholders of an investment company with


                                       2
<PAGE>

            appropriate  and  meaningful  protection  against  dilution of their
            indirect  investment  interest in  portfolio  securities,  the Board
            believes that this would  essentially be irrelevant to the interests
            of investors in an operating  company,  who look to its consolidated
            earnings stream and cash flow from operations for investment value.

      o     ISSUANCE OF SECURITIES OTHER THAN COMMON STOCK. BDC's are limited or
            restricted as to the type of securities other than common stock they
            issue. The issuance of convertible  securities and rights to acquire
            shares of common  stock (e.g.,  warrants and options) is  restricted
            primarily   because  of  the  statutory   interest  in  facilitating
            computation of the Company's net asset value per share. In addition,
            issuances of senior debt and senior equity  securities  require that
            certain "asset  coverage" tests and other criteria be satisfied on a
            continuing basis. This significantly  affects the use of these types
            of  securities  because  asset  coverage   continuously  changes  by
            variations in market prices of the Company's investment  securities.
            Operating  companies,  including holding companies operating through
            subsidiaries,  benefit  from  having  maximum  flexibility  to raise
            capital through various financing structures and means.

      o     RELATED PARTY  TRANSACTIONS.  The 1940 Act significantly  restricts,
            among other things, (a) transactions involving transfers of property
            between the Company  and certain  affiliated  persons of the Company
            (or the  affiliated  persons of such  affiliated  persons),  and (b)
            transactions  in which the Company and such  affiliated  persons (or
            the  affiliated  persons  of such  affiliated  persons)  participate
            jointly  vis-a-vis  third  parties on the other.  To overcome  these
            investment  company  restrictions,  approval  of the  United  States
            Securities  and Exchange  Commission  ("SEC") is required,  which is
            often a time-consuming  and expensive  procedure,  regardless of the
            intrinsic  fairness of such  transactions or the approval thereof by
            the  independent  directors of the Company.  The Board also believes
            that  situations  may arise in which a company's  best interests are
            served by such  transactions.  The Board believes that even with the
            protections afforded under the 1940 Act, stockholders are adequately
            protected by the fiduciary  obligations  imposed on directors  under
            state corporate law, which  generally  requires that the independent
            directors  determine fairness to the Company of an  interested-party
            transaction   (provided  full   disclosure  of  all  material  facts
            regarding the  transaction and the interested  party's  relationship
            with the Company is made), and SEC disclosure  rules,  which require
            the Company to include specified disclosure  regarding  transactions
            with related parties in its SEC filings.

      o     COMPENSATION OF EXECUTIVES. The 1940 Act limits the extent to which,
            and the  circumstances  under which  executives of a BDC may be paid
            compensation  other than in the form of salary  payable in cash. For
            example,  the  issuance  of  equity  compensation  in  the  form  of
            restricted  stock  is  generally  prohibited.   However,  the  Board
            believes that by achieving greater flexibility in the structuring of
            employee compensation  packages, the Company will be able to attract
            and retain additional  talented and qualified  personnel and to more
            fairly  reward  and  more  effectively  motivate  its  personnel  in
            accordance with industry practice.

      o     ELIGIBLE  INVESTMENTS.  As a BDC,  the  Company  may not acquire any
            asset  other  than  "Qualifying  Assets"  unless,  at the  time  the
            acquisition is made, Qualifying Assets represent at least 70% of the
            value  of  the  total  assets  (the  "70%  TEST").  Because  of  the
            limitations on the type of investments the Company may make, as well
            as  the  Company's  total  asset  composition,  the  Company  may be
            foreclosed from participating in prudent investment opportunities.

            Moreover,  the Company incurs  significant  costs in order to comply
with the regulations  imposed by the 1940 Act.  Management devotes  considerable
time to issues  relating to compliance  with the 1940 Act and the Company incurs
substantial legal and accounting fees with respect to such matters.  While these
protections are for the benefit of the Company's stockholders, the costs of this
regulation are none


                                       3
<PAGE>

the less borne by the  stockholders  of the  Company.  The Board  believes  that
resources now being  expended on 1940 Act  compliance  matters could be utilized
more  productively  if devoted to the operation of the Company's  business.  The
Board  has  determined  that  the  costs  of  compliance  with  the 1940 Act are
substantial,  especially  when compared to the  Company's  relative size and net
income,  and  that it  would  therefore  be in the  financial  interests  of the
stockholders  for the  Company  to  cease  to be  regulated  under  the 1940 Act
altogether.

            The Board  believes that the above  reasons,  among others,  confirm
that the  restrictions  of the 1940 Act would have the effect of  hindering  the
Company's financial growth in the future. The Board has determined that the most
efficacious way to reduce these costs, improve profitability,  and eliminate the
competitive  disadvantages  the Company  experiences  due to compliance with the
many requirements and restrictions  associated with operating under the 1940 Act
would be to withdraw the Company's election to be treated as a BDC.

Effect of Election to Withdrawal as a BDC

            In the event that the Board  withdraws the Company's  election to be
treated as a BDC and the Company becomes an operating  company,  the fundamental
nature  of the  Company's  business  will  change  from that of  investing  in a
portfolio of securities,  with the goal of achieving gains on  appreciation  and
dividend  income,  to  that of  being  actively  engaged  in the  ownership  and
management of operating businesses,  with the goal of generating income from the
operations of those businesses.

            The  election  to  withdraw  the Company as a BDC under the 1940 Act
will result in a significant  change in the Company's method of accounting.  BDC
financial  statement  presentation  and accounting  utilizes the value method of
accounting used by investment companies,  which allows BDC's to recognize income
and value their  investments at fair value as opposed to historical  cost. As an
operating company, the required financial statement  presentation and accounting
for  securities  held will be either fair value or  historical  cost  methods of
accounting,  depending on the classification of the investment and the Company's
intent  with  respect to the  period of time it intends to hold the  investment.
Change in the Company's  method of  accounting  could reduce the market value of
its investments in privately held companies by eliminating the Company's ability
to report an  increase  in value of its  holdings  as they  occur.  Also,  as an
operating  company,   the  Company  would  have  to  consolidate  its  financial
statements with  subsidiaries,  thus eliminating the portfolio company reporting
benefits available to BDC's.

            The pro forma  unaudited  balance sheet presented below gives effect
to the  withdrawal  of the  Company's  election  to be  regulated  as a business
development   company.  The  pro  forma  unaudited  balance  sheet  assumes  the
withdrawal had occurred as of January 1, 2003. The pro forma  unaudited  balance
sheet  includes the  historical  amounts of the Company  adjusted to reflect the
effects  of the  Company's  withdrawal  of its  election  to be  regulated  as a
business  development  company.  The pro  forma  information  should  be read in
conjunction with the historical financial statements of the Company.


                                       4
<PAGE>

             FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES PRO FORMA
                        UNAUDITED PRO FORMA BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,                                                                     2004              2003
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<S>                                                                          <C>              <C>
ASSETS

Cash and cash equivalents                                                    $    846,404     $    224,225
Trading assets                                                                  4,020,154        1,955,169
Other current assets                                                              255,510           58,432
                                                                             ------------     ------------
TOTAL CURRENT ASSETS                                                            5,122,068        2,237,826

Property, plant and equipment, net                                                 23,657           20,206
Other long-term investments                                                     1,788,518        1,000,000
                                                                             ------------     ------------

TOTAL ASSETS                                                                 $  6,934,243     $  3,258,032
                                                                             ============     ============

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LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Notes payable                                                                $    892,530     $    915,754
Accounts payable and accrued liabilities                                          939,568          318,140
Trading assets sold short                                                       1,075,100
Due to broker                                                                     460,776

TOTAL CURRENT LIABILITIES                                                       3,367,974        1,233,894
                                                                             ------------     ------------

STOCKHOLDERS' EQUITY

Convertible preferred stock, $1 par value, cumulative 7% dividend:
    10,000,000 shares authorized; 10,950 issued and outstanding
    at December 31, 2004 and 2003
    (Liquidation preference $1,095,000)                                            10,950           10,950
Common stock, $1 par value: 50,000,000 shares authorized;
    2,042,689 and 1,505,888 shares issued: 1,556,901 and 1,020,100 shares
    outstanding at December 31, 2004 and 2003, respectively                     2,042,689        1,505,888
Paid-in capital                                                                13,925,253       10,439,610
Accumulated deficit                                                            (9,795,791)      (7,315,478)
                                                                             ------------     ------------

                                                                                6,183,101        4,640,970
Deduct: 485,788 shares of common stock held in treasury
    at cost, at December 31, 2004 and 2003, respectively                       (2,616,832)      (2,616,832)
                                                                             ------------     ------------

Total stockholders' equity                                                      3,566,269        2,024,138
                                                                             ------------     ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $  6,934,243     $  3,258,032
                                                                             ============     ============
</TABLE>

            The Company does not believe that the  withdrawal of its election to
be treated as a BDC will have any impact on its federal income tax status, since
it has never  elected to be  treated as a  regulated  investment  company  under
Subchapter  M of  the  Internal  Revenue  Code.  (Electing  for  treatment  as a
regulated  investment  company under  Subchapter M generally  allows a qualified
investment  company to avoid paying corporate level federal income tax on income
it  distributes  to its  stockholders.)  Instead,  the  Company  has always been
subject to corporate  level federal income tax on its income  (without regard to
any distributions it makes to its stockholders) as a "regular" corporation under
Subchapter  C of the Code.  There  will be no change in its  federal  income tax
status as a result of it becoming an operating company.

            In addition, withdrawal of the Company's election to be treated as a
BDC will not  affect  the  Company's  registration  under  Section  12(b) of the
Exchange  Act.  Under the Exchange Act, the Company is required to file periodic
reports on Form 10-K,  Form 10-Q,  Form 8-K, proxy  statements and other reports
required  under the Exchange Act.  Withdrawal  of the  Company's  election to be
treated as a BDC is not  expected  to have any affect on the  Company's  listing
status on the AMEX.

            Steps Toward Withdrawal

            The Company is using  maximum  efforts to qualify for this change of
status and has undertaken  several steps to meet the requirements for withdrawal
of its election to be treated as a BDC, including: (i) preparing a detailed plan
of operations in contemplation of such a change to the status for the Company


                                       5
<PAGE>

and (ii) consulting with outside counsel as to the  requirements for withdrawing
its  election  as a  BDC  and  exemption  or  exclusion  from  being  deemed  an
"investment  company"  under the 1940 Act.  As of the date  hereof,  the Company
believes that the Company meets the  requirements  for filing an  application to
withdraw  its  election to be treated as a BDC.  However,  we may not change the
nature of our  business so as to cease to be, or withdraw our election as, a BDC
unless authorized by vote of a "majority of the outstanding voting  securities,"
as defined in the 1940 Act. A majority of the outstanding voting securities of a
company is defined  under the 1940 Act as the lesser of: (i) 67% or more of such
company's shares present at a meeting if more than 50% of the outstanding shares
of such  company are present and  represented  by proxy or (ii) more than 50% of
the outstanding shares of such company.

            On June 24, 2004, we received a letter from AMEX inquiring as to the
Company's  ability to remain listed on AMEX.  Specifically,  AMEX indicated that
the Company's  common stock was subject to delisting  under sections  1003(a)(i)
and 1003(a)(ii) of AMEX Company Guide because the Company's stockholders' equity
was below the level required by AMEX's continued listing standards. Accordingly,
AMEX requested information relating to the Company's plan to retain its listing.

            On September 13, 2004, the Company presented the final components of
its proposed plan to AMEX to comply with AMEX's continued  listing standards and
on  September  15,  2004,  AMEX  notified  the Company  that it had accepted the
Company's plan and had granted the Company an extension  until December 26, 2005
to be in compliance with the AMEX contained listing standards, during which time
AMEX will  continue the Company's  listing  subject to certain  conditions.  The
Company  cooperated,  and has continue to cooperate,  with AMEX regarding  these
issues  and  intends  to make every  effort to remain  listed on AMEX.  AMEX has
notified the Company, however, that failure to make progress consistent with the
plan of compliance or to be in compliance with the continued  listing  standards
could result in the  Company's  common stock being  delisted  from AMEX,  and no
assurances  can be made  that  the  Company  will be able to  maintain  its AMEX
listing. A delisting from AMEX would have a material adverse effect on the price
and liquidity of Franklin's common stock.

            On  November  11,  2004,  our Board  adopted  and  approved  certain
corporate governance-related documents, including a code of business conduct and
ethics,  and revised  audit and  compensation  committee  charters,  in order to
comply with certain of AMEX's corporate governance listing standards.

            The Company  believes  that it is currently in  compliance  with the
AMEX requirements.

            If the  stockholders  approve this proposal to permit the Company to
withdraw its BDC election,  the withdrawal will become effective upon receipt by
the SEC of the  Company's  application  for  withdrawal.  The  Company  does not
anticipate  filing the  application  of  withdrawal  until it can be  reasonably
certain that the Company will not be deemed to be an investment  company without
the  protection  of its  BDC  election.  After  the  Company's  application  for
withdrawal of its BDC election is filed with the SEC, the Company will no longer
be subject to the  regulatory  provisions  of the 1940 Act  applicable  to BDC's
generally,  including regulations related to insurance,  custody, composition of
its Board, affiliated transactions and any compensation arrangements.

INITIATION OF THE RESTRUCTURING PLAN AND CHANGE IN CONTROL

            On May 11, 2004, Ault Glazer & Company  Investment  Management,  LLC
("AULT GLAZER"),  a private  investment  management firm  headquartered in Santa
Monica,  California that manages  approximately $20 million in individual client
accounts and private  investment  funds and is owned by Milton  "Todd" Ault III,
Lynne  Silverstein,  and Louis and Melanie Glazer began acquiring  shares of our
common  stock,  par  value  $1.00  (the  "COMMON  STOCK")  through   open-market
purchases.

            By May 12,  2004,  Ault  Glazer  indirectly  beneficially  owned  or
controlled  approximately 11% of the outstanding  shares of Common Stock. On May
18,  2004,  in its  original  filing with the SEC on Schedule  13D,  Ault Glazer
disclosed  its concerns  regarding  the ability and  willingness  of  Franklin's
then-current  management to maximize  stockholder value and stated its intention
to recommend that  Franklin's  management  coordinate with Ault Glazer to effect
certain  fundamental  changes within  Franklin.  Both prior to and following the
filing of the  Schedule  13D,  Ault had several  conversations  with  Stephen L.
Brown, Franklin's then Chairman and Chief Executive Officer ("Brown"), and other
members of the Board  regarding  Ault  Glazer's  ideas with  respect to changing
Franklin's leadership and business.

            On May 19, 2004, by which time Ault Glazer  indirectly  beneficially
owned or controlled  over 30% of the  outstanding  shares of Common  Stock,  the
Board met to discuss Ault Glazer's  acquisitions of Common Stock and the Board's
responsibilities  and obligations to Franklin's  stockholders in connection with
these acquisitions,  as well as an appropriate  response.  At the meeting,  Ault
confirmed  to the Board that Ault  Glazer,  in an effort to  maximize  long-term
stockholder value, intended to effect a change of control and a restructuring of
Franklin  involving,  among other things,  the  introduction of a new management
team to replace the existing directors and officers of Franklin, the liquidation
of Franklin's current investment  portfolio,  the  recapitalization  of Franklin
with new outside  financing,  and the relocation of Franklin's  headquarters  to
Santa  Monica,  California.  During the  meeting,  Franklin and Ault Glazer also
entered into a  confidentiality  and "standstill"  agreement,  pursuant to which
Ault Glazer agreed, among other things, not to acquire any additional securities
of  Franklin  until May 30,  2004.  On June 1, 2004,  Ault  Glazer and Ault also
amended  their  existing  filing on Schedule 13D to confirm  their  intention to
effect a change of control of Franklin.


                                       6
<PAGE>

            In response to the Board's  request,  Ault Glazer,  through  private
discussions with the Board between June 3, 2004 and June 9, 2004,  presented the
basic terms of the Restructuring Plan. On June 9, 2004, the Board met to discuss
the Restructuring Plan.  Following the discussion,  the Board concluded that the
Restructuring  Plan was in the best interests of Franklin and its  stockholders.
As a result,  the Board  authorized and directed  Franklin's  management to hold
further  discussions  and  negotiations  with Ault  Glazer  with  respect to the
Restructuring Plan.

IMPLEMENTING THE RESTRUCTURING PLAN

            On June 23, 2004, the Company entered into a Letter of Understanding
(the  "LOU")  with  Ault  Glazer.  This LOU set  forth  the  understandings  and
agreements  of the Company and Ault  Glazer  with  respect to the  Restructuring
Plan. The Restructuring Plan was intended to maximize stockholder value through,
among other things, (i) a shift in the Company's  investment  strategy away from
the radio and  telecommunications  industry toward a primary focus on the health
care and  medical  products  related  companies,  and to a lesser  extent in the
financial  services  and real estate  industries,  (ii) the  liquidation  of the
Company's investments (including Excelsior Radio Networks, Inc.  ("EXCELSIOR")),
(iii) the raising of new capital to fund new investments,  and (iv) the election
of new  directors  and officers  with  experience  and  expertise in the medical
products, health care solutions, financial services and real estate industries.

            In connection  with the  Restructuring  Plan,  Franklin also entered
into  a  Termination   Agreement  and  Release  (the  "TERMINATION  AND  RELEASE
AGREEMENT")   with  Brown  that  contains  the  terms  of  Brown's   prospective
resignation from Franklin.  Franklin and Brown amended the Termination Agreement
on September 30, 2004. See "TERMINATION AGREEMENT AND RELEASE" BELOW.

            On  October  22,  2004,  the  Company  held  a  special  meeting  of
stockholders to approve certain  proposals  relating to the  Restructuring  Plan
(the "SPECIAL  MEETING").  At the Special  Meeting,  the Company's  stockholders
approved proposals  relating to: (1) the election of Louis Glazer,  M.D., Ph.G.,
Herbert Langsam,  Alice Campbell and Brigadier General (Ret.) Lytle Brown III to
serve on the Company's Board of Directors;  (2) the amendment and restatement of
the Company's  certificate of incorporation to increase the authorized number of
shares of the Company's common stock from 5,000,000 shares to 50,000,000 shares;
(3) the amendment and restatement of the Company's  certificate of incorporation
to increase the  authorized  number of shares of the Company's  preferred  stock
from 5,000,000 shares to 10,000,000 shares; (4) the amendment and restatement of
the Company's  certificate of  incorporation  to provide for the  exculpation of
director liability to the fullest extent permitted by law; (5) the amendment and
restatement  of the Company's  certificate of  incorporation  to provide for the
classification of the Board into three classes of directors; (6) the sale by the
Company  to Quince  Associates,  LP of all of the shares  of,  and  warrants  to
purchase shares of, common stock of Excelsior Radio Networks,  Inc. beneficially
owned by the  Company;  and (7) the  prospective  sale by the  Company  of up to
5,000,000  shares of common stock and  warrants to purchase up to an  additional
1,500,000 shares of common stock. The proposal  relating to the prospective sale
by the Company of Common Stock and warrants to purchase  Common Stock to certain
"interested  stockholders"  under Delaware law was not approved by the requisite
stockholder vote.

            On October 22, 2004,  Stephen L. Brown,  resigned from his positions
as the Company's Chairman and Chief Executive  Officer,  Hiram M. Lazar resigned
from his positions as the Company's  Chief Financial  Officer and Secretary.  To
fill the  vacancies  created  by these  resignations,  the newly  elected  Board
(consisting of Louis Glazer,  Alice Campbell,  Herbert Langsam,  and Lytle Brown
III)  appointed  Ault to serve as the  Company's  Chairman  and Chief  Executive
Officer and Silverstein to serve as the Company's President and Secretary.


                                       7
<PAGE>

TERMINATION AGREEMENT AND RELEASE

            In connection with the Restructuring  Plan, the Company entered into
a Termination Agreement and Release (the "TERMINATION AGREEMENT") with Mr. Brown
that contained the terms of his  resignation  from the Company.  Pursuant to the
terms of the  Termination  Agreement,  we paid Mr. Brown a severance  payment of
$250,000.  In addition, we also agreed to: (i) pay Mr. Brown an aggregate amount
of $200,000 payable over eight months for consulting  services to the Company on
historical  matters  concerning the Company's  operations and stock portfolio as
may be reasonably  requested  from time to time by a designee of the Board,  and
(ii)  continue to provide  coverage to Mr. Brown and his wife under our medical,
dental  and  vision  plans for a period  of three  years  following  the date of
termination.  The  Company  recorded  a charge to  operations  of  approximately
$483,000 in 2004 under the Termination Agreement.

            A copy of the  Termination  Agreement  was included as an exhibit to
the Company's  report on Form 8-K filed with the SEC on June 24, 2004 and a copy
of Amendment  No. 1 to the  Termination  Agreement was included as an exhibit to
the  Company's  current  report on Form 8-K filed with the SEC on September  30,
2004.

            All of the  foregoing  events are  discussed  in more  detail in the
definitive  proxy  materials filed with the SEC on September 30, 2004, and March
3, 2005.

OUR CURRENT BUSINESS PLAN

THE MEDICAL PRODUCTS AND HEALTHCARE SOLUTIONS INDUSTRY

            The Company  believes that the healthcare  delivery  system is under
tremendous  pressure to identify  and  commercialize  simple  medical  solutions
quickly to lower costs,  control  infections,  reduce  liability  and  eliminate
preventable errors.  Increased  litigation and a renewed focus on patient safety
by regulators is spurring demand for new innovative  medical  devices.  With the
convergence   of   scientific,   electronic   and  digital   technologies,   new
breakthroughs  in  medical  devices  will play a critical  role in  solving  the
problems in healthcare and enhancing patient safety in the future.

            Surgeries are increasing in both number and  complexity,  creating a
need for newer, more efficient and safer medical devices.  The urgency to reduce
the high level of preventable medical errors,  reduce liability issues,  control
infection and offer new health care services,  will focus command  attention and
resources as never before.

            The medical community recognizes the importance of improving patient
safety,  not  only to  enhance  the  quality  of care,  but also to help  manage
skyrocketing  medical costs and related  litigation  costs. We are confident the
medical  profession and healthcare  professionals  will rise to the occasion and
help develop the medical solutions to revolutionize health care.

            Franklin is dedicated to leading this effort through the development
and  introduction  of  ground-breaking  patient safety products such as its lead
product, the patented  Safety-Sponge(TM)  System, which management believes will
allow the Company to capture a significant portion of what we believe,  based on
industry sources,  to be approximately $650 million in annual U.S., European and
Japanese  surgical  sponge  sales.  In addition,  the Company  believes that its
innovative  Safety-Sponge(TM)  System could save up to an estimated $1.5 billion
annually in retained sponge  litigation,  based upon  information  from industry
sources.

            To augment the Company's focus in the medical products  industry the
Company  formed  Franklin  Medical  Products,  LLC,  a  wholly-owned  healthcare
consulting  services  company.  Effective  February 23, 2005,  Franklin  Medical
Products, LLC changed its name to Patient Safety Consulting Group, LLC.


                                       8
<PAGE>

("PSCG").  Initially,  efforts at PSCG will be directed at products and services
that promote usage of our lead product.

CUSTOMERS

            The  Company  intends to target  hospitals,  physicians,  nurses and
clinics as its initial source of customers.  In addition, the Company also plans
to develop strategic alliances with universities, medical facilities and notable
medical  researchers  around  the United  States,  that will  provide  research,
development and promotional support for the Company's products and services.

                                       9
<PAGE>


GEOGRAPHIC AREAS

            The Company  intends to market and sell its patient safety  products
and services in the United States and in Europe. However, the principal markets,
products and methods of  distribution  will vary by country based on a number of
factors,  including,  healthcare  regulations,  insurance  coverage and customer
demographics.  Investments  and activities in some countries  outside the United
States are subject to higher risks than comparable U.S.  activities  because the
investment and commercial climate is influenced by restrictive economic policies
and political uncertainties.

PRODUCT DEVELOPMENT

            The  Company's   current   patient  safety   products  such  as  the
Safety-Sponge(TM) System are presently in the optimization and commercialization
phase. The Safety-Sponge(TM) System allows for faster and more accurate counting
of surgical  sponges.  SurgiCount  has obtained  FDA 510k exempt  status for the
Safety-Sponge(TM)  line.  The  Safety-Sponge(TM)  line  of  sponges  has  passed
required FDA  biocompatibility  tests including ISO sensitization,  cytotoxicity
and skin irritation  tests.  SurgiCount is now a wholly-owned  subsidiary of the
Company.  It is  anticipated  in the future that  distribution  of the Company's
medical products to health care professional  markets will be done both directly
and through surgical supply and other dealers.

            The  Company  intends  to do further  research  and  development  to
advance its products as is normal for any other company.  However,  we intend to
outsource  much of the R&D functions and focus our direct  efforts on optimizing
this product and  establishing  distribution  channels with strategic  alliances
with  hospitals  to deploy  the  products.  We also seek  qualified  input  from
professionals in the healthcare  profession as well as individuals at University
hospitals such as Harvard and the University of California, San Francisco. These
independent  physicians and researchers  maintain medical practices primarily at
University   hospitals  and  are  involved  in  various  research  and  clinical
development  programs.  We  meet  on an as  needed  basis  to  discuss  medical,
technology and development issues.

MANUFACTURING AND RAW MATERIALS

            The  Company  has  not  begun   commercial   manufacturing   of  its
Safety-Sponge(TM)  System.  Upon such  initiative,  the Company intends to enter
into agreements or  relationships  with several vendors to commercially  produce
our  products.  We believe that the  materials  used in our products are readily
available and can be purchased and/or produced by several different vendors and,
therefore, we do not anticipate being dependent on any one vendor.

RESEARCH AND DEVELOPMENT

            Research and  development  activities are important to the Company's
business.  However,  at this time the Company does not have a research  facility
but rather focuses its efforts on acquisitions of companies operating within our
target  industries that have  demonstrated  product  viability through their own
research and development activities. We intend to outsource much of the research
and  development  activities  relating to  improving  our  existing  products or
expanding our  intellectual  property to similar  products or products that have
similar characteristics in our target industries.  The Company did not incur any
costs in 2004 relating to the  development of new products,  the  improvement of
existing   products,   technical   support  of  products  and  compliance   with
governmental  regulations  for the  protection of the  consumer.  In the future,
these  costs  will be charged  directly  to income in the year in which they are
incurred.

PATENTS AND TRADEMARKS

            The  Company  intends  to  make  a  practice  of  obtaining   patent
protection on its products and processes where possible.  The Company's  patents
and  trademarks  are  protected by  registration  in the United States and other
countries where its products are marketed.


                                       10
<PAGE>

            The Company  currently  owns patents issued in the United States and
Europe related to the  Safety-Sponge(TM)  System. Sales of the Safety-Sponge(TM)
System  in the  future  will  be  expected  to  play a  significant  part of the
Company's total revenues.  The Company considers these patents and trademarks in
the aggregate to be of material importance in the operation of its business. The
loss or expiration of any product patent or trademark  could result in a loss of
market exclusivity and can result in a significant reduction in sales.

COMPETITION

            The medical  products and  healthcare  solutions  industry is highly
competitive. We expect that if our investment model proves to be successful, our
current competitors in the medical products and healthcare  solutions market may
duplicate  our strategy  and new  competitors  may enter the market.  We compete
against other medical products and healthcare solutions companies, some of which
are much larger and have significantly  greater financial  resources than we do.
In addition,  these companies will be competing with our portfolio  companies to
acquire  technologies  from  universities  and  research  laboratories.  We also
compete  against  large  companies  that seek to license  medical  products  and
healthcare solutions  technologies for themselves.  We cannot assure you that we
will  be  able  to  successfully   compete  against  these  competitors  in  the
acquisition,  development,  or  commercialization  of any medical  products  and
healthcare  solutions,  funding of medical  products  and  healthcare  solutions
companies or marketing of our products and solutions.

            Competition in research,  involving the  development of new products
and  processes  and the  improvement  of existing  products  and  processes,  is
particularly  significant  and results  from time to time in product and process
obsolescence.  The development of new and improved  products is important to the
Company's  success in all areas of its business.  This  competitive  environment
requires substantial  investments in continuing research,  multiple sales forces
and  strategic  alliances.  In addition,  the winning and  retention of customer
acceptance of the Company's patient safety products involves heavy  expenditures
for health care regulatory compliance, advertising, promotion and selling.

COMPETITIVE ADVANTAGES

            We believe  that we are well  positioned  to provide  financing  and
research and development  resources to medical products and health  care-related
companies for the following reasons:

      o     Focus on innovative technologies, products and services;

      o     Network  of  well  respected   industry   affiliations  and  medical
            expertise;

      o     Expertise in originating, structuring and monitoring investments;


                                       11
<PAGE>

      o     Flexible investment approach; and

      o     Established deal sourcing network.

FINANCIAL SERVICES INDUSTRY

            In  recent  years  there  has  been  substantial  convergence  among
companies  in the  financial  services  industry.  A large  number of  corporate
entities, including, commercial banks, insurance companies and other broad-based
financial  services  companies have established or acquired  broker-dealers  and
asset  management  firms to  compliment  their  existing  lines of business.  In
general,  there are two types of institutions  that will be the initial focus of
the Company's entry into the financial  services industry -- broker-dealers  and
investment  management  firms.  Other types of entities in which the Company may
acquire or invest in the future,  include,  but are not necessarily  limited to:
finance   companies   (including   real-estate  and  mortgage   related  finance
companies),  mutual fund companies,  collection companies,  technology companies
related to the financial  services  industry and companies  engaged in financing
activities.

            The Company intends to enter the financial services business through
the establishment of a broker-dealer or asset management subsidiary or through a
majority or minority  acquisition or joint venture interest in a company engaged
in the  provision  of  brokerage,  asset  management  and/or  similarly  related
services.  The  Company  also  intends to provide  financial  advice on mergers,
acquisitions,   restructurings   and  similar   corporate   finance  matters  in
furtherance of its financial services business line.

            The Company has not invested in the financial  services  industry in
the past and therefore  has not compiled a track record  regarding the financial
performance  to be expected in  connection  with the  operation  of this line of
business.  However,  the Company intends to utilize and rely on its relationship
with Ault  Glazer,  a private  investment  management  firm owned and managed by
Milton  "Todd"  Ault III and other  principals  of the  Company as well as other
third  parties,  to facilitate its  acquisitions  and/or joint  investments  the
forgoing types of financial services companies.

COMPETITION

            The financial services industry is a highly competitive  environment
where there are no long-term  contracted sources of revenue.  Each engagement is
separately awarded and negotiated.  Our competitors are other investment banking
firms,  merchant  banks,  broker dealers and  investment  management  firms.  We
compete with our competitors primarily on a regional, product or niche basis. We
compete on the basis of a number of factors, including our range of products and
services, innovation, and reputation.

            As we expand our financial services business, we face competition to
acquire  investments  in  attractive  portfolio   companies.   The  activity  of
identifying,  completing and realizing  attractive private equity investments of
the  types we  expect  to make is  competitive  and  involves  a high  degree of
uncertainty.  We may be competing with other investors and corporate  buyers for
the investments that we make.

            Competition  is also  intense for the  attraction  and  retention of
qualified  employees.  Our ability to compete  effectively in financial services
industry  will depend upon our ability to attract new  employees  and retain and
motivate our existing employees.

THE REAL ESTATE INDUSTRY

            The  Company's  real estate  operations  will  eventually  include a
mixture of commercial  properties,  residential  land  development  projects and
other  unimproved  land, all in various stages of development  and all available
for sale.  Therefore,  performance of the real estate operations will largely be
dependent upon the performance of the operating  properties,  the current status
of  the  Company's  development  projects  and  non-recurring  gains  or  losses
recognized when and if real estate assets are sold. As a result,  the results of
operations  for  the  Company's   real  estate   operations  are  likely  to  be
unpredictable and may experience significant year-over-year fluctuations.

            The Company had several  real  estate  investments  at December  31,
2004.  These  investments  consisted of eight vacant single family buildings and
two  multi-unit  buildings in Baltimore,  Maryland,  approximately  8.5 acres of
undeveloped land in Heber Springs,  Arkansas,  and various loans secured by real
estate in Heber Springs,  Arkansas.  The Company's real estate  investments  are
held  in  Franklin  Properties.  Franklin  Properties  primary  focus  is on the
acquisition and management of income producing real estate holdings.

COMPETITION

            The   Company's   real   estate   operations   are  in   competitive
environments.  The Company  has  concentrations  of  investments  in  Baltimore,
Maryland and Heber Springs,  Arkansas.  The Company competes with a large number
of real estate property owners and developers.  Principal factors of competition
are rent charged,  attractiveness  of location,  the quality of the property and
breadth and  quality of services  provided.  The success of the  Company's  real
estate operations depends upon, among other factors,  trends of the national and
local  economies,  financial  condition  and  operating  results of  prospective
tenants  and  customers,  availability  and cost of  capital,  construction  and
renovation costs, taxes,  governmental  regulations,  legislation and population
trends.

RECENT DEVELOPMENTS

            On February 25, 2005, in  furtherance of the  implementation  of the
Company's Restructuring Plan the Company purchased SurgiCount, a privately held,
California-based  developer  of  patient  safety  devices.   SurgiCount  is  the
Company's  first  major  acquisition  in its  plan to  become  a  leader  in the
multi-billion  dollar patient  safety field market and management  believes that
the  acquisition  is a significant  milestone in the Company's plan to shift its
focus from radio and  telecommunications  to  products  and  services  targeting
patient safety.

            On March 2, 2005, the Company made an investment in the common stock
of Administration for International Credit & Investments,  Inc. ("AICI"), valued
at $450,000. As part of its investment, the Company received 225,000 warrants to
purchase common stock at $1.50 per share and 225,000 warrants to purchase common
stock at $2.00 per share.  The  warrants  are  exercisable  for a period of five
years and are callable by AICI in certain instances. AICI operates an electronic
market  for   collecting,   detecting,   converting,   enhancing   and   routing
telecommunication   traffic  and  digital  content.   Members  of  the  exchange
anonymously  exchange  information  based on route  quality and price  through a
centralized,   web   accessible   database  and  then  route   traffic.   AICI's
fully-automatic,  highly scalable Voice over Internet  Protocol routing platform
updates  routes  based on  availability,  quality  and  price and  executes  the
capacity  request of the orders using  proprietary  software  and delivers  them
through  AICI's  system.  AICI invoices and processes  payments for its members'
transactions and offsets credit risk through its credit management programs with
third  parties.  AICI's name changed to Ipex,  Inc and began  trading on the OTC
Bulletin Board on March 29, 2005.

            On March 16,  2005,  Ault Glazer  filed a Schedule  13D with the SEC
relating  to its  holdings in Tuxis  Corporation  ("Tuxis").  Tuxis,  a Maryland
corporation,  currently  is  registered  under  the 1940  Act,  as a  closed-end
management investment company.  Tuxis previously received Board of Directors and
shareholder  approval to change the nature of its  business so as to cease to be
an investment  company and on May 3, 2004,  filed an application with the SEC to
de-register.  At March 16, 2005,  the Company  directly  held 36,000  shares and
indirectly,  by virtue of its relationship with Ault Glazer,  held 98,000 shares
of  Tuxis  common  stock,  which  represented  approximately  3.66%  and  9.96%,
respectively,  of the total outstanding  shares. At December 31, 2004, Tuxis had
reportable net assets of approximately $9.1 million.

INVESTMENT PROCESS

            The  Company  identifies  investment  opportunities  in  our  target
industries  through an extensive network of contacts in the medical products and
health care solutions  industries,  relationships with venture capital firms and
other  associations  with  individuals  at  University  hospitals  such as those
operated  by Harvard and the  University  of  California,  San  Francisco.  Upon
identification  of  an  investment  opportunity  the  Company  relies  upon  the
executive  management  team to conduct a thorough  evaluation of the company and
its  technology.  As required,  the executive  management  team may consult with
individuals that have specialized  expertise in the target industry. In the case
of an investment  where  Franklin is the sole or lead investor and the executive
management  team is  satisfied  with  its  evaluation,  the  basic  terms  of an
investment  are  negotiated  directly  by the  executive  management  team  and,
depending on the amount of the transaction, presented to the Board for approval.
Upon mutual  acceptance  of the basic terms,  outside  counsel would prepare the
transaction investment documents.


                                       12
<PAGE>

            On March 2, 2005, the Company filed  definitive proxy materials with
the  Securities  and  Exchange  Commission  in  connection  with its 2004 Annual
Meeting of the Stockholders (the "ANNUAL MEETING").  The Annual Meeting is being
held on March  30,  2005 in order to vote on the  following  proposals:  (i) the
election  of  Lytle  Brown  III as a  Class I  Director  to  hold  office  for a
three-year  term  expiring in 2007, or until his successor has been duly elected
and qualified or until his earlier death,  resignation or removal, in accordance
with the Company's bylaws, as amended;  (ii) the ratification of the appointment
by the Board of  Directors  of the Company (the  "BOARD") of  Rothstein,  Kass &
Company, P.C. ("ROTHSTEIN KASS") to serve as independent auditors for the fiscal
year ended December 31, 2004; (iii) the  authorization and approval of the stock
option  component of the stock option and restricted  stock plan for the Company
(the "NEW PLAN");  (iv) the  authorization  and approval of the restricted stock
component of the New Plan; (v) the  authorization and approval of the payment of
cash  and  equity  compensation  to  Milton  "Todd"  Ault  III  ("AULT"),  Lynne
Silverstein   ("SILVERSTEIN"),   and  Louis  Glazer  and  Melanie   Glazer  (the
"GLAZERS"),  each of whom may be deemed to be an  "interested  stockholder"  (as
defined in Section 203 of the Delaware  General  Corporate  Law ("DGCL")) of the
Company;  (vi) the  authorization  and  approval of the sale of common stock par
value $1.00 of the Company ("COMMON  STOCK"),  warrants to purchase Common Stock
("WARRANTS") and other  securities  representing  indebtedness  convertible into
Common Stock to Ault, Silverstein and the Glazers, each of whom may be deemed to
be an "interested stockholder" (as defined in Section 203 of the DGCL), on terms
that are approved by the Board  consistent with its fiduciary  duties and market
terms existing at the time of such offering,  including  those relating to price
per share,  interest rate,  warrant  coverage and  registration  rights for such
issuances and the  requirements  of applicable  law,  including the 1940 Act, as
described in this proxy statement;  (vii) the  authorization and approval of the
certificate   of  amendment  to  the  Amended  and   Restated   Certificate   of
Incorporation of the Company (the  "CERTIFICATE OF AMENDMENT") to reduce the par
value of the  Common  Stock from $1.00 per share to $0.33 per share and effect a
three-for-one  split  of the  Common  Stock  (the  "STOCK  SPLIT");  (viii)  the
authorization and approval of the prospective  issuance of bonds, notes or other
evidences of indebtedness  that are convertible into Common Stock  ("CONVERTIBLE
BONDS,"  "CONVERTIBLE NOTES" or "OTHER CONVERTIBLE  INDEBTEDNESS") in accordance
with the  requirements of the 1940 Act; (ix) the  authorization  and approval of
the Board to withdraw the Company's  election to be treated as a BDC pursuant to
Section  54(c) under the 1940 Act;  (x) the  authorization  and  approval of the
Certificate  of Amendment  to change the name of the Company to "Patient  Safety
Technologies,  Inc."; and (xi) the authorization and approval of the Certificate
of Amendment to decrease  the  authorized  number of shares of Common Stock from
50,000,000  shares to 25,000,000  shares and decrease the  authorized  number of
shares of Preferred Stock from 10,000,000 shares to 1,000,000 shares.

            Please refer to our definitive proxy statement filed with the SEC on
March 2, 2005 and September 30, 2004,  our quarterly  reports on Form 10-Q filed
with the SEC for the quarters ended March 31, 2004,  June 30, 2004 and September
30, 2004, and our Form 8-K's filed with the SEC on October 27, 2004, November 3,
2004,  November 9, 2004, November 19, 2004, December 8, 2004, December 27, 2004,
January  4, 2005,  February  9, 2005,  February  9, 2005,  and March 3, 2005 for
additional descriptions of, and information relating to, the Restructuring Plan,
the proposals  voted on by the Company's  stockholders at the Special Meeting of
Stockholders   held  on  October  28,  2004,   press  releases  related  to  the
announcement of the Company's future plans, and the proposals to be voted at the
Company's upcoming Annual Meeting.

PORTFOLIO OF INVESTMENTS

            The Company has historically invested in long-term equity securities
of  start-up  and early  stage  companies  in the  radio and  telecommunications
industry.  However,  as a result of the  Restructuring  Plan,  the  Company  has
shifted its  investment  focus  toward that of  investments  in companies in the
medical  products/health  care solutions and financial  services and real estate
industries. These private businesses may be thinly


                                       13
<PAGE>

capitalized, unproven, small companies that lack management depth, are dependent
on new,  commercially  unproven  technologies  and have  little or no history of
operations.

            The following is a discussion of our most significant investments at
February 25, 2005.  Pursuant to the Restructuring  Plan, the Company shifted its
primary investment focus from the radio and  telecommunications  industry to the
medical products and health care solutions industries, and to a lesser extent in
the financial  services and real estate  industries.  In  conjunction  with this
shift, on October 22, 2004, we sold our remaining  equity interests in Excelsior
Radio  Networks,  Inc.("EXCELSIOR")  to Quince  Associates,  LP  ("QUINCE")  for
$1,489,210.   For  a  more  detailed   discussion  of  this   transaction,   see
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS" - "OVERVIEW" and "INVESTMENTS - EXCELSIOR RADIO NETWORKS, INC."

SurgiCount

            On February 25, 2005, the Company purchased  SurgiCount Medical Inc.
("SURGICOUNT"),  a privately held,  California-based developer of patient safety
devices. Under the terms of the agreement, the Company paid to Brian Stewart and
Dr. William  Stewart,  the holders of 100% of the  outstanding  capital stock of
SurgiCount (the "Shareholders"), consideration in the amount of $340,000 in cash
and 200,000 shares of Common Stock,  of which 10,000 shares of Common Stock will
be held in escrow until August 2005.  In  addition,  if certain  milestones  are
satisfied,  the Company will issue up to an  additional  33,334 shares of Common
Stock to the Shareholders.

            SurgiCount is the Company's  first major  acquisition in its plan to
become a  leader  in the  multi-billion  dollar  patient  safety  field  market.
Management  believes  that the  acquisition  is a  significant  milestone in the
Company's plan to shift its focus from radio and  telecommunications to products
and services  targeting health care and patient safety.  SurgiCount owns patents
issued in the United States and Europe  related to patient  safety,  among them,
the Safety-Sponge(TM) System, an innovation which management believes will allow
the  Company  to capture a  significant  portion  of what we  believe,  based on
industry sources,  to be approximately $650 million in annual U.S., European and
Japanese surgical sponge sales.

            The  Safety-Sponge(TM)  System  allows for faster and more  accurate
counting of surgical sponges. SurgiCount has obtained FDA 510k exempt status for
the  Safety-Sponge(TM)  line. The  Safety-Sponge(TM)  line of sponges has passed
required FDA  biocompatibility  tests including ISO sensitization,  cytotoxicity
and skin irritation  tests.  SurgiCount is now a wholly-owned  subsidiary of the
Company.

China Nurse

            On  November  23,  2004,  the  Company   entered  into  a  strategic
relationship   with  China  Nurse  LLC   ("China   Nurse"),   an   international
nurse-recruiting  firm based in New York that focuses on recruiting and training
qualified  nurses from China and Taiwan for job  placement  with  hospitals  and
other health care  facilities  in the United  States.  In  connection  with this
strategic  relationship,  the Company has agreed to provide  referrals and other
assistance and has also made a small capital investment in that company.

Digicorp

            On December  29,  2004,  the  Company  entered  into a Common  Stock
Purchase Agreement with certain  shareholders of DigiCorp (the "Agreement"),  to
purchase an aggregate  of 3,453,527  shares of DigiCorp  common  stock.  Of such
shares,  2,229,527  shares were  purchased  for $.135 per share on December  29,
2004,  100,787  shares were  purchased for $.145 on December 29, 2004.  Franklin
agreed to


                                       14
<PAGE>

purchase  an  additional  1,224,000  shares of  DigiCorp  common  stock from the
selling  shareholders  at such time as the shares are registered for resale with
the SEC.  The  purchase  price  for such  shares  is $.135 or $.145  per  share,
depending on when the closing occurs.  Digicorp's  common stock is traded on the
OTC Bulletin Board.  In connection  with the Agreement,  Franklin is entitled to
designate  two members to the Board of Directors of Digicorp.  Franklin's  first
designee,  Melanie  Glazer,  was appointed on December 29, 2004.  The Company is
currently evaluating several strategic  alternatives for the use of the DigiCorp
entity, however, no definitive plan has been decided upon at this time.

Alacra Corporation

            At December 31,  2004,  the Company had an  investment  in shares of
Series  F  convertible   preferred  stock  of  Alacra  Corporation,   valued  at
$1,000,000,  which represented 14.4% of the corporation's total assets and 28.0%
of its net  assets.  Franklin  has the  right to have the  Series F  convertible
preferred  stock  redeemed by Alacra for face value plus  accrued  dividends  on
December 31, 2006.  Alacra,  based in New York, is a global provider of business
and  financial  information.  Alacra  provides  a  diverse  portfolio  of  fast,
sophisticated online services that allow users to quickly find, analyze, package
and present  mission-critical  business information.  Alacra's customers include
more than 750 financial institutions,  management consulting, law and accounting
firms and other corporations throughout the world.

Real Estate Investments

            At December  31,  2004,  the Company held a portfolio of real estate
investments through Franklin Capital Properties, LLC ("Franklin Properties"),  a
Delaware limited liability company and a wholly owned subsidiary. As of December
31, 2004 Franklin  Properties was valued at $738,518,  which represents 10.7% of
the  Company's  total  assets and 20.7% of its net assets.  Franklin  Properties
primary focus is on the  acquisition  and  management of income  producing  real
estate  holdings.  Franklin  Properties  real estate  holdings  consist of eight
vacant  single  family  buildings  and two  multi-unit  buildings in  Baltimore,
Maryland,  approximately  8.5  acres  of  undeveloped  land  in  Heber  Springs,
Arkansas,  and various loans secured by real estate in Heber Springs,  Arkansas.
Franklin  Properties  intends to renovate the single family buildings and engage
in an active rental program.

            For  more  information   about  the  Company's  other   investments,
including its real estate  holdings,  see Item 7  "MANAGEMENT'S  DISCUSSION  AND
ANALYSIS OF FINANCIAL CONDITION."

Excelsior Radio Networks, Inc.

            At December 31,  2003,  the Company had an  investment  in Excelsior
Radio Networks, Inc., formerly known as eCom Capital, Inc., valued at $1,921,270
which  represented  59.0% of the  Company's  total  assets  and 94.9% of its net
assets.  Excelsior  produces and syndicates  programs and services heard on more
than 2,000 radio stations nationwide across most major formats.

            Franklin along with Sunshine initially purchased Excelsior on August
28, 2001. On October 3, 2002,  Franklin sold 773,196 common shares for $1.94 per
share for $1,500,000 realizing a gain of $726,804. On January 31, 2003, Franklin
purchased and  subsequently  on May 29, 2003,  Franklin  cancelled the purchase,
33,750 common shares for $1.625 per share and 65,199  warrants to acquire shares
of Excelsior common stock at an exercise price of $1.125 per share for $0.50 per
warrant.  On August 12, 2003,  Franklin sold 193,000 common shares for $1.30 per
share for $250,900 realizing a gain of $57,900.  Franklin has stock appreciation
rights on these common shares as follows, a) in the event that Excelsior is sold
on or before August 8, 2004 for gross proceeds of no less than $40,000,000, then
Franklin shall be


                                       15
<PAGE>

entitled to receive  fifty  percent (50%) of any net value above $1.30 per share
not to exceed total proceeds to Franklin of $1.94 per share, and b) in the event
that Excelsior is sold on or before August 8, 2005 for gross proceeds of no less
than $40,000,000, then Franklin shall be entitled to receive fifty percent (50%)
of any net value  above  $1.30 per share not to exceed  proceeds  to Franklin of
$1.625 per share. On October 8, 2003,  Franklin sold to Sunshine  375,000 shares
of the common stock of Excelsior  for an aggregate  purchase  price of $750,000,
realizing a gain of $375,000,  pursuant to a stock  purchase  agreement  between
Sunshine and Franklin.  On March 19, 2004  Franklin  sold an  additional  58,804
shares of the common stock of  Excelsior  to Sunshine for an aggregate  purchase
price of  $117,608,  $2.00 per common  share.  Franklin  has stock  appreciation
rights on the common  shares  sold to  Sunshine on October 8, 2003 and March 19,
2004, such that if Excelsior is sold and the purchaser of the common shares from
Franklin receives more than $3.50 per share, Franklin is entitled to receive 80%
of the value greater than $3.50 per share.

            On June 30, 2004,  Franklin sold 200,000  common shares of Excelsior
to Quince Associates, LP ("Quince") for an aggregate purchase price of $500,000,
$2.50 per common share. On July 5, 2004, Franklin entered into an agreement with
Quince to sell  Franklin's  remaining  interest in Excelsior.  The  transactions
contemplated by this agreement were subject to shareholder  approval. On October
22, 2004, Franklin's  shareholders approved the sale and Franklin agreed to sell
its remaining  550,000  shares of Excelsior  common stock at $2.50 per share and
warrants  exercisable for 74,232 shares of Excelsior common stock at an exercise
price of $1.20 per share at $1.30  per  warrant  and  warrants  exercisable  for
12,879 shares of Excelsior common stock at an exercise price of $1.125 per share
at $1.375 per warrant.  On September 24, 2004, 100,000 shares of common stock of
Excelsior were sold for an aggregate purchase price of $250,000 as an advance to
the final sale. On October 22, 2004,  Franklin  sold its  remaining  interest in
Excelsior to Quince for an aggregate  purchase price of  $1,489,210.  Cumulative
realized  gains on the sale of  Excelsior  common stock and warrants to purchase
Excelsior common stock to Quince amounted to $1,389,210.

            The purchase price in connection  with the June 30, 2004,  September
24,  2004 and October 22, 2004 sales of our equity  interests  in  Excelsior  to
Quince is subject to a potential  adjustment  whereby, in the event that the per
share net proceeds from any liquidation of Excelsior exceeds $3.00 (or an amount
equal to $3.00 plus $.050 multiplied by the number of years, up to five, elapsed
since the closing date of the sale), Franklin will be entitled to receive 80% of
the value greater than $3.00 (or such other  applicable  amount) per share.  The
purchase  price  adjustment  for  the  sale  will  expire  as of a date 5  years
following the closing of each sale transaction.

Other Investments

            In 2001,  Franklin  maintained  group life and dental insurance with
Principal  Financial Group ("PFG").  Upon the  demutualization of PFG in October
2001,  Franklin received 4,338 common shares of PFG.  However,  Franklin did not
receive  notification for the receipt of such shares.  In 2004,  Franklin became
aware of its ownership of PFG common shares, and recorded the fair value of such
shares  within  marketable  investments.  On April 23, 2004,  Franklin  sold the
common shares of PFG for $151,400, which was recorded as other realized gains in
the accompanying statement of operations.


                                       16
<PAGE>

EMPLOYEES

            As of December  31, 2004,  we had 7 employees  in our  offices,  all
based in our Santa Monica  office.  We believe our relations  with our employees
are good.

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

            For federal and state income tax  purposes,  we are taxed at regular
corporate  rates on ordinary  income and  recognize  gains on  distributions  of
appreciated property. We are not entitled to the special tax treatment available
to BDCs that elect to be treated as  regulated  investment  companies  under the
Internal  Revenue Code because,  among other  reasons,  we do not  distribute at
least 90% of  "investment  company  taxable  income" as required by the Internal
Revenue Code for such treatment. As of December 31, 2004, we had a net operating
loss carryforward of approximately  $8.6 million to offset future taxable income
for federal income tax purposes.  See  "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF  OPERATIONS--RESULTS  OF  OPERATIONS--TAXES."
Distributions  in excess of current or accumulated  earnings and profits will be
treated first as a return of capital to the extent of the holder's tax basis and
then as gain from the sale or exchange of property.

            In the event that the company  withdraws  its election to be treated
as a BDC, the Company does not believe that the withdrawal of its election to be
treated as a BDC will have any impact on its federal income tax status, since it
has  never  elected  to be  treated  as a  regulated  investment  company  under
Subchapter  M of  the  Internal  Revenue  Code.  (Electing  for  treatment  as a
regulated  investment  company under  Subchapter M generally  allows a qualified
investment  company to avoid paying corporate level federal income tax on income
it  distributes  to its  stockholders.)  Instead,  the  Company  has always been
subject to corporate  level federal income tax on its income  (without regard to
any distributions it makes to its stockholders) as a "regular" corporation under
Subchapter  C of the Code.  There  will be no change in its  federal  income tax
status as a result of it becoming an operating company.

            For more  information  about the  Company's  plans to  withdraw  its
election as a BDC, see "WITHDRAWAL OF THE COMPANY'S  ELECTION TO BE TREATED AS A
BDC MAY INCREASE THE RISKS TO OUR  SHAREHOLDERS  SINCE THE COMPANY  WOULD NOT BE
SUBJECT  TO MANY OF THE  REGULATORY  RESTRICTIONS  IMPOSED  BY, OR  RECEIVE  THE
FINANCIAL REPORTING BENEFITS, OF THE 1940 ACT" below.

REGULATION OF THE MEDICAL PRODUCTS AND HEALTHCARE INDUSTRY

            The  healthcare   industry  is  affected  by  extensive   government
regulation at the Federal and state levels. In addition,  the Company's business
may also be subject to varying degrees of governmental


                                       17
<PAGE>

regulation in the countries in which  operations are conducted,  and the general
trend is toward regulation of increasing  stringency.  In the United States, the
drug,  device,  diagnostics  and cosmetic  industries  have long been subject to
regulation by various federal, state and local agencies, primarily as to product
safety,  efficacy,  advertising and labeling.  The exercise of broad  regulatory
powers by the FDA continues to result in increases in the amounts of testing and
documentation  required  for  FDA  clearance  of new  drugs  and  devices  and a
corresponding  increase in the expense of product  introduction.  Similar trends
toward  product and  process  regulation  are also  evident in a number of major
countries  outside of the United  States,  especially  in the European  Economic
Community  where efforts are  continuing  to harmonize  the internal  regulatory
systems.

            The  costs of human  health  care  have  been and  continue  to be a
subject of study,  investigation  and  regulation by  governmental  agencies and
legislative  bodies in the  United  States  and other  countries.  In the United
States,  attention has been focused on drug prices and profits and programs that
encourage  doctors to write  prescriptions  for  particular  drugs or  recommend
particular  medical devices.  Managed care has become a more potent force in the
market place and it is likely that increased  attention will be paid to drug and
medical device pricing,  appropriate drug and medical device utilization and the
quality of health care.

            The  regulatory  agencies  under whose purview the Company  operates
have  administrative  powers that may  subject  the  Company to such  actions as
product recalls,  seizure of products and other civil and criminal sanctions. In
some  cases the  Company  may deem it  advisable  to  initiate  product  recalls
voluntarily.  We are also subject to the Safe Medical Devices Act of 1990, which
imposes  certain  reporting  requirements  on  distributors  in the  event of an
incident involving serious illness, injury or death caused by a medical device.

            In  addition,  sales and  marketing  practices  in the  health  care
industry have come under  increased  scrutiny by  government  agencies and state
attorney generals and resulting  investigations  and prosecutions carry the risk
of significant civil and criminal penalties.

            Changes in regulations  and healthcare  policy occur  frequently and
may impact our results,  growth  potential and the  profitability of products we
sell.  There can be no  assurance  that  changes to  governmental  reimbursement
programs will not have a material adverse effect on the Company.

REGULATION AS A BUSINESS DEVELOPMENT COMPANY

GENERAL

            A BDC is  regulated  by the 1940 Act. A BDC must be organized in the
United  States for the purpose of investing  in or lending to primarily  private
companies  and making  managerial  assistance  available  to them. A BDC may use
capital  provided  by public  stockholders  and from other  sources to invest in
long-term,  private investments in businesses.

            We may not change the nature of our  business  so as to cease to be,
or withdraw our election  as, a BDC unless  authorized  by vote of a majority of
the outstanding  voting  securities,  as required by the 1940 Act. A majority of
the outstanding  voting securities of a company is defined under the 1940 Act as
the lesser of: (i) 67% or more of such company's voting securities  present at a
meeting if more than 50% of the  outstanding  voting  securities of such company
are present or  represented by proxy,  or (ii) more than 50% of the  outstanding
voting securities of such company.  We do not anticipate any substantial  change
in the nature of our business.

            As with other companies regulated by the 1940 Act, a BDC must adhere
to certain substantive regulatory requirements. A majority of our directors must
be persons who are not interested  persons,  as that term is defined in the 1940
Act.  Additionally,  we are  required to provide and maintain a bond issued by a
reputable fidelity insurance company to protect the BDC. Furthermore,  as a BDC,
we are prohibited  from protecting any director or officer against any liability
to the company or our stockholders arising from willful misfeasance,  bad faith,
gross negligence or reckless  disregard of the duties involved in the conduct of
such person's office.

            As a BDC, we are  required to meet a coverage  ratio of the value of
total assets to total senior securities, which include all of our borrowings and
any preferred stock we may issue in the future, of at least 200%. We may also be
prohibited   under  the  1940  Act  from  knowingly   participating  in  certain
transactions with our affiliates without the prior approval of our directors who
are not interested persons and, in some cases, prior approval by the SEC.

            We are not  generally  able to issue and sell our common  stock at a
price below net asset value per share. See "RISK FACTORS--RISKS  RELATING TO OUR
BUSINESS AND STRUCTURE--REGULATIONS  GOVERNING OUR OPERATION AS A BDC AFFECT OUR
ABILITY TO, AND THE WAY IN WHICH WE RAISE ADDITIONAL  CAPITAL." We may, however,
sell our common  stock,  or  warrants,  options or rights to acquire  our common
stock, at a price below the  then-current net asset value of our common stock if
our Board of Directors  determines  that such sale is in our best  interests and
the best interests of our stockholders,  and our stockholders approve such sale.
In addition,  we may  generally  issue new shares of our common stock at a price
below net asset value in rights offerings to existing  stockholders,  in payment
of dividends and in certain other limited circumstances.

            We will be periodically  examined by the SEC for compliance with the
1940 Act.

            As a BDC, we are  subject to certain  risks and  uncertainties.  See
"RISK FACTORS--RISKS RELATING TO OUR BUSINESS AND STRUCTURE."

            In addition, the Company currently has plans, subject to shareholder
approval at the Annual Meeting, to withdraw the Company's election to be treated
as a BDC regulated under the 1940 Act. See "WITHDRAWAL OF THE COMPANY'S ELECTION
TO BE  TREATED AS A BDC MAY  INCREASE  THE RISKS TO OUR  SHAREHOLDERS  SINCE THE
COMPANY WOULD NOT BE SUBJECT TO MANY OF THE REGULATORY  RESTRICTIONS IMPOSED BY,
OR RECEIVE THE FINANCIAL REPORTING BENEFITS, OF THE 1940 ACT" below.

REGULATION OF THE FINANCIAL SERVICES INDUSTRY

FINANCIAL SERVICES INDUSTRY REGULATION

            The growth and earnings  performance of a financial  institution are
affected not only by management decisions (such as the development of a business
plan and lending  decisions) and general  economic  conditions (such as interest
rates, housing demand and business cycles), but also by the various governmental
regulations and authorities,  including,  but not limited to,  regulation by the
Board of Governors of the Federal  Reserve System  ("FRB"),  the Federal Deposit
Insurance  Corporation  ("FDIC"),  the Office of the Comptroller of the Currency
("OCC"),  the Office of Thrift Supervision ("OTS"), the Internal Revenue Service
("IRS"), and other federal and state authorities.

            In  addition,   the  Company  will  also  be  subject  to  extensive
regulation by  self-regulatory  bodies,  including  the New York Stock  Exchange
(NYSE) and various other stock exchanges, the Securities and Exchange Commission
(SEC), the National  Association of Securities Dealers Regulation,  Inc. (NASDR)
and foreign regulatory bodies.

            Federal  and state  laws and  regulations  generally  applicable  to
financial  institutions  regulate,  among other  things,  the scope of business,
investment  activities,  capital levels,  reserves against deposits,  collateral
requirements,   transactions   with   insiders  and  certain   affiliates,   the
establishment of branches, mergers, acquisitions,  consolidations,  the issuance
of equity and debt, and the payment of dividends.

            Broker-dealers  and  investment  advisers are subject to  regulation
covering virtually all aspects of their businesses. These regulatory authorities
have adopted rules that govern the securities  industry and, as a normal part of
their  procedures,  conduct  periodic  examinations of the Company's  securities
brokerage and asset management operations.  Additional  legislation,  changes in
rules   promulgated   by  the  SEC,   foreign   regulatory   agencies,   or  any
self-regulatory organization, or changes in the interpretation or enforcement of
existing  laws  and  rules,  may  directly  affect  the  mode of  operation  and
profitability of the Company. In the United States,  brokerage firms and certain
investment   advisers  also  are  subject  to  regulation  by  state  securities
commissions  in the  states in which they  conduct  business.  These  regulatory
authorities,  including state securities commissions, may conduct administrative
proceedings  which can result in censure,  fine,  suspension  or  expulsion of a
broker-dealer or investment adviser, its officers or employees.

REGULATION OF THE REAL ESTATE INDUSTRY

            The real  estate  development  industry  is subject  to  substantial
environmental,  building, construction,  zoning and real estate regulations that
are imposed by various federal, state and local authorities. In order to develop
its properties, the Company must obtain the approval of numerous


                                       18
<PAGE>

governmental  agencies  regarding such matters as permitted land uses,  density,
the  installation  of utility  services (such as water,  sewer,  gas,  electric,
telephone  and cable  television)  and the  dedication  of acreage  for  various
community  purposes.  Furthermore,  changes in prevailing local circumstances or
applicable laws may require  additional  approvals or modifications of approvals
previously  obtained.  Delays in obtaining required approvals and authorizations
could adversely affect the profitability of the Company's projects.


                                       19
<PAGE>

QUALIFYING ASSETS

            As a BDC,  we may not  acquire  any  asset  other  than  "qualifying
assets" unless, at the time we make the acquisition, the value of our qualifying
assets  represent at least 70% of the value of our total  assets.  The principal
categories of qualifying assets relevant to our business are:

      o     Securities  of an eligible  portfolio  company that are purchased in
            transactions  not  involving  any  public   offering.   An  eligible
            portfolio  company  is  defined  under the 1940 Act to  include  any
            issuer that:

            o     is organized  and has its  principal  place of business in the
                  U.S.;

            o     is not an investment  company or a company operating  pursuant
                  to certain  exemptions  under the 1940 Act, other than a small
                  business investment company wholly owned by a BDC; and

            o     does not have any class of  publicly  traded  securities  with
                  respect to which a broker may extend margin  credit  (i.e.,  a
                  "marginable security").

      o     Securities  received in exchange for or distributed  with respect to
            securities described in the bullet above or pursuant to the exercise
            of options, warrants, or rights relating to those securities; and

      o     Cash,  cash  items,  government  securities,  or high  quality  debt
            securities  (as  defined in the 1940 Act),  maturing  in one year or
            less from the time of investment.

            Amendments  promulgated in 1998 by the Federal Reserve  expanded the
definition of a marginable  security under the Federal Reserve's margin rules to
include any non-equity security.  Thus, any debt securities issued by any entity
are marginable securities under the Federal Reserve's current margin rules. As a
result,  the staff of the SEC has raised the  question to the BDC industry as to
whether a private company that has outstanding  debt securities would qualify as
an "eligible portfolio company" under the 1940 Act.

            The SEC has recently issued proposed rules to correct the unintended
consequence of the Federal  Reserve's 1998 margin rule  amendments of apparently
limiting the investment  opportunities  of business  development  companies.  In
general,  the SEC's proposed rules would define an eligible portfolio company as
any  company  that  does not have  securities  listed on a  national  securities
exchange or association.  We are currently in the process of reviewing the SEC's
proposed rules and assessing their impact, to the extent such proposed rules are
subsequently  approved  by the  SEC,  on our  investment  activities.  We do not
believe that these  proposed  rules will have a material  adverse  effect on our
operations.

            Until the SEC or its staff has taken a final  public  position  with
respect to the issue  discussed  above,  we will  continue to monitor this issue
closely,  and may be  required  to adjust our  investment  focus to comply  with
and/or take advantage of any future administrative  position,  judicial decision
or legislative action.


                                       20
<PAGE>

            In addition,  a BDC must have been  organized and have its principal
place of business in the United  States and must be operated  for the purpose of
making investments in eligible portfolio companies,  or in other securities that
are consistent with its purpose as a BDC.

SIGNIFICANT MANAGERIAL ASSISTANCE

            To include certain  securities  described above as qualifying assets
for the  purpose  of the 70% test,  a BDC must  offer to make  available  to the
issuer of those securities  significant  managerial assistance such as providing
guidance  and  counsel  concerning  the  management,   operations,  or  business
objectives and policies of a portfolio  company.  We offer to provide managerial
assistance to our portfolio companies.

INVESTMENT CONCENTRATION

            Our  investment  objective  is to  maximize  our  portfolio's  total
return,  principally  by  investing  in the debt  and/or  equity  securities  of
companies in the medical products, healthcare solutions,  financial services and
real estate  industries.  In this respect,  we  concentrate in these sectors and
invest, under normal circumstances,  at least 80% of the value of our net assets
(including the amount of any borrowings for investment  purposes) in the medical
products,  healthcare solutions,  financial services and real estate industries.
This 80% policy is not a fundamental policy and therefore may be changed without
the  approval  of our  stockholders.  However,  we may not change or modify this
policy  unless we provide our  stockholders  with at least 60 days prior notice,
pursuant to Rule 35d-1 of the 1940 Act. See "RISK FACTORS--RISKS  RELATED TO OUR
INVESTMENTS--OUR  PORTFOLIO MAY BE CONCENTRATED IN A LIMITED NUMBER OF PORTFOLIO
COMPANIES."

1940 ACT CODE OF ETHICS

            As  required  by the 1940 Act,  we  maintain  a code of ethics  that
establishes   procedures  for  personal   investments   and  restricts   certain
transactions by our personnel. See "Risk factors--Risks relating to our business
and structure--There are significant  potentiaL conflicts of interest." Our code
of ethics  generally does not permit  investments by our employees in securities
that  may be  purchased  or held  by us.  A copy of the  code of  ethics  may be
obtained,  without charge,  upon a written  request mailed to: Franklin  Capital
Corporation c/o Corporate Secretary,  100 Wilshire Boulevard,  Suite 1500, Santa
Monica, California 90401.

CODE OF BUSINESS CONDUCT AND ETHICS

            Each executive officer and director as well as every employee of the
Company is subject to the  Company's  Code of Business  Conduct and Ethics which
was  adopted by the Board on  November  11,  2004 and filed as Appendix D to the
definitive  proxy  materials  filed with the SEC on March 2,  2005.  The code of
ethics  applies to all the  directors,  officers  and certain  employees  of the
Company, including the principal executive officer, principal financial officer,
principal  accounting  officer  or  controller,  or persons  performing  similar
functions.  A copy of the Code of Business  Conduct and Ethics may be  obtained,
without charge,  upon a written request mailed to: Franklin Capital  Corporation
c/o  Corporate  Secretary,  100 Wilshire  Boulevard,  Suite 1500,  Santa Monica,
California 90401.

COMPLIANCE POLICIES AND PROCEDURES

            We have adopted and  implemented  written  policies  and  procedures
reasonably designed to prevent violation of the federal securities laws, and are
required to review these compliance  policies and procedures  annually for their
adequacy and the effectiveness of their implementation, and to designate a


                                       21
<PAGE>

Chief Compliance  Officer to be responsible for  administering  the policies and
procedures.  Lynne  Silverstein  serves  as  Chief  Compliance  Officer  for the
Company.

SARBANES-OXLEY ACT OF 2002

            On July 30, 2002,  President Bush signed into law the Sarbanes-Oxley
Act of 2002.  The  Sarbanes-Oxley  Act,  as well as the  rules  and  regulations
promulgated thereunder, imposed a wide variety of new regulatory requirements on
publicly-held  companies and their insiders.  Many of these requirements  affect
us. For example:

      o     Pursuant to Rule 13a-14 of the  Securities  Exchange Act of 1934, as
            amended  (the "1934  Act"),  our Chief  Executive  Officer and Chief
            Financial  Officer  must  certify  the  accuracy  of  the  financial
            statements contained in our periodic reports;

      o     Pursuant to Item 307 of  Regulation  S-K, our periodic  reports must
            disclose our conclusions  about the  effectiveness of our disclosure
            controls and procedures;

      o     Pursuant to Rule 13a-15 of the 1934 Act, our management must prepare
            a report  regarding  its  assessment  of our  internal  control over
            financial  reporting,  which  must  be  audited  by our  independent
            registered public accounting firm; and

      o     Pursuant to Item 308 of  Regulation  S-K and Rule 13a-15 of the 1934
            Act,  our  periodic   reports  must  disclose   whether  there  were
            significant  changes in our  internal  controls or in other  factors
            that could  significantly  affect these  controls  subsequent to the
            date of their  evaluation,  including  any  corrective  actions with
            regard to significant deficiencies and material weaknesses.

            The  Sarbanes-Oxley  Act requires us to review our current  policies
and procedures to determine  whether we comply with the  Sarbanes-Oxley  Act and
the  regulations  promulgated  thereunder.  We  will  continue  to  monitor  our
compliance with all regulations  that are adopted under the  Sarbanes-Oxley  Act
and will take actions necessary to ensure that we are in compliance therewith.

                                       22
<PAGE>

AVAILABLE INFORMATION

            Copies of the Company quarterly reports on Form 10-Q, annual reports
on Form  10-K  and  current  reports  on Form  8-K,  and any  amendments  to the
foregoing,  will be provided  without  charge to any  shareholder  submitting  a
written request to the Corporate Secretary,  Franklin Capital  Corporation,  100
Wilshire  Boulevard,  Suite 1500,  Santa  Monica,  CA 90401 or by calling  (310)
752-1416.  You may also obtain the documents filed by Franklin  Capital with the
Securities and Exchange  Commission for free at the Internet website  maintained
by the Securities and Exchange  Commission at www.sec.gov.  The Company does not
currently make these documents available on its website.

RISK FACTORS

            AN  INVESTMENT  IN OUR  SECURITIES  INVOLVES  A HIGH  DEGREE OF RISK
RELATING TO OUR BUSINESS,  STRATEGY,  STRUCTURE AND INVESTMENT  OBJECTIVES.  THE
RISKS SET OUT  BELOW ARE NOT THE ONLY  RISKS WE FACE,  AND WE FACE  OTHER  RISKS
WHICH ARE NOT YET  PREDICTABLE  OR  IDENTIFIABLE.  IF ANY EVENTS  UNDERLYING  OR
RELATING TO THE FOLLOWING  RISKS OCCUR,  OUR BUSINESS,  FINANCIAL  CONDITION AND
RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED.  IN SUCH CASE, OUR
NET ASSET VALUE AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU
MAY  LOSE  ALL OR PART OF YOUR  INVESTMENT.  IN  ADDITION  TO THE  RISK  FACTORS
DESCRIBED  BELOW,  OTHER  FACTORS  THAT  COULD  CAUSE  ACTUAL  RESULTS TO DIFFER
MATERIALLY GENERALLY INCLUDE:

o     CHANGES IN OR CONDITIONS AFFECTING THE ECONOMY;

o     RISK ASSOCIATED WITH POSSIBLE  DISRUPTION IN THE COMPANY'S  OPERATIONS DUE
      TO TERRORISM;

o     FUTURE REGULATORY ACTIONS AND CONDITIONS IN THE COMPANY'S  OPERATING AREAS
      OR TARGET INDUSTRIES FOR INVESTMENTS; AND

o     OTHER RISKS AND  UNCERTAINTIES AS MAY BE DETAILED FROM TIME TO TIME IN THE
      COMPANY'S PUBLIC ANNOUNCEMENTS AND SEC FILINGS.


                                       23
<PAGE>

RISKS RELATING TO OUR BUSINESS AND STRUCTURE

WE RECENTLY  RESTRUCTURED OUR INVESTMENT STRATEGY AND OBJECTIVE AND HAVE LIMITED
OPERATING HISTORY UNDER OUR NEW STRUCTURE.

            Upon the  change of  control  that  occurred  in  October  2004,  we
restructured  our  investment  strategy  and  objective  to focus on the medical
products,  healthcare  solutions,  financial services and real estate industries
instead  of the  radio  and  telecommunications  industries.  We have a  limited
operating  history  under  this  new  structure.  We are  subject  to all of the
business risks and uncertainties  associated with any new investment strategy or
objective,  including the risk that we will not achieve our investment objective
and that the value of your investment in us could decline substantially.

THE COMPANY MAY NOT SUCCESSFULLY IMPLEMENT ITS RESTRUCTURING PLAN

            The Restructuring  Plan has shifted Franklin's  investment  strategy
away from the radio and  telecommunications  industry  and  refocused  it on the
medical  products,  healthcare  solutions,  financial  services  and real estate
industries.  Franklin has not typically invested in these industries in the past
and  therefore  has  not  compiled  a  track  record   regarding  the  financial
performance to be expected in connection with these new  investments.  There can
be no  assurance  regarding  the  return  on,  or the  recovery  of,  Franklin's
investments in businesses in these industries, and whether such investments will
be profitable.

            Moreover,  there are a number of inherent  risks for entities  doing
business in the medical products,  healthcare solutions,  financial services and
real estate  industries,  including a complex array of regulatory  requirements.
These risks could have a material  adverse  effect on the  profitability  of the
businesses  in which  Franklin  invests,  which in turn  could  have a  material
adverse  effect on the return on, or the recovery of,  Franklin's  investment in
such businesses.

WITHDRAWAL  OF THE  COMPANY'S  ELECTION TO BE TREATED AS A BDC MAY  INCREASE THE
RISKS TO OUR SHAREHOLDERS  SINCE THE COMPANY WOULD NOT BE SUBJECT TO MANY OF THE
REGULATORY RESTRICTIONS IMPOSED BY, OR RECEIVE THE FINANCIAL REPORTING BENEFITS,
OF THE 1940 ACT

            If the Company  withdraws  its  election to be treated as a BDC, the
Company  would no longer be subject to regulation  under the 1940 Act,  which is
designed to protect the  interests of investors in  investment  companies.  As a
non-BDC,  the Company will not be subject to many of the  regulatory,  financial
reporting  and  other  requirements  and  restrictions  imposed  by the 1940 Act
including, but not necessarily limited to, limitations on the amounts, types and
prices at which securities  which may be issued,  participation in related party
transactions,  the  payment  of  compensation  to  executives,  and the scope of
eligible investments.

            In the event that the Company  withdraws  its election to be treated
as a BDC and  becomes  an  operating  company,  the  fundamental  nature  of the
Company's  business  will  change  from  that of  investing  in a  portfolio  of
securities  in the radio  and  telecommunications  industries,  with the goal of
achieving gains on appreciation and dividend  income,  to that of being actively
engaged in the ownership and  management of operating  businesses in the medical
products, health care solutions,  financial services and real estate industries,
with the goal of generating income from the operations of those  businesses.  No
assurance can be given that our business strategy or investment  objectives will
be achieved by withdrawing our election to be treated as a BDC.

            Further,  the  election to  withdraw  the Company as a BDC under the
1940  Act will  result  in a  significant  change  in the  Company's  method  of
accounting.  BDC financial  statement  presentation and accounting  utilizes the
value method of accounting  used by investment  companies,  which allows BDCs to
recognize  income  and value  their  investments  at market  value as opposed to
historical  cost.  As an operating  company,  the required  financial  statement
presentation  and accounting  for  securities  held will be either fair value or
historical cost methods of accounting,  depending on the  classification  of the
investment  and the  Company's  intent  with  respect  to the  period of time it
intends to hold the investment.


                                       24
<PAGE>

A change in the Company's  method of accounting could reduce the market value of
its investments in privately held companies by eliminating the Company's ability
to report an increase in the value of its  holdings as they occur.  Also,  as an
operating  company,   the  Company  would  have  to  consolidate  its  financial
statements with  subsidiaries,  thus eliminating the portfolio company reporting
benefits available to BDCs.

WE ARE  DEPENDENT  UPON OUR KEY  MANAGEMENT  PERSONNEL  FOR OUR FUTURE  SUCCESS,
PARTICULARLY MILTON "TODD" AULT III.

            The Company is  dependent on the  diligence  and skill of its senior
management and other key personnel for the selection,  structuring,  closing and
monitoring of its  investments.  The future success of the Company  depends to a
significant  extent on the  continued  service  and  coordination  of its senior
management team,  principally our Chief Executive  Officer and Chairman,  Milton
"Todd" Ault III. Mr. Ault is not  currently  subject to an  employment  contract
with  us.  The  departure  of any  key  management  personnel,  or Mr.  Ault  in
particular,  could have a material  adverse  effect on the Company's  ability to
implement its business strategy or achieve its investment objective.

            As a result  of the  implementation  of the  Restructuring  Plan and
pursuant to the  Termination  Agreement,  on October  22,  2004,  Stephen  Brown
resigned  as the  Chairman  and  Chief  Executive  Officer  of the  Company.  In
addition,  certain other members of senior management and the board of directors
either resigned or were replaced with new directors and/or  officers.  These new
directors  and/or  officers have not previously  been involved with the Company.
Profitability  of the Company  would be  dependent  on this new  management,  as
opposed to former  management.  As a result,  there can be no assurance that the
new senior management would operate the Company in a profitable manner.

OUR  MANAGEMENT  HAS LIMITED  EXPERIENCE  IN MANAGING AND  OPERATING AS A PUBLIC
COMPANY UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, OR A BDC UNDER THE 1940 ACT, AS AMENDED.

            Prior to the change in control that  occurred in October  2004,  our
senior  management  were  primarily  engaged in  operating a private  investment
management firm. In this capacity they developed a general  understanding of the
administrative  and regulatory  environment in which public  companies  operate.
However,  our senior  management lacks practical  experience  operating a public
company and relies in many instances on the  professional  experience and advice
of  third  parties   including  its  consultants,   attorneys  and  accountants.
Additionally, utilization of professionals is expensive and in the event we fail
to reach profitability and/or raise additional capital there can be no assurance
that these resources will be available to the Company in the future.

            Failure to comply or  adequately  comply  with any laws,  rules,  or
regulations  applicable  to our business or us may result in fines or regulatory
actions,  which  may  materially  adversely  affect  our  business,  results  of
operation, or financial condition.

OUR FINANCIAL  CONDITION AND RESULTS OF OPERATIONS WILL DEPEND ON OUR ABILITY TO
MANAGE OUR FUTURE GROWTH EFFECTIVELY.

            As  part  of the  Restructuring  Plan,  we  changed  our  investment
strategy and objective and are currently  recapitalizing our business.  As such,
our success in achieving our investment  objective will depend on our ability to
grow  effectively and efficiently,  including our ability to identify,  analyze,
and invest in and  finance  companies  in a timely  manner.  Accomplishing  this
result  will also  require us to raise  capital on a  cost-effective  and timely
basis.  As we grow,  we will  need to hire,  train,  supervise  and  manage  new
employees.  Our  failure to manage our future  growth  effectively  could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.


                                       25
<PAGE>

OUR BUSINESS MODEL DEPENDS UPON THE DEVELOPMENT OF STRONG REFERRAL RELATIONSHIPS
WITH PRIVATE EQUITY AND VENTURE CAPITAL FUNDS AND INVESTMENT BANKING FIRMS.

            If we fail to maintain our  relationships  with key firms,  or if we
fail to  establish  strong  referral  relationships  with  other  firms or other
sources of investment  opportunities,  we will not be able to grow our portfolio
of private companies and achieve our investment objective. In addition,  persons
with whom we have  informal  relationships  are not obligated to provide us with
investment  opportunities,  and  therefore  there  is  no  assurance  that  such
relationships will lead to the origination of debt or other investments.

WE MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY RESULTS.

            We may experience  fluctuations in our quarterly  operating  results
due to a number of factors, including the rate at which we identify and make new
investments, the success rate of our new investments, the level of our expenses,
variations in and the timing of the recognition of realized and unrealized gains
or losses,  the degree to which we  encounter  competition  in our  markets  and
general  economic  conditions.  As a result of these  factors,  results  for any
period should not be relied upon as being  indicative of  performance  in future
periods.

ECONOMIC  RECESSIONS  OR  DOWNTURNS  COULD IMPAIR OUR  INVESTMENTS  AND HARM OUR
OPERATING RESULTS.

            Many of the companies in which we have made or will make investments
may be susceptible to economic slowdowns or recessions. An economic slowdown may
affect the ability of a company to engage in a  liquidity  event such as a sale,
recapitalization,  or initial  public  offering.  Our  nonperforming  assets are
likely to increase and the value of our  portfolio is likely to decrease  during
these periods.  These conditions could lead to financial losses in our portfolio
and a decrease in our revenues, net income, and assets.

            Our business of making private equity  investments  and  positioning
them for  liquidity  events also may be  affected  by current and future  market
conditions.  The absence of an active senior  lending  environment  may slow the
amount of private equity investment activity generally. As a result, the pace of


                                       26
<PAGE>

our  investment  activity  may slow.  In  addition,  significant  changes in the
capital markets could have an effect on the valuations of private  companies and
on the potential for  liquidity  events  involving  such  companies.  This could
affect the amount and timing of gains realized on our investments.

THE INABILITY OF THE COMPANIES IN WHICH WE INVEST TO  SUCCESSFULLY  MARKET THEIR
PRODUCTS WOULD HAVE A NEGATIVE IMPACT ON OUR INVESTMENT RETURNS

Even if the companies in which we invest are able to develop commercially viable
products,  the market for new products and  services is highly  competitive  and
rapidly changing.  Commercial  success is difficult to predict and the marketing
efforts of our portfolio companies may not be successful.

WE MAY NEED TO UNDERTAKE  ADDITIONAL  FINANCINGS  TO MEET OUR GROWTH,  OPERATING
AND/OR CAPITAL NEEDS.

            We anticipate that  monetizable  revenue from our operations for the
foreseeable  future may not be sufficient to meet our growth,  operating  and/or
capital requirements.  We believe that we currently have the financial resources
to meet our operating  requirements  for the next twelve months.  We may however
undertake  additional equity financings to better enable the Company to meet its
future growth, operating and/or capital requirements. We have no commitments for
any financings,  and there can be no assurance that any such  commitments can be
obtained  on terms  acceptable  to us, if at all.  Any equity  financing  may be
dilutive to our  stockholders,  and debt  financing,  if available,  may involve
restrictive  covenants or other  adverse  terms with  respect to raising  future
capital and other financial and operational  matters. If we are unable to obtain
financing as needed, we may be required to reduce the scope of our expansion and
growth plans, as well as operations,  which could have a material adverse effect
on us.

THERE ARE SIGNIFICANT  POTENTIAL  CONFLICTS OF INTEREST,  WHICH COULD IMPACT OUR
INVESTMENT RETURNS.

            Our executive  officers and directors serve or may serve as officers
and directors of entities who operate in the same or related line of business as
we do.  Accordingly,  they may have  obligations to investors in those entities,
the  fulfillment  of  which  might  not be in the  best  interests  of us or our
stockholders.  For example, certain of the Company's officers,  directors and/or
their family members have existing responsibilities and, in the future, may have
additional  responsibilities,  to  act  and/or  provide  services  as  executive
officers, directors, owners and/or managers of Ault Glazer. Accordingly, certain
conflicts  of interest  between the Company and Ault Glazer will occur from time
to time.  The Company will attempt to resolve any such  conflicts of interest in
its favor. Because of these possible conflicts of interest, such individuals may
direct potential business and investment  opportunities to other entities rather
than to us.

            The Board does not believe  that the Company  has any  conflicts  of
interest  with the business of Ault Glazer,  other than certain of the Company's
officers   responsibility  to  provide  certain  management  and  administrative
services to Ault Glazer and its clients from time-to-time.  However,  subject to
applicable  law,  the  Company may engage in  transactions  with Ault Glazer and
related  parties in the  future.  These  related  party  transactions  may raise
conflicts of interest and, although the Company does not have a formal policy to
address  such  conflicts of interest,  the Audit  Committee  intends to evaluate
relationships and transactions involving conflicts of interest on a case by case
basis and the  approval of the Audit  Committee  shall be required  for all such
transactions.  The Audit Committee  intends that any related party  transactions
will be on terms and  conditions  no less  favorable  to the Company  than those
terms and conditions  reasonably obtainable from third parties and in accordance
with applicable law.

            In order to minimize the potential  conflicts of interest that might
arise, we have adopted a Code of Ethics in accordance  with the  requirements of
Investment Company Act that applies to all the directors,


                                       27
<PAGE>

officers and certain employees of the Company.  A copy of the Code of Ethics may
be obtained, without charge, upon a written request mailed to the Company.

ANY  TRANSACTIONS  WE  ENGAGE  IN WITH  AFFILIATES  WILL  INVOLVE  CONFLICTS  OF
INTEREST.

            Affiliated  transactions  between  us and  any  of  our  affiliates,
including our officers,  directors or employees and principal  stockholders  are
subject to inherent conflicts of interest.  In many cases, the 1940 Act, as well
as Federal and State securities laws and applicable State corporate regulations,
prohibit  transactions  between such persons and ourselves unless we first apply
for and obtain an  exemptive  order from the SEC.  Delays and costs in obtaining
necessary  approvals may decrease or even  eliminate any  profitability  of such
transactions  or  make  it   impracticable  or  impossible  to  consummate  such
transactions.  These affiliations  could cause  circumstances that would require
the SEC's  approval  in  advance of  proposed  transactions  by us in  portfolio
companies.  Further, depending upon the extent of our management's influence and
control  with  respect  to  such  portfolio  companies,  the  selection  of  the
affiliates of  management  to perform such  services may not be a  disinterested
decision,  and the terms and conditions for the performance of such services and
the amount and terms of such  compensation may not be determined at arm's-length
negotiations.

THE SALE OR ISSUANCE OF SECURITIES TO INTERESTED STOCKHOLDERS MAY BE DILUTIVE TO
OUR EXISTING SHAREHOLDERS

            In the event  that the  Company is no longer a BDC,  and  subject to
approval of the  stockholders at the Annual Meeting of the sale of securities to
"interested  stockholders"  (as defined in Section 203 of the  Delaware  General
Corporate  Law), the Company may from time to time issue common stock,  warrants
to purchase  common stock,  or other  securities  representing  indebtedness  to
Milton "Todd" Ault III, Lynne  Silverstein,  Louis Glazer or Melanie Glazer. Any
sale of equity  securities  may be dilutive to the Company's  stockholders,  and
debt financing, if available,  may involve restrictive covenants with respect to
raising  future  capital  and  other  financial  and  operational  matters.  The
securities  which may be issued to Milton  "Todd" Ault III,  Lynne  Silverstein,
Louis Glazer or Melanie Glazer may have a material  adverse effect on the market
price of the Common Stock as a result of the potential  for dilution  created by
the issuance of additional  common stock,  warrants to purchase common stock, or
other  securities  representing  indebtedness.  In  addition,  resales by Milton
"Todd" Ault III,  Lynne  Silverstein  or Louis and Melanie Glazer may be made at
times that are adverse to the interests of other stockholders.  Such sales could
further  consolidate voting control in Milton "Todd" Ault III, Lynne Silverstein
or Louis and Melanie Glazer.

ONE OF OUR CURRENT  STOCKHOLDERS  HAS SIGNIFICANT  INFLUENCE OVER OUR MANAGEMENT
AND AFFAIRS.

            Milton  "Todd" Ault III, our Chief  Executive  Officer and Chairman,
beneficially  owns  approximately  27.1% of our common  stock as of February 28,
2005.  Therefore Mr. Ault may be able to exert influence over our management and
policies.   Mr.  Ault  may  acquire   additional  equity  in  the  future.   The
concentration  of ownership may also have the effect of delaying,  preventing or
deterring  a change of control  of us,  could  deprive  our  shareholders  of an
opportunity  to receive a premium for their  common stock as part of the sale of
us and might ultimately affect the market price of our common stock.

REGULATIONS  GOVERNING OUR OPERATION AS A BDC AFFECT OUR ABILITY TO, AND THE WAY
IN WHICH WE RAISE ADDITIONAL  CAPITAL,  WHICH MAY EXPOSE US TO RISKS,  INCLUDING
THE TYPICAL RISKS ASSOCIATED WITH LEVERAGE.

            Our business will require a substantial amount of capital,  which we
may acquire from the following sources:


                                       28
<PAGE>

SENIOR SECURITIES AND OTHER INDEBTEDNESS

            We may issue debt  securities or preferred stock and/or borrow money
from banks or other  financial  institutions,  which we refer to collectively as
"senior  securities," up to the maximum amount  permitted by the 1940 Act. Under
the  provisions  of the 1940 Act, we are  permitted,  as a BDC, to issue  senior
securities in amounts such that our asset coverage ratio, as defined in the 1940
Act, equals at least 200% of gross assets, less all liabilities and indebtedness
not represented by senior securities,  after each issuance of senior securities.
If we issue senior securities, including preferred stock and debt securities, we
will be  exposed  to  typical  risks  associated  with  leverage,  including  an
increased risk of loss. If we incur leverage to make investments,  a decrease in
the value of our investments  would have a greater  negative impact on the value
of our common  stock.  If we issue debt  securities  or preferred  stock,  it is
likely that such securities will be governed by an indenture or other instrument
containing covenants restricting our operating  flexibility.  In addition,  such
securities may be rated by rating  agencies,  and in obtaining a rating for such
securities,  we may be required to abide by operating and investment  guidelines
that could further restrict our operating flexibility.

            Our ability to pay dividends or issue additional  senior  securities
would be  restricted if our asset  coverage  ratio was not at least 200%. If the
value of our assets  declines,  we may be unable to satisfy  this test.  If that
happens,  we may be required to sell a portion of our investments and, depending
on the nature of our  leverage,  repay a portion of our  indebtedness  at a time
when such sales may be disadvantageous.  Furthermore, any amounts that we use to
service our indebtedness  would not be available for distributions to our common
stockholders.

            In the event that the Company is no longer a BDC,  the Company  will
not be  subject to the  prohibitions  and  limitations  listed  above  which are
currently   imposed  by  1940  Act.  The  Company  does  not  currently  have  a
self-imposed lower threshold limit with respect to its asset coverage ratio, and
does not  anticipate  that such a limit would apply if it withdraws its election
to be treated as a BDC.

COMMON STOCK

            We are not  generally  able to issue and sell our common  stock at a
price below net asset value per share. We may,  however,  sell our common stock,
or warrants, options or rights to acquire our common stock, at a price below the
then-current  net asset  value of our  common  stock if our  Board of  Directors
determines  that  such  sale is in the best  interests  of the  Company  and its
stockholders,  and our  stockholders  approve  such  sale.  In  certain  limited
circumstances, pursuant to an SEC staff interpretation, we may also issue shares
at a price  below net  asset  value in  connection  with a  transferable  rights
offering so long as: (1) the offer does not discriminate among shareholders; (2)
we use our best  efforts to ensure an  adequate  trading  market  exists for the
rights; and (3) the ratio of the offering does not exceed one new share for each
three rights held. If we raise  additional funds by issuing more common stock or
senior  securities  convertible into, or exchangeable for, our common stock, the
percentage  ownership of our  stockholders  at that time would decrease and they
may  experience  dilution.  Moreover,  we can offer no assurance that we will be
able to issue and sell additional  equity securities in the future, on favorable
terms or at all.

            In the event that the Company is no longer a BDC,  the Company  will
not be  subject to the  prohibitions  and  limitations  listed  above  which are
currently imposed by 1940 Act.

ANY  CHANGE  IN  REGULATION  OF  OUR  BUSINESS  COULD   NEGATIVELY   AFFECT  THE
PROFITABILITY OF OUR OPERATIONS.

            We are currently  subject to government  regulations  because of our
status as a BDC. As a BDC,  the 1940 Act imposes  numerous  restrictions  on our
activities,


                                       29
<PAGE>

including  restrictions on the nature of our investments and  transactions  with
affiliates.  Any change in the law or regulations that govern our business could
have a material  impact on us or our  operations.  Laws and  regulations  may be
changed from time to time,  and the  interpretations  of the  relevant  laws and
regulations  also are  subject  to change.  In the event that the  Company is no
longer a BDC, many of the regulatory, financial reporting and other requirements
and  restrictions  imposed  by  the  1940  Act  will  be  removed.   This  could
significantly  impact the way the Company operates its business from a financial
reporting, tax, legal, and accounting structure.

            Additionally, changes in the laws, regulations or interpretations of
the  laws  and  regulations  that  govern  our  portfolio  companies,  regulated
investment  companies or non-depository  commercial lenders could  significantly
affect our operations and our cost of doing business. We are subject to federal,
state  and  local  laws  and   regulations  and  are  subject  to  judicial  and
administrative decisions that affect our operations.  If these laws, regulations
or decisions change, or if we expand our business into  jurisdictions  that have
adopted more  stringent  requirements  than those in which we currently  conduct
business,  we may have to incur  significant  expenses  in order to comply or we
might have to restrict our operations.

PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW AND OF OUR CHARTER AND BYLAWS
COULD DETER  TAKEOVER  ATTEMPTS  AND HAVE AN ADVERSE  IMPACT ON THE PRICE OF OUR
COMMON STOCK.

            Our charter and bylaws,  as well as certain statutory and regulatory
requirements,   contain   certain   provisions  that  may  have  the  effect  of
discouraging  a third party from making an  acquisition  proposal  for us. These
anti-takeover  provisions may inhibit a change of control in circumstances  that
could give the holders of our common stock the  opportunity to realize a premium
over the market price for our common stock.

RISKS RELATED TO OUR INVESTMENTS

INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK.

            The Company's portfolio consists primarily of investments in private
companies.  Investments in private  businesses involve a high degree of business
and  financial  risk,  which can result in  substantial  losses and  accordingly
should be considered speculative. Because of the speculative nature and the lack
of a public market for these investments, there is significantly greater risk of
loss than is the case with traditional  investment  securities.  The Company has
invested a substantial  portion of its assets in private small private companies
or start-up  companies.  These private businesses tend to be thinly capitalized,
unproven, small companies with risky technologies that lack management depth and
have not  attained  profitability  or have no  history of  operations.  There is
generally  no publicly  available  information  about the  companies in which we
invest,  and we rely  significantly on the diligence of our employees and agents
to obtain information in connection with our investment decisions.  In addition,
some smaller businesses have narrower product lines and market shares than their
competition  and  may  be  more  vulnerable  to  customer  preferences,   market
conditions,  loss of key personnel,  or economic downturns,  which may adversely
affect the return on, or the recovery of, our investment in such businesses.

            The Company expects that some of its investments  will be a complete
loss or will be  unprofitable  and that some will  appear to be likely to become
successful but never realize their potential.  The Company has been risk seeking
rather  than  risk  averse  in its  approach  to its  investments.  Neither  the
Company's investments nor an investment in the Company is intended to constitute
a balanced investment program. The Company has in the past relied, and continues
to rely to a large extent,  upon proceeds from sales of investments  rather than
investment income to defray a significant portion of its operating expenses.


                                       30
<PAGE>

OUR  INVESTMENTS IN OUR PORTFOLIO  COMPANIES MAY BE  CONCENTRATED IN ONE OR MORE
INDUSTRIES AND IF THESE INDUSTRIES SHOULD DECLINE OR FAIL TO DEVELOP AS EXPECTED
OUR INVESTMENTS WILL BE LOST.

            Our  investments in our portfolio  companies may be  concentrated in
one or more industries.  This  concentration will mean that our investments will
be   particularly   dependent  on  the  development  and  performance  of  those
industries.  Accordingly,  our  investments may not benefit from any advantages,
which might be obtained with greater  diversification of the industries in which
our portfolio  companies operate.  If those industries should decline or fail to
develop  as  expected,  our  investments  in our  portfolio  companies  in those
industries will be subject to loss.

THE MEDICAL  PRODUCTS  AND  HEALTHCARE-RELATED  SECTOR IS SUBJECT TO MANY RISKS,
INCLUDING VOLATILITY,  INTENSE COMPETITION,  DECREASING LIFE CYCLES AND PERIODIC
DOWNTURNS.

            We   invest   in   companies    in   the   medical    products   and
healthcare-related  sector,  some of which may have  relatively  short operating
histories.  The revenues,  income (or losses) and valuations of medical products
and  healthcare-related  companies  can and  often  do  fluctuate  suddenly  and
dramatically.  Also,  the  medical  products  and  healthcare-related  market is
generally  characterized by abrupt business cycles and intense  competition.  In
addition,  because of rapid technological  change, the average selling prices of
products   and   some   services   provided   by  the   medical   products   and
healthcare-related  sector have  historically  decreased  over their  productive
lives. As a result,  the average selling prices of products and services offered
by our portfolio  companies may decrease over time, which could adversely affect
their operating  results and their ability to meet their financial  obligations,
as well as the value of any equity securities,  that we may hold. This could, in
turn, materially adversely affect our business,  financial condition and results
of operations.

OUR INVESTMENTS IN THE MEDICAL PRODUCTS AND HEALTHCARE-RELATED COMPANIES THAT WE
ARE  TARGETING  MAY BE  EXTREMELY  RISKY  AND WE  COULD  LOSE ALL OR PART OF OUR
INVESTMENTS.

            Although a prospective  portfolio company's assets are one component
of our analysis when determining  whether to provide equity or debt capital,  we
generally do not base an investment  decision primarily on the liquidation value
of a company's balance sheet assets.  Instead, given the nature of the companies
that we invests in, we also review the company's  historical  and projected cash
flows,  equity  capital  and  "soft"  assets,  including  intellectual  property
(patented and non-patented), databases, business relationships (both contractual
and  non-contractual) and the like.  Accordingly,  considerably higher levels of
overall risk will likely be associated with our portfolio.

            Specifically,    investment    in   the   medical    products    and
healthcare-related  companies  that  we  are  targeting  involves  a  number  of
significant risks, including:

      o     these  companies  may have limited  financial  resources  and may be
            unable to meet their current or future financial obligations,  which
            may result in the deterioration in the value of any collateral and a
            reduction  in the  likelihood  of us  realizing  any value  from the
            liquidation of such collateral;

      o     they typically have limited  operating  histories,  narrower product
            lines and smaller market shares than larger  businesses,  which tend
            to render them more  vulnerable to  competitors'  actions and market
            conditions, as well as general economic downturns;

      o     because they tend to be privately  owned,  there is generally little
            publicly  available  information about these businesses;  therefore,
            although the Company will perform "due diligence"


                                       31
<PAGE>

            investigations  on these portfolio  companies,  their operations and
            their prospects, we may not learn all of the material information we
            need to know regarding these businesses;

      o     they are more likely to depend on the management talents and efforts
            of a small  group of  persons;  therefore,  the  death,  disability,
            resignation  or  termination  of one or more of these  persons could
            have a material  adverse  impact on our  portfolio  company  and, in
            turn, on us; and

      o     they generally have less  predictable  operating  results,  may from
            time to time be  parties  to  litigation,  may be engaged in rapidly
            changing  businesses with products  subject to a substantial risk of
            obsolescence,  and may  require  substantial  additional  capital to
            support  their  operations,  finance  expansion  or  maintain  their
            competitive position.

WE FACE  STRONG  COMPETITION  FROM FAR LARGER  FIRMS IN THE  FINANCIAL  SERVICES
INDUSTRY

            The  financial  services  industry is intensely  competitive  and we
expect  it to  remain  so.  We  compete  on the  basis of a number  of  factors,
including  the quality of our advice and service,  innovation,  and  reputation.
Most of our  competitors in the financial  services  industry have a far greater
range of products and  services,  greater  financial  and  marketing  resources,
larger customer bases,  greater name recognition,  greater global reach and more
established  relationships  with potential  customers than we have. These larger
and better  capitalized  competitors may be better able to respond to changes in
the  financial  services  industry,  to compete  for skilled  professionals,  to
finance investment and acquisition opportunities, to fund internal growth and to
compete for market share generally.

DIFFICULT  MARKET  CONDITIONS  COULD  ADVERSELY  AFFECT OUR  FINANCIAL  SERVICES
BUSINESS

            Adverse market or economic conditions would likely affect the number
and size of transactions on which we provide mergers and acquisitions advice and
therefore  adversely  affect the amount of capital we commit to these  strategic
relationships.


            Adverse  market or  economic  conditions  as well as a  slowdown  of
activity in the sectors in which the portfolio companies of our merchant banking
funds  operate could have an adverse  effect on the earnings of those  portfolio
companies, and therefore,  our earnings,  especially in the future as we seek to
increase our merchant banking fund management revenues.



REAL ESTATE INVESTMENTS' VALUE AND INCOME FLUCTUATE DUE TO VARIOUS FACTORS.

            THE VALUE OF REAL ESTATE  FLUCTUATES  DEPENDING ON CONDITIONS IN THE
GENERAL ECONOMY AND THE REAL ESTATE  BUSINESS.  THESE  CONDITIONS MAY ALSO LIMIT
OUR REVENUES AND AVAILABLE CASH.

            The  factors  that may  affect  the  value  of the our  real  estate
include, among other things,  national,  regional and local economic conditions;
consequences of any armed conflict involving,  or terrorist attack against,  the
United States; our ability to secure adequate  insurance;  local conditions such
as an  oversupply of space or a reduction in demand for real estate in the area;
competition  from other available  space;  whether  tenants  consider a property
attractive;  the financial condition of tenants,  including the extent of tenant
bankruptcies  or  defaults;  whether  we are  able  to  pass  some or all of any
increased operating costs through to tenants; how well we manage our properties;
fluctuations in interest rates; changes in real estate taxes and other expenses;
changes in market rental rates;  the timing and costs  associated  with property
improvements  and  rentals;  changes  in  taxation  or zoning  laws;  government
regulation;  availability of financing on acceptable terms or at all;  potential
liability  under  environmental  or  other  laws  or  regulations;  and  general
competitive factors.

            The rents we  expect  to  receive  and the  occupancy  levels at our
properties may not  materialize  as a result of adverse  changes in any of these
factors.  If our rental revenues fail to materialize,  we generally would expect
to have less cash  available  to pay our  operating  costs.  In  addition,  some
expenses,  including mortgage payments, real estate taxes and maintenance costs,
generally do not decline when the related rents decline.

            WE ANTICIPATE ON LEASING SPACE TO TENANTS ON ECONOMICALLY  FAVORABLE
TERMS AND COLLECTING RENT FROM OUR TENANTS, WHO MAY NOT BE ABLE TO PAY.

            Our financial  results  depend on leasing space in our properties to
tenants on economically  favorable  terms. If a tenant does not pay its rent, we
might not be able to enforce  our rights as  landlord  without  delays and might
incur substantial legal costs to enforce those rights.

            BANKRUPTCY  OR  INSOLVENCY  OF TENANTS  MAY  DECREASE  OUR  EXPECTED
REVENUES AND AVAILABLE  CASH.

            A number of companies have declared bankruptcy in recent years. If a
major tenant were to declare bankruptcy or become insolvent, the rental property
where it leases space may have lower revenues and operational difficulties. As a
result,  the  bankruptcy or insolvency of a major tenant could result in a lower
level of funds from operations available to pay our operating cost.

            REAL ESTATE IS A COMPETITIVE BUSINESS.

            For a discussion of risks related to  competition in the real estate
business, see "THE REAL ESTATE INDUSTRY - COMPETITION."

OUR REAL ESTATE  INVESTMENTS ARE  CONCENTRATED IN BALTIMORE,  MARYLAND AND HEBER
SPRINGS, ARKANSAS. CIRCUMSTANCES AFFECTING THESE AREAS GENERALLY COULD ADVERSELY
AFFECT OUR BUSINESS.

            A  significant  proportion  of our real  estate  investments  are in
Baltimore, Maryland and Heber Springs, Arkansas and are affected by the economic
cycles and risks inherent to those regions.  Like other real estate markets, the
real estate markets in these areas have  experienced  economic  downturns in the
past,  and we cannot  predict how the current  economic  conditions  will impact
these markets in both the short and long term.  Further  declines in the economy
or a decline in the real estate  markets in these areas could hurt our financial
performance  and the value of our  properties.  The factors  affecting  economic
conditions in these regions include:  business  layoffs or downsizing;  industry
slowdowns;  relocations of businesses; changing demographics; and any oversupply
of or reduced demand for real estate.

AS A BDC, OUR ABILITY TO INVEST IN PRIVATE  COMPANIES  MAY BE LIMITED IN CERTAIN
CIRCUMSTANCES.

            If we  maintain  our status as a BDC, we must not acquire any assets
other than "qualifying assets" unless, at the time of and after giving effect to
such acquisition,  at least 70% of our total assets are qualifying assets. If we
acquire debt or equity securities from an issuer that has outstanding marginable
securities at the time we make an investment,  these  acquired  assets cannot be
treated as  qualifying  assets.  This result is dictated  by the  definition  of
"eligible  portfolio company" under the 1940 Act, which in part looks to whether
a company has outstanding marginable securities.  For a more detailed discussion
of  the  definition  of an  "eligible  portfolio  company"  and  the  marginable
securities  requirement,  see the  section  entitled  "REGULATION  AS A BUSINESS
DEVELOPMENT COMPANY."

            Amendments  promulgated in 1998 by the Federal Reserve  expanded the
definition of a marginable  security under the Federal Reserve's margin rules to
include any non-equity security.  Thus, any debt securities issued by any entity
are marginable securities under the Federal Reserve's current margin rules. As a
result,  the staff of the SEC has raised the  question to the BDC industry as to
whether a private company that has outstanding  debt securities would qualify as
an "eligible portfolio company" under the 1940 Act.

            The SEC has recently issued proposed rules to correct the unintended
consequence of the Federal  Reserve's 1998 margin rule  amendments of apparently
limiting the investment  opportunities  of business  development  companies.  In
general,  the SEC's proposed rules would define an eligible portfolio company as
any  company  that  does not have  securities  listed on a  national  securities
exchange or association.  We are currently in the process of reviewing the SEC's
proposed rules and assessing their impact, to the extent such proposed rules are
subsequently  approved  by the  SEC,  on our  investment  activities.  We do not
believe that these  proposed  rules will have a material  adverse  effect on our
operations.

            Until the SEC or its staff has taken a final  public  position  with
respect to the issue  discussed  above,  we will  continue to monitor this issue
closely,  and may be  required  to adjust our  investment  focus to comply  with
and/or take advantage of any future administrative  position,  judicial decision
or legislative action.

THE LACK OF LIQUIDITY IN OUR INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS.

            A  majority  of the  Company's  investments  consist  of  securities
acquired directly from the issuer in private  transactions.  They may be subject
to restrictions on resale or otherwise be illiquid.  Franklin  anticipates  that
there  may  not  be  an  established   trading   market  for  such   securities.
Additionally,  many of the securities that the Company may invest in will not be
eligible for sale to the public without registration under the Securities Act of
1933,  which could prevent or delay any sale by the Company of such  investments
or reduce the amount of proceeds  that might  otherwise  be realized  therefrom.
Restricted


                                       32
<PAGE>

securities  generally sell at a price lower than similar  securities not subject
to restrictions on resale.  Further,  even if a portfolio  company registers its
securities and becomes a reporting corporation under the Securities Exchange Act
of 1934,  the  Company  may be  considered  an  insider  by  virtue of its board
representation   and  would  be  restricted  in  sales  of  such   corporation's
securities.

            We typically exit our investments  when the portfolio  company has a
liquidity event such as a sale, recapitalization,  or initial public offering of
the company. The illiquidity of our investments may adversely affect our ability
to  dispose  of debt and equity  securities  at times  when it may be  otherwise
advantageous  for us to liquidate  such  investments.  In  addition,  if we were
forced to immediately liquidate some or all of the investments in the portfolio,
the proceeds of such liquidation  would be significantly  less than the value at
which we acquired those investments.

WE MAY NOT REALIZE GAINS FROM OUR EQUITY INVESTMENTS.

            We intend to invest,  from time to time, in the equity securities of
other  companies.  However,  these equity  interests may not appreciate in value
and, in fact, may decline in value.  Accordingly,  we may not be able to realize
gains  from our  equity  interests,  and any  gains  that we do  realize  on the
disposition  of any equity  interests  may not be sufficient to offset any other
losses we experience.

BECAUSE MOST OF OUR INVESTMENTS ARE NOT IN PUBLICLY TRADED SECURITIES,  THERE IS
UNCERTAINTY REGARDING THE VALUE OF OUR INVESTMENTS, WHICH COULD ADVERSELY AFFECT
THE DETERMINATION OF OUR NET ASSET VALUE.

            Our  portfolio  investments  are not  generally  in publicly  traded
securities.  As a result,  the fair  value of these  securities  is not  readily
determinable.  We value these  securities  at fair value as  determined  in good
faith by our  Board  of  Directors.  The  types of  factors  that the  Valuation
Committee takes into account in providing its fair value


                                       33
<PAGE>

recommendation to the Board of Directors includes,  as relevant,  the nature and
value of any collateral,  the portfolio  company's  ability to make payments and
its  earnings,  the  markets  in which  the  portfolio  company  does  business,
comparison to valuations of publicly  traded  companies,  comparisons  to recent
sales of comparable  companies,  the  discounted  value of the cash flows of the
portfolio  company and other  relevant  factors.  Because  such  valuations  are
inherently  uncertain and may be based on estimates,  our determinations of fair
value may differ  materially  from the values  that would be assessed if a ready
market for these securities existed.

OUR INVESTMENTS ARE RECORDED AT FAIR VALUE AS DETERMINED BY THE
BOARD OF DIRECTORS IN THE ABSENCE OF READILY ASCERTAINABLE PUBLIC MARKET VALUES.

            Pursuant to the requirements of the 1940 Act, the Company's board of
directors is required to value each investment quarterly, and we are required to
carry such  investments  at a fair market  value as  determined  by the board of
directors.  Since there is typically  no public  market for the loans and equity
securities of the companies in which we invest, our board of directors estimates
the fair value of these loans and equity securities on a quarterly basis.  There
is no single  standard for  determining  fair value in good faith.  As a result,
determining  fair value  requires that judgment be applied to the specific facts
and  circumstances of each  investment.  If we were required to sell any of such
investments,  there is no assurance  that the fair value,  as  determined by the
Board of  Directors,  would be obtained.  If we were unable to obtain fair value
for such  investments,  there would be an adverse  effect on our net asset value
and on the price of our common  stock.  Unlike  banks,  we are not  permitted to
provide a general reserve for anticipated loan losses;  instead, we are required
by the 1940 Act to specifically  value each individual  investment and record an
unrealized  loss for an asset that we believes  has become  impaired.  Without a
readily  ascertainable  market value, the estimated value of our investments may
differ  significantly  from the values that would be placed such  investments if
there  existed a ready  market for those  investments.  Any changes in estimated
values are recorded in the Company's  statement of operations as "Net unrealized
gains (losses)."

OUR FINANCIAL RESULTS COULD BE NEGATIVELY  AFFECTED IF A SIGNIFICANT  INVESTMENT
FAILS TO PERFORM AS EXPECTED.

            We intend to purchase controlling equity stakes in companies and our
total debt and equity  investment  in controlled  companies  may be  significant
individually or in the aggregate.  Investments in controlled portfolio companies
are generally  larger and in fewer  companies than our  investments in companies
that we do not control. As a result, if a significant  investment in one or more
controlled  companies fails to perform as expected,  our financial results could
be more  negatively  affected  and  the  magnitude  of the  loss  could  be more
significant than if we had made smaller investments in more companies.

            In the case of SurgiCount, acquired subsequent to December 31, 2004,
we own patents issued in the United States and Europe related to patient safety,
among them, the Safety-Sponge(TM) System. These patents are a key element to the
success of SurgiCount aNd our Company as a whole could be materially impacted if
the patent is  compromised.  Our  ability to enforce  our  patents is subject to
general  litigation  risks as well as  uncertainty as to the  enforceability  in
various  countries We believe that the  duration of the  applicable  patents are
adequate relative to the expected life of the product.  Because of the fast pace
of innovation  and product  development  our product may be obsolete  before the
patents related to it expire.


                                       34
<PAGE>

WE BORROW  MONEY,  WHICH  MAGNIFIES  THE  POTENTIAL  FOR GAIN OR LOSS ON AMOUNTS
INVESTED AND MAY INCREASE THE RISK OF INVESTING IN US.

            Borrowings,  also known as leverage,  magnify the potential for gain
or loss on amounts invested and,  therefore,  increase the risks associated with
investing in our securities.  We borrow from and issue senior debt securities to
banks,  insurance  companies,   and  other  lenders.  Lenders  of  these  senior
securities have fixed dollar claims on our consolidated assets that are superior
to the  claims of our  common  shareholders.  If the  value of our  consolidated
assets increases,  then leveraging would cause the net asset value  attributable
to our  common  stock to  increase  more  sharply  than it would have had we not
leveraged.  Conversely,  if the  value  of our  consolidated  assets  decreases,
leveraging would cause net asset value to decline more sharply than it otherwise
would have had we not  leveraged.  Similarly,  any increase in our  consolidated
income in excess of  consolidated  interest  payable on the borrowed funds would
cause our net income to increase more than it would without the leverage,  while
any decrease in our  consolidated  income would cause net income to decline more
sharply than it would have had we not borrowed. Leverage is generally considered
a speculative investment technique.

CHANGES IN  INTEREST  RATES MAY AFFECT  OUR COST OF CAPITAL  AND NET  INVESTMENT
INCOME.

            Because we may borrow money to make investments,  our net investment
income is  dependent  upon the  difference  between  the rate at which we borrow
funds and the rate at which we invest these funds. As a result,  there can be no
assurance  that a significant  change in market  interest  rates will not have a
material  adverse  effect on our net  investment  income.  In  periods of rising
interest  rates,  our cost of funds would  increase,  which would reduce our net
investment  income.  We  may  use a  combination  of  long-term  and  short-term
borrowings  and equity capital to finance our investing  activities.  We utilize
our revolving  line of credit as a means to bridge to long-term  financing.  Our
long-term   fixed-rate   investments  are  financed   primarily  with  long-term
fixed-rate debt and equity. We may use interest rate risk management  techniques
in an  effort  to  limit  our  exposure  to  interest  rate  fluctuations.  Such
techniques may include  various  interest rate hedging  activities to the extent
permitted by the 1940 Act.  Accordingly,  no  assurances  can be given that such
changes  will not have a  material  adverse  effect  on the  return  on,  or the
recovery of, Franklin's investments.

RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK

OUR COMMON STOCK PRICE MAY BE VOLATILE.

            The trading price of our common stock may  fluctuate  substantially.
The price of the  common  stock  that will  prevail  in the  market  after  this
offering  may be higher  or lower  than the  price  you pay,  depending  on many
factors, some of which are beyond our control and may not be directly related to
our operating  performance.  These factors include,  but are not limited to, the
following:

      o     price and volume  fluctuations in the overall stock market from time
            to time;

      o     significant  volatility  in the market  price and trading  volume of
            securities of regulated investment  companies,  business development
            companies or other financial services companies;

      o     changes in  regulatory  policies or tax  guidelines  with respect to
            regulated investment companies or business development companies;

      o     actual or anticipated changes in our earnings or fluctuations in our
            operating  results  or  changes in the  expectations  of  securities
            analysts;


                                       35
<PAGE>

      o     general economic conditions and trends;

      o     loss of a major funding source; or

      o     departures of key personnel.

            In the past,  following periods of volatility in the market price of
a  company's  securities,  securities  class  action  litigation  has often been
brought  against that  company.  Due to the  potential  volatility  of our stock
price,  we may therefore be the target of  securities  litigation in the future.
Securities  litigation could result in substantial costs and divert management's
attention and resources from our business.

OUR SHARES MAY TRADE AT DISCOUNTS  FROM NET ASSET VALUE OR AT PREMIUMS  THAT ARE
UNSUSTAINABLE OVER THE LONG TERM.

            Shares of business development companies may trade at a market price
that is less than the net asset value that is attributable to those shares.  The
possibility  that our shares of common  stock will trade at a discount  from net
asset  value or at  premiums  that  are  unsustainable  over  the long  term are
separate  and  distinct  from the risk that our net asset  value will  decrease.
During the second and third  quarters of 2004, our shares of common stock traded
at a discount to the net asset value  attributable  to those  shares.  It is not
possible to predict  whether our shares will trade at, above, or below net asset
value.

THERE IS A RISK THAT YOU MAY NOT RECEIVE DIVIDENDS OR THAT OUR DIVIDENDS MAY NOT
GROW OVER TIME.

            We cannot  assure you that we will achieve  investment  results that
will allow any specified level of cash  distributions or year-to-year  increases
in cash  distributions.  Historically,  the only  dividends the Company has paid
have been  those  required  by our  Preferred  Stock,  currently  7% a year.  We
currently have no intention of paying dividends on our Common Stock.

IF THE COMPANY'S  STOCKHOLDERS  APPROVE A THREE-FOR-ONE  STOCK SPLIT THERE IS AN
INCREASED RISK THAT THE COMPANY'S SHARES OF COMMON STOCK MAY SELL AT A LOW PRICE
PER SHARE AND INCREASE THE RISK OF A DELISTING ON THE AMEX.

            The  Company  is  requesting  stockholder  approval  of the  Board's
proposal  to  amend  the   Company's   Amended  and  Restated   Certificate   of
Incorporation (the "CURRENT  CERTIFICATE") to reduce the par value of each share
of  Common  Stock,  from  $1.00  per  share  to $0.33  per  share  and  effect a
three-for-one  stock  split of the  Common  Stock  of the  Company  (the  "STOCK
SPLIT").

            As of February 28, 2005, there were 1,758,776 shares of Common Stock
issued  and  outstanding  and  10,950  shares  of  Preferred  Stock  issued  and
outstanding.  Additionally, as of December 31, 2004, there were 1,875 options to
purchase  Common  Stock  outstanding  and 18,750  options  available  for future
issuance  under the 1997  Non-Statutory  Stock Option Plan.  If this Proposal is
approved by the stockholders,  there would be an additional  3,517,552 shares of
Common Stock issued to existing  stockholders of record as of the effective date
of the Stock Split.  This means that on a post-split  basis,  the Company  would
have approximately  5,276,328 shares of Common Stock  outstanding.  In addition,
each share of Preferred Stock which is currently  convertible into 7.5 shares of
Common Stock would become convertible into 22.5 shares of Common Stock after the
Stock Split.

            The  Company's  Common Stock is listed for trading on the AMEX under
the symbol "FKL." The new shares of Common Stock to be issued as a result of the
Stock Split would be included in our listing on the AMEX.  The AMEX may delist a
security when it sells for a substantial period of time at a low


                                       36
<PAGE>

price  per  share  ("the  low  selling  price").  As a  result  of the  proposed
significant  increase in the outstanding shares of our Common Stock it is highly
probable  that the per share  price  would  experience  an  immediate  decrease.
Further,  in the event any other factors outside the control of the Company were
to put  downward  pressure on the  Company's  stock price the actual price could
fall and remain within the low selling price.

IF THE COMPANY FAILS TO COMPLY WITH THE REQUIREMENTS OF THE FORUM IN WHICH THEIR
SECURITIES  ARE  QUOTED OR THE  TRADING  MARKET ON WHICH  THEIR  SECURITIES  ARE
LISTED,  THE  LIQUIDITY  AND PRICES OF YOUR  INVESTMENT  IN THE COMPANY WOULD BE
MATERIALLY ADVERSELY AFFECTED.

            On June 24, 2004,  Franklin received a letter from AMEX inquiring as
to Franklin's  ability to remain listed on AMEX.  Specifically,  AMEX  indicated
that the Common Stock was subject to delisting  under  sections  1003(a)(i)  and
1003(a)(ii) of AMEX's Company Guide because Franklin's  stockholders' equity was
below the level required by AMEX's  continued  listing  standards.  Accordingly,
AMEX requested information relating to Franklin's plan to retain its listing. On
September 13, 2004, Franklin presented the final components of its proposed plan
to AMEX to comply with AMEX's continued  listing  standards and on September 15,
2004,  AMEX  notified  Franklin  that it had  accepted  Franklin's  plan and had
granted  Franklin an extension  until  December  26, 2005 to regain  compliance,
during  which  time AMEX will  continue  Franklin's  listing  subject to certain
conditions.  Franklin has cooperated,  and will continue to cooperate, with AMEX
regarding these issues and intends to make every effort to remain listed on AMEX
irrespective of the outcome of the Special Meeting.  AMEX has notified Franklin,
however, that failure to make progress consistent with the plan of compliance or
to regain  compliance with the continued  listing standards by December 26, 2005
could result in the Common Stock being delisted from AMEX, and no assurances can
be made that  Franklin  will be able to maintain its listing.  A delisting  from
AMEX could  have a material  adverse  effect on the price and  liquidity  of the
Common Stock.

            At September 30, 2004,  Franklin  securities were quoted on the AMEX
under the ticker "FKL". In order for our securities to be eligible for continued
quotation  on the AMEX,  the Company  must  remain in  compliance  with  certain
listing standards.  Among other things, these standards require that the Company
remain  current in their  filings  with the SEC and comply  with  certain of the
provisions  of the  Sarbanes-Oxley  Act of 2002.  If the Company is no longer in
compliance  with these  requirements,  there would be no forum or market for the
quotation or listing of the securities of our portfolio companies.  Without such
a forum or market, the liquidity and prices of your investments in the Company's
securities would be materially adversely affected.  We cannot give any assurance
that the Company will remain in compliance with the requirements to be quoted on
the AMEX.

TECHNOLOGIES OR PRODUCTS  ACQUIRED OR DEVELOPED BY US, OR THE COMPANIES IN WHICH
WE MAY INVEST, MAY BECOME OBSOLETE.

            Neither  we,  nor the  companies  in which we may  invest,  have any
control  over  the  pace  of  technology  or  product  development.  There  is a
significant risk that we, or the companies in which we invest,  could develop or
acquire the rights to a technology  that is currently  or is  subsequently  made
obsolete by other technological  developments.  We cannot assure you that either
we, or the companies in which we may invest, will successfully acquire, develop,
transfer or sell any new technology or products.

FORWARD-LOOKING STATEMENTS

            This annual report contains forward-looking  statements that involve
substantial risks and uncertainties.  These  forward-looking  statements are not
historical  facts, but rather are based on current  expectations,  estimates and
projections about our industry, our beliefs, and our assumptions.  Words such as
"anticipates,"   "expects,"   "intends,"  "plans,"   "believes,"   "seeks,"  and
"estimates"  and variations


                                       37
<PAGE>

of these words and similar expressions are intended to identify  forward-looking
statements.  These  statements are not guarantees of future  performance and are
subject to risks, uncertainties, and other factors, some of which are beyond our
control  and  difficult  to predict  and could  cause  actual  results to differ
materially from those expressed or forecasted in the forward-looking statements.
Forward-looking  statements  include,  among others,  the  following  statements
related to:

      o     OUR STRATEGY FOR GROWING OUR OPERATIONS IN THE TARGET INDUSTRIES;

      o     OUR   ABILITY   TO   OPERATE   SUCCESSFULLY   IN  HIGHLY   REGULATED
            ENVIRONMENTS;

      o     AN  ECONOMIC  DOWNTURN  COULD  DISPROPORTIONATELY  IMPACT THE TARGET
            INDUSTRIES  IN WHICH WE  CONCENTRATE  CAUSING US TO SUFFER LOSSES IN
            OUR PORTFOLIO AND EXPERIENCE  DIMINISHED DEMAND FOR CAPITAL IN THESE
            INDUSTRY SECTORS;

      o     A CONTRACTION OF AVAILABLE  CREDIT AND/OR AN INABILITY TO ACCESS THE
            EQUITY MARKETS COULD IMPAIR OUR INVESTMENT ACTIVITIES;

      o     INTEREST RATE VOLATILITY COULD ADVERSELY AFFECT OUR RESULTS; AND

      o     THE RISKS,  UNCERTAINTIES  AND OTHER  FACTORS WE  IDENTIFY  IN "RISK
            FACTORS" AND ELSEWHERE IN THIS FORM 10-K AND IN OUR FILINGS WITH THE
            SEC.

Although  we  believe  that  the  assumptions  on  which  these  forward-looking
statements are based are reasonable,  any of those assumptions could prove to be
inaccurate,  and as a  result,  the  forward-looking  statements  based on those
assumptions also could be inaccurate.  Important assumptions include our ability
to  originate  new  loans  and  investments,   certain  margins  and  levels  of
profitability and the availability of additional  capital. In light of these and
other uncertainties,  the inclusion of a projection or forward-looking statement
in this annual report should not be regarded as a representation  by us that our
plans and objectives  will be achieved.  These risks and  uncertainties  include
those  described or  identified  in "Risk  Factors" and elsewhere in this annual
report. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this annual report.

ITEM 2. PROPERTIES

            We  do  not  own  any  real  estate  or  other  physical  properties
materially  important  to our  operation.  Our  headquarters  are located at 100
Wilshire Boulevard,  Suite 1500, Santa Monica, California 90401, where we occupy
our office space with Ault Glazer at no cost to the Company. Our office space is
currently  approximately  2,000 square  feet.  The Company  anticipates  leasing
office space in 2005.

            In addition,  we also have several  real estate  investments  in our
wholly-owned subsidiary Franklin Capital Properties LLC. These investments range
in fair value, as carried in our financial statements,  from $75,000 to $300,000
and are  comprised of eight vacant single  family  buildings and two  multi-unit
buildings in Baltimore, Maryland, approximately 8.5 acres of undeveloped land in
Heber  Springs,  Arkansas,  and  various  loans  secured by real estate in Heber
Springs, Arkansas. Based upon the number of real estate investments, and related
fair values,  management  does not  currently  believe that the  Company's  real
estate holdings represent a material risk to the Company.


                                       38
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

            On  October  15,  2001,  Jeffrey  A. Leve and  Jeffrey  Leve  Family
Partnership,  L.P. filed a lawsuit against Franklin, Sunshine Wireless, LLC, and
four other defendants affiliated with Winstar  Communications,  Inc. On February
25, 2003,  the case against  Franklin and Sunshine was  dismissed.  However,  on
October 19, 2004, the plaintiffs  exercised  their right to appeal.  The initial
lawsuit  alleged  that the  Winstar  defendants  conspired  to commit  fraud and
breached  their  fiduciary  duty  to  the  plaintiffs  in  connection  with  the
acquisition of the plaintiffs' radio production and distribution  business.  The
complaint  further  alleged  that  Franklin  and  Sunshine  joined  the  alleged
conspiracy.  The plaintiffs  seek recovery of damages in excess of  $10,000,000,
costs and attorneys' fees. An unfavorable outcome in an appeal, together with an
unfavorable  outcome  in the  lawsuit  may have a  material  adverse  effect  on
Franklin's business,  financial condition and results of operations. The Company
believes the lawsuit is without merit and intends to vigorously defend itself.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

            The  following  proposals  were  submitted  to  shareholders  at our
Special Meeting of Stockholders  held October 28, 2004. The following  proposals
were approved by a majority of the shares present at the meeting.

            1. To elect four  directors  to hold  office  until the next  annual
meeting of  stockholders  or until their  successors  have been duly elected and
qualified  (two of whom are to be elected by the  holders of  Franklin's  Common
Stock and Franklin's  Preferred Stock, par value $1.00 per share (the "PREFERRED
STOCK"), voting together as a single class, and two of whom are to be elected by
the holders of Preferred Stock,  voting as a separate class).  This proposal was
approved. Results of the voting were as follows:

<TABLE>
<CAPTION>
                                                      NO. OF SHARES
------------------------------------------------    -----------------    -----------------         ----------------
                     NOMINEES                           SHARES FOR        SHARES WITHHELD          BROKER NON-VOTES
------------------------------------------------    -----------------    -----------------         ----------------
<S>                                                       <C>                  <C>                       <C>
COMMON AND PREFERRED STOCK NOMINEES
Lytle Brown III                                           976,510              3,693                     N/A
Alice Campbell                                            976,510              3,693                     N/A

PREFERRED STOCK NOMINEES
Louis Glazer                                               9,750               None                      N/A
Herbert Langsam                                            9,750               None                      N/A
</TABLE>

            2.  To  approve  the   amendment  and   restatement   of  Franklin's
certificate  of  incorporation  to increase the  authorized  number of shares of
Common Stock from  5,000,000  shares to  50,000,000  shares.  This  proposal was
approved. Results of the voting were as follows:

<TABLE>
<CAPTION>
                                              NO. OF SHARES
----------------    -----------------       -----------------        ----------------     ------------------
                        SHARES FOR               AGAINST                 ABSTAIN           BROKER NON-VOTES
----------------    -----------------       -----------------        ----------------     ------------------
<S>                       <C>                    <C>                      <C>                    <C>
Common Stock              914,280                55,006                   1,167                  0
Preferred Stock           9,750                  0                        0                      0
----------------
Common Stock and          924,030                55,006                   1,167                  0
Preferred Stock
</TABLE>


                                       39
<PAGE>

            3.  To  approve  the   amendment  and   restatement   of  Franklin's
certificate  of  incorporation  to increase the  authorized  number of shares of
Preferred Stock from 5,000,000  shares to 10,000,000  shares.  This proposal was
approved. Results of the voting were as follows:

<TABLE>
<CAPTION>
                                              NO. OF SHARES
----------------    -----------------       -----------------        ----------------     ------------------
                        SHARES FOR               AGAINST                 ABSTAIN             BROKER NON-VOTES
----------------    -----------------       -----------------        ----------------     ------------------
<S>                       <C>                    <C>                      <C>                    <C>
Common Stock              713,793                53,521                   2,667                  200,472
Preferred Stock           9,750                  0                        0                      0
----------------
Common Stock and          723,543                53,521                   2,267                  200,472
Preferred Stock
</TABLE>

            4.  To  approve  the   amendment  and   restatement   of  Franklin's
certificate  of  incorporation  to  provide  for  the  exculpation  of  director
liability to the fullest  extent  permitted by law.  This proposal was approved.
Results of the voting were as follows:

<TABLE>
<CAPTION>
                                             NO. OF SHARES
----------------    -----------------       -----------------     ----------------      ------------------
                        SHARES FOR              AGAINST               ABSTAIN            BROKER NON-VOTES
----------------    -----------------       -----------------     ----------------      ------------------
<S>                       <C>                    <C>                    <C>                    <C>
Common Stock and          924,860                55,119                 224                    0
Preferred Stock
</TABLE>

            5.  To  approve  the   amendment  and   restatement   of  Franklin's
certificate of  incorporation  to provide for the  classification  of Franklin's
board of directors (the "Board") into three classes of directors.  This proposal
was approved. Results of the voting were as follows:

<TABLE>
<CAPTION>
                                             NO. OF SHARES
----------------    -----------------       -----------------     ----------------       ------------------
                         SHARES FOR             AGAINST                ABSTAIN            BROKER NON-VOTES
----------------    -----------------       -----------------     ----------------       ------------------
<S>                       <C>                    <C>                    <C>                    <C>
Common Stock and          723,552                8,409                  47,800                 200,472
Preferred Stock
</TABLE>

            6. To  approve  the sale by  Franklin  to Quince  Associates,  LP, a
Maryland limited partnership  ("Quince"),  of all of the shares of common stock,
and warrants to purchase  shares of common stock,  of Excelsior  Radio Networks,
Inc. ("Excelsior") beneficially owned by Franklin, upon the terms and subject to
the conditions  described in this proxy  statement.  This proposal was approved.
Results of the voting were as follows:

<TABLE>
<CAPTION>
                                             NO. OF SHARES
----------------     -----------------      -----------------     ----------------       ------------------
                         SHARES FOR             AGAINST               ABSTAIN             BROKER NON-VOTES
----------------     -----------------      -----------------     ----------------       ------------------
<S>                       <C>                    <C>                    <C>                    <C>
Common Stock and          773,540                5,779                  412                    200,472
Preferred Stock
</TABLE>


                                       40
<PAGE>

            7. To approve the issuance of an aggregate of up to 5,000,000 shares
of Common  Stock,  and  warrants  to purchase an  aggregate  of up to  1,500,000
additional  shares of Common Stock upon terms that are approved by a majority of
the Board  consistent  with its fiduciary  duties and consistent with prevailing
market terms  relating to price per share,  warrant  coverage  and  registration
rights for such  issuances at the time of such  issuances,  as described in this
proxy  statement.  This  proposal  was  approved.  Results of the voting were as
follows:

<TABLE>
<CAPTION>
                                              NO. OF SHARES
----------------     -----------------      -----------------     ----------------        ------------------
                         SHARES FOR              AGAINST               ABSTAIN             BROKER NON-VOTES
----------------     -----------------      -----------------     ----------------        ------------------
<S>                       <C>                    <C>                    <C>                    <C>
Common Stock and          723,058                55,586                 1,087                  200,472
Preferred Stock
</TABLE>

<TABLE>
<CAPTION>
                                    NO. OF SHARES (AFTER SUBTRACTION)
----------------     -----------------      -----------------     ----------------        ------------------
                         SHARES FOR              AGAINST               ABSTAIN             BROKER NON-VOTES
----------------     -----------------      -----------------     ----------------        ------------------
<S>                       <C>                    <C>                    <C>                    <C>
Common Stock and          158,474                55,586                 1,087                  200,472
Preferred Stock
</TABLE>

            8. To approve  the sale of Common  Stock and  warrants  to  purchase
Common Stock to certain  "interested  stockholders"  (as such term is defined in
Section 203 of the Delaware General  Corporation Law (the "DGCL")) on terms that
are approved by a majority of the Board consistent with its fiduciary duties and
consistent  with  prevailing  market terms relating to price per share,  warrant
coverage  and  registration  rights  for  such  issuances  at the  time  of such
issuances.  This  proposal  was not  approved.  Results  of the  voting  were as
follows:

<TABLE>
<CAPTION>
                                             NO. OF SHARES
----------------     -----------------      -----------------     ----------------       ------------------
                         SHARES FOR             AGAINST               ABSTAIN             BROKER NON-VOTES
----------------     -----------------      -----------------     ----------------       ------------------
<S>                       <C>                    <C>                    <C>                    <C>
Common Stock and          771,633                7,386                  712                    200,472
Preferred Stock
</TABLE>

<TABLE>
<CAPTION>
                                   NO. OF SHARES (AFTER SUBTRACTION)
----------------     -----------------      -----------------     ----------------       ------------------
                         SHARES FOR             AGAINST               ABSTAIN             BROKER NON-VOTES
----------------     -----------------      -----------------     ----------------       ------------------
<S>                       <C>                    <C>                    <C>                    <C>
Common Stock and          259,199                7,386                  712                    200,472
Preferred Stock
</TABLE>

            No other matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 2004. However, on March
2, 2005,  Company filed  definitive  proxy  materials  with the  Securities  and
Exchange   Commission  in  connection  with  its  2004  Annual  Meeting  of  the
Stockholders (the "ANNUAL  MEETING").  The Annual Meeting is being held on March
30, 2005 in order to vote on the following proposals:  (i) the election of Lytle
Brown III as a Class I Director to hold office for a three-year term expiring in
2007,  or until his  successor  has been duly elected and qualified or until his
earlier death,  resignation or removal, in accordance with the Company's bylaws,
as amended;  (ii)


                                       41
<PAGE>

the  ratification  of the  appointment  by the Board of Directors of the Company
(the "BOARD") of Rothstein,  Kass & Company, P.C. ("ROTHSTEIN KASS") to serve as
independent  auditors for the fiscal year ended  December  31,  2004;  (iii) the
authorization and approval of the stock option component of the stock option and
restricted stock plan for the Company (the "NEW PLAN");  (iv) the  authorization
and  approval  of the  restricted  stock  component  of the  New  Plan;  (v) the
authorization  and  approval of the payment of cash and equity  compensation  to
Milton "Todd" Ault III ("AULT"),  Lynne Silverstein  ("SILVERSTEIN"),  and Louis
Glazer and Melanie Glazer (the  "GLAZERS"),  each of whom may be deemed to be an
"interested  stockholder"  (as  defined in Section 203 of the  Delaware  General
Corporate Law ("DGCL")) of the Company;  (vi) the  authorization and approval of
the sale of common  stock  par  value  $1.00 of the  Company  ("COMMON  STOCK"),
warrants to purchase Common Stock ("WARRANTS") and other securities representing
indebtedness convertible into Common Stock to Ault, Silverstein and the Glazers,
each of whom may be deemed to be an  "interested  stockholder"  (as  defined  in
Section 203 of the DGCL),  on terms that are  approved  by the Board  consistent
with  its  fiduciary  duties  and  market  terms  existing  at the  time of such
offering,  including those relating to price per share,  interest rate,  warrant
coverage and  registration  rights for such  issuances and the  requirements  of
applicable  law,  including the 1940 Act, as described in this proxy  statement;
(vii) the  authorization  and  approval of the  certificate  of amendment to the
Amended  and  Restated   Certificate  of   Incorporation  of  the  Company  (the
"CERTIFICATE  OF  AMENDMENT")  to reduce the par value of the Common  Stock from
$1.00  per share to $0.33 per  share  and  effect a  three-for-one  split of the
Common Stock (the "STOCK SPLIT");  (viii) the  authorization and approval of the
prospective issuance of bonds, notes or other evidences of indebtedness that are
convertible  into Common  Stock  ("CONVERTIBLE  BONDS,"  "CONVERTIBLE  NOTES" or
"OTHER  CONVERTIBLE  INDEBTEDNESS")  in accordance with the  requirements of the
1940 Act;  (ix) the  authorization  and  approval of the Board to  withdraw  the
Company's  election to be treated as a BDC  pursuant to Section  54(c) under the
1940 Act; (x) the  authorization and approval of the Certificate of Amendment to
change the name of the Company to "Patient Safety Technologies,  Inc."; and (xi)
the  authorization  and approval of the Certificate of Amendment to decrease the
authorized number of shares of Common Stock from 50,000,000 shares to 25,000,000
shares and decrease  the  authorized  number of shares of  Preferred  Stock from
10,000,000 shares to 1,000,000 shares.


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

STOCK TRANSFER AGENT

            Mellon  Investor  Services,  85 Challenger  Road,  Overpack  Center,
Ridgefield  Park, NJ 07660  (Telephone  (800) 851-9677) serves as transfer agent
for the Company's common stock.  Certificates to be transferred should be mailed
directly to the transfer agent, preferably by registered mail.

MARKET PRICES

            The Company's  common stock is traded on The American Stock Exchange
under the symbol "FKL." The following table sets forth the range of the high and
low selling  price of the  Company's  shares during each quarter of the last two
years, as reported by the American Stock Exchange.


                                       42
<PAGE>

             2004 QUARTER ENDING                      LOW               HIGH
             -------------------                      ---               ----

             December 31                            $  9.20           $ 12.75
             September 30                           $  3.20           $ 14.75
             June 30                                $  0.90           $  8.90
             March 31                               $  1.05           $  1.52

             2003 QUARTER ENDING                      LOW               HIGH
             -------------------                      ---               ----

             December 31                            $  0.50           $  1.55
             September 30                           $  0.75           $  1.05
             June 30                                $  0.77           $  1.26
             March 31                               $  1.10           $  1.62

DIVIDENDS

            The Company paid  $76,650,  and $76,652 and $115,152 in dividends to
preferred  stockholders  during 2004, 2003 and 2002,  respectively,  and has not
paid any dividends to common stockholders during the past three years. Dividends
to our preferred  stockholders are cumulative and paid at the rate of 7% a year.
We currently have no intention of paying dividends on our common stock.

STOCKHOLDERS

            As of February 28, 2005,  there were 615 registered  shareholders of
record of the  Company's  common  stock.  The Company has  50,000,000  shares of
common stock authorized,  of which 2,242,689 are issued and 1,758,776 shares are
outstanding at March 7, 2005.  The Company has 10,000,000  shares of convertible
preferred stock authorized, of which 16,450 were issued on February 22, 2000 and
10,950 shares are outstanding at March 7, 2005. See Item 7 "FINANCIAL CONDITION,
LIQUIDITY AND CAPITAL RESOURCES."

            We are  seeking  shareholder  approval at Annual  Meeting to,  among
other  items,  reduce the par value of our Common  Stock from $1.00 per share to
$0.33 per share and effect a Stock Split;  to decrease the authorized  number of
shares of Common Stock from 50,000,000  shares to 25,000,000 shares and decrease
the authorized  number of shares of Preferred  Stock from  10,000,000  shares to
1,000,000 shares.

ITEM 6. SELECTED FINANCIAL DATA

            The  following  selected  financial  data for the fiscal  year ended
December 31, 2004 and for the periods  ended  December  31,  2003,  December 31,
2002,  December 31, 2001 and  December  31, 2000 are derived from our  financial
statements  which have been  audited by Ernst & Young,  LLP  (December  31, 2000
through  December  31,  2003)  and  Rothstein  Kass  (December  31,  2004),  our
independent  registered  public  accounting  firms.  The data  should be read in
conjunction  with our  financial  statements  and the related  notes thereto and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" included elsewhere in this report.


                                       43
<PAGE>

BALANCE SHEET DATA
FINANCIAL POSITION AS OF DECEMBER 31:

<TABLE>
<CAPTION>
                                                           2004            2003            2002            2001             2000
                                                           ----            ----            ----            ----             ----
<S>                                                 <C>             <C>             <C>             <C>              <C>
Total assets                                        $ 6,934,243     $ 3,258,032     $ 4,632,338     $ 4,098,866      $ 5,766,712

Liabilities                                         $ 3,367,974     $ 1,233,894     $   187,632
                                                                                                    $ 1,364,798      $ 1,177,121

Net assets                                          $ 3,566,269     $ 2,024,138     $ 3,267,540     $ 2,921,745      $ 5,579,080

Net asset value per share attributable to common
stockholders                                        $      1.59     $      0.91     $      2.07     $      1.19      $      3.58

Net asset value per share, as if converted basis    $      2.18     $      1.84     $      2.89     $      2.44      $      4.57

Shares outstanding                                    1,556,901       1,020,100       1,049,600       1,074,700        1,098,200
</TABLE>

OPERATING DATA FOR THE YEAR ENDED DECEMBER 31:

<TABLE>
<CAPTION>
                                                           2004            2003            2002            2001             2000*
                                                           ----            ----            ----            ----             -----
<S>                                                 <C>             <C>             <C>             <C>              <C>
Investment income                                   $    11,056     $   183,159     $   455,081     $   192,697      $   115,015

Expenses                                            $ 2,951,173     $ 1,279,526     $ 1,985,450     $ 1,579,382      $ 2,372,797

Net investment loss from operations                 $(2,940,117)    $(1,096,367)    $(1,530,369)    $(1,386,685)     $(2,257,782)

Net realized gain on portfolio of investments       $   430,883     $   237,327     $   522,131     $ 1,195,875
                                                                                                                     $ 1,591,156

Net (decrease) increase in
     unrealized appreciation of investments         $(1,054,702)    $  (475,605)    $ 1,663,304     $(1,553,756)     $(3,365,513)

Net (decrease) increase in net
     assets attributable to common stockholders     $(2,480,313)    $(1,217,741)    $   255,110     $(2,533,460)     $(4,526,053)
Basic and diluted net (decrease) increase in net
       assets from operations per weighted
       average number of shares outstanding         $     (2.25)    $     (1.17)    $      0.24     $     (2.34)     $     (4.14)
</TABLE>

*     Expenses in the year ended December 31, 2000 include non-cash compensation
      of $349,644 due to the exercise of employee incentive stock options.

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

            THE  FOLLOWING  ANALYSIS OF OUR  FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS  SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL  STATEMENTS AND THE
RELATED NOTES THERETO CONTAINED ELSEWHERE IN THIS FORM 10-K.

            THE  FOLLOWING   "OVERVIEW"  SECTION  IS  A  BRIEF  SUMMARY  OF  THE
SIGNIFICANT  ISSUES  ADDRESSED  IN  MANAGEMENT'S   DISCUSSION  AND  ANALYSIS  OF
FINANCIAL  CONDITION AND RESULTS OF OPERATIONS  ("MD&A").  INVESTORS SHOULD READ
THE  RELEVANT  SECTIONS  OF THE MD&A FOR A  COMPLETE  DISCUSSION  OF THE  ISSUES
SUMMARIZED  BELOW.  THE ENTIRE MD&A SHOULD BE READ IN  CONJUNCTION  WITH ITEM 6.
SELECTED FINANCIAL DATA AND ITEM 8. FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA
APPEARING ELSEWHERE IN THIS FORM 10K.

OVERVIEW

            Franklin Capital  Corporation is a publicly traded,  non-diversified
internally managed,  closed-end investment company that elected to be treated as
a BDC under the 1940 Act. We are  currently  involved in  providing  capital and
managerial assistance to early stage companies primarily in the medical products
and health care  solutions  industries,  and to a lesser extent in the financial
services and real estate industries.  Franklin Capital  Properties,  LLC, a real
estate development and management company and


                                       44
<PAGE>

Franklin Medical Products,  LLC, a healthcare  consulting services company, both
wholly-owned  subsidiaries of Franklin,  were created to augment our investments
in these industries. Effective February 23, 2005, Franklin Medical Products, LLC
changed its name to Patient Safety Consulting Group, LLC.

            In the first half of 2004, we focused our investment strategy on the
achievement of capital  appreciation  through  long-term  equity  investments in
start-up  and  early  stage  companies  in  the  radio  and   telecommunications
industries.  However,  beginning in June 2004, we undertook a Restructuring Plan
which ultimately  culminated in a subsequent change in control in our management
and a shift in our  business  focus  away from the radio and  telecommunications
industries  toward a primary  focus on the  medical  products  and  health  care
solutions  industries,  particularly,  the patient  safety market as well as the
financial services and real estate industries.

            In  addition  to  shifting  a  significant  amount of our  available
capital to investments in the above-referenced industries our primary investment
objective  has also shifted and is now focused on maximizing  long-term  capital
growth through the appreciation of controlling  interests in operating companies
and assets in such target  industries.  As such, it is management's  belief that
the regulatory  regime governing BDC's is no longer  appropriate and will hinder
the Company's  future growth.  Accordingly,  among other things,  we are seeking
shareholder  approval at the upcoming annual meeting to withdraw its election to
be treated as a BDC.

            Since the  Restructuring  Plan became  effective at the end of 2004,
and the  reporting  period for this Form 10-K is as of December  31,  2004,  the
operating  results  discussed in this MD&A  primarily  relate to the  investment
focus that  existed for the  majority of the year and the  liquidation  of those
investments. During 2004, the Company realized approximately $1,448,014 in gains
on its sale of  Excelsior  common  stock.  The Company  continues to rely on the
increase in the value of its  investments  and the ability to sell them in order
to fund its ongoing  operations.  Operating  expenses increased by approximately
$1,672,000 due to the severance payment to Stephen L. Brown, our former Chairman
and Chief Executive  Officer and professional fees related to the negotiation of
the LOU with Ault Glazer and the filing of proxy  statements in connection  with
the Special Meeting of the Stockholders of the Company held on October 22, 2004,
and the 2004 Annual  Shareholder  Meeting of the Company to be held on March 30,
2005.

CRITICAL ACCOUNTING POLICIES

            Franklin's  discussion  and analysis of its financial  condition and
results of operations are based upon the Company's financial  statements,  which
have been prepared in accordance with accounting  principles  generally accepted
in the United States.  The  preparation of these financial  statements  requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities,  revenues and expenses and related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates its estimates,
the most critical of which are those that are both important to the presentation
of our financial  condition and results of operations  and require  management's
most difficult,  complex, or subjective judgments.  Our most critical accounting
policy relates to the valuation of our investments.

            As a business  development  company, we invest primarily in illiquid
equity securities of private companies. Our investments are generally subject to
restrictions on resale and generally have no established trading market. Because
of the type of  investments  that we make and the  nature of our  business,  our
valuation process requires an analysis of various factors.

            Pursuant to the requirements of the 1940 Act, our Board of Directors
(the "Board") is responsible for determining in good faith the fair value of our
investments for which market quotations are not readily  available.  At December
31, 2004, approximately 26% of our total assets represented investments recorded
at fair value. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the
market price for those


                                       45
<PAGE>

securities  for which a market  quotation is readily  available and (ii) for all
other  securities  and assets,  fair value is as determined in good faith by the
board of directors.  Since there is typically no readily  available market value
for  the  investments  in  our  portfolio,  we  value  substantially  all of our
investments at fair value as determined in good faith by our Board pursuant to a
valuation  policy and a consistent  valuation  process.  Because of the inherent
uncertainty  of  determining  the fair value of  investments  that do not have a
readily available market value, the fair value of our investments  determined in
good faith by our Board may differ significantly from the values that would have
been used had a ready market existed for the  investments,  and the  differences
could be material.  For the years ended  December 31,  2004,  2003 and 2002,  as
reported in our 2004 STATEMENTS OF OPERATIONS,  variances  between the estimates
utilized  to  determine  the fair  market  value of our  investments  have  been
consistent  with  the  amounts  actually  received  upon  liquidation  of  those
investments.

            Security  investments  which  are  publicly  traded  on  a  national
exchange or Nasdaq Stock Market are stated at the last  reported  sales price on
the day of  valuation  or,  if no sale  was  reported  on that  date,  then  the
securities are stated at the last quoted bid price. Our Board may determine,  if
appropriate,  to  discount  the  value  where  there  is an  impediment  to  the
marketability of the securities held.

            Investments  for which  there is no ready  market are valued at fair
value based upon the financial condition and operating results of the issuer and
other  pertinent  factors as determined in good faith by the Board of Directors.
The financial  condition and operating  results have been derived utilizing both
audited and unaudited  data. In the absence of a ready market for an investment,
numerous assumptions are inherent in the valuation process. Some or all of these
assumptions may not  materialize.  Unanticipated  events and  circumstances  may
occur  subsequent  to the date of the  valuation  and  values  may change due to
future  events.  Therefore,  the actual  amounts  eventually  realized from each
investment  may vary  from  the  valuations  shown  and the  differences  may be
material.  Franklin  reports the  unrealized  gain or loss  resulting  from such
valuation  in  the  line  item  entitled   "(Decrease)  increase  in  unrealized
appreciation of investments" in the Statements of Operations.

ACCOUNTING DEVELOPMENTS

            In  December  2004,  Statement  of  Financial  Accounting  Standards
("SFAS") No. 123(R),  "SHARE-BASED  PAYMENT," which addresses the accounting for
employee  stock  options,   was  issued.  SFAS  123(R)  revises  the  disclosure
provisions of SFAS 123, "ACCOUNTING FOR STOCK BASED COMPENSATION" and supersedes
Accounting Principles Board ("APB") Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED
TO Employees." SFAS 123(R) requires that the cost of all employee stock options,
as well as other  equity-based  compensation  arrangements,  be reflected in the
financial  statements  based on the  estimated  fair value of the  awards.  This
statement is effective  for the Company as of the beginning of the first interim
or annual reporting period that begins after June 15, 2005. We adopted Statement
123(R) as of  January  1,  2005,  and it did not have a  material  effect on the
Company's accounting for employee stock options.

STATEMENT OF OPERATIONS

            The Company accounts for its operations under accounting  principles
generally accepted in the United States for investment companies. On this basis,
the principal measure of its financial  performance is captioned "Net (decrease)
increase in net assets from operations," which is composed of the following:

      o     "Net  investment  loss  from  operations,"  which is the  difference
            between the Company's  income from interest,  dividends and fees and
            its operating expenses;


                                       46
<PAGE>

      o     "Net  realized  gain on  portfolio  of  investments,"  which  is the
            difference  between  the  proceeds  received  from  dispositions  of
            portfolio securities and their stated cost;

      o     any applicable income tax provisions (benefits); and

      o     "Net (decrease) increase in unrealized appreciation of investments,"
            which  is  the  net  change  in the  fair  value  of  the  Company's
            investment  portfolio,  net of any  (decrease)  increase in deferred
            income   taxes  that  would   become   payable  if  the   unrealized
            appreciation  were realized through the sale or other disposition of
            the investment portfolio.

            "Net  realized  gain (loss) on  portfolio of  investments"  and "Net
(decrease)  increase in unrealized  appreciation  of  investments"  are directly
related.  When a  security  is  sold to  realize  a  gain,  the  net  unrealized
appreciation  decreases and the net realized gain increases.  When a security is
sold to realize a loss,  the net unrealized  appreciation  increases and the net
realized gain decreases.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

            The  Company's  total  assets  and net  assets  were,  respectively,
$6,934,243 and $3,566,269 at December 31, 2004 versus  $3,258,032 and $2,024,138
at  December  31,  2003.  Net  asset  value  per  share  attributable  to common
stockholders and on an as if converted basis was $1.59 and $2.18 at December 31,
2004, respectively,  versus $0.91 and $1.84, respectively, at December 31, 2003.
The  change in total  assets  and net assets is  primarily  attributable  to the
Company's operating losses and financing activities.

            At December  31, 2004 and  December  31,  2003,  we had $846,404 and
$224,225  in cash and cash  equivalents.  Our Board has given our  Chairman  and
Chief  Executive  Officer,  Milton  "Todd" Ault III, the authority to invest our
cash balances in the public equity and debt markets as  appropriate  to maximize
the short-term  return on such assets.  The making of such  investments  entails
risks related to the loss of investment and price volatility.

            During 2004, the Company raised net proceeds of approximately $3.925
million in a private placement  transaction.  Management  believes that existing
cash resources,  together with anticipated revenues from its operations,  should
be adequate to fund its operations for the twelve months  subsequent to December
31, 2004. However,  long-term liquidity is dependent on the Company's ability to
attain future profitable operations. Management may undertake additional debt or
equity  financings  to better  enable  the  Company  to grow and meet its future
operating and capital requirements.

            As of December 31, 2004,  we had no  outstanding  commitments  other
than  these  reflected  on  our  balance  sheet.  Management  was,  however,  in
discussions with various companies regarding acquisition transactions,  of which
SurgiCount  was one. As in our  acquisition  of  SurgiCount,  we intend to use a
combination of common stock and warrants to purchase common stock as the primary
means to acquire companies. Accordingly, the Company's need to raise significant
amounts of cash can be minimized,  provided the companies we acquire are willing
to accept non-cash forms of consideration.

            Cash and cash equivalents  increased by $622,179 to $846,404 for the
year ended  December 31,  2004,  compared to a decrease of $337,966 for the year
ended December 31, 2003.

            Operating  activities  used  $2,684,458  of cash for the year  ended
December 31, 2004,  compared to using $1,192,248 for the year ended December 31,
2003.


                                       47
<PAGE>

            Operating activities for the year ended December 31, 2004, exclusive
of changes in operating assets and liabilities,  used $2,939,254 of cash, as the
Company's  net decrease in net assets from  operations  of  $2,403,663  included
non-cash charges for  depreciation  and amortization of $863,  realized gains of
$1,591,156 and unrealized losses of $1,054,702.  For the year ended December 31,
2003,  operating  activities,  exclusive  of  changes  in  operating  assets and
liabilities,  used  $1,079,395  of cash,  as the  Company's  net decrease in net
assets from operations of $1,141,089  included non-cash charges for depreciation
and amortization of $16,972, realized gains of $430,883 and unrealized losses of
$475,605.

            Changes  in  operating  assets  and  liabilities  produced  cash  of
$254,796 for the year ended  December 31, 2004,  principally  due an increase in
the level of accounts payable and accrued expenses.  For the year ended December
31,  2003,  changes  in  operating  assets  and  liabilities  decreased  cash by
$112,853.

            The  principal  factor in the  $560,121  of cash  used in  investing
activities  in the year ended  December  31, 2004 was the sale of the  remaining
interest of the Company's  holding in Excelsior for $2,356,818,  the increase in
the amount due to the Company's  broker of $460,776,  offset by net purchases of
marketable  investment  securities of  $2,589,197,  and  investments in Franklin
Properties of $738,518. The principal factor in the $992,658 of cash provided by
investing  activities  in the year  ended  December  31,  2003 was the sale of a
portion of the Company's holdings in Excelsior for $1,000,900.

            Cash provided by financing  activities  for the year ended  December
31, 2004, of $3,866,758  resulted  primarily from the net proceeds from issuance
of common stock of  $3,924,786  and payment of  preferred  dividends of $76,650.
Cash used in financing  activities  for the year ended  December  31,  2003,  of
$138,376 resulted  primarily from the payment of preferred  dividends of $76,652
and the purchase of treasury  stock of $25,661.  Additionally,  during the years
ended December 31, 2004 and 2003 the note payable was offset by certain payments
made allowed for in the note payable.

            At December 31, 2004,  the Company had 10,950 shares of  convertible
preferred stock  outstanding.  The stock was issued at a price of $100 per share
and has a 7% quarterly  dividend.  The stock is convertible into Franklin common
stock at a conversion price of $13.33 per common share.

            On  November  3,  2004,  the  Company  entered  into a  Subscription
Agreement  and sold an  aggregate  of  405,625  shares of its  Common  Stock and
warrants to purchase an aggregate of up to 202,810 shares of its Common Stock in
a private placement transaction to certain accredited investors. Pursuant to the
terms of the Subscription Agreement, the Company held additional closings of the
private  placement on November 15, 2004,  December 2, 2004,  and on December 27,
2004, and sold an aggregate of 100,275 additional shares of its Common Stock and
warrants to purchase an  aggregate of up to 50,137  shares of its Common  Stock.
The Company received aggregate net proceeds from all the closings of $3,924,786.
The  Company is  required to file a  registration  statement  with the SEC on or
before  May 2,  2005,  which  is 180  days  after  closing  of  the  first  sale
transaction, registering the resale of the shares of our Common Stock (including
the shares of common stock  issuable upon exercise of the warrants)  sold in the
private  placement  transactions  on a  continuous  or delayed  basis  under the
Securities  Act of 1933. We are required to use our  reasonable  best efforts to
cause the  registration  statement to become  effective within 90 days after the
date we file  such  registration  statement  with the SEC.  If the  registration
statement  has not been filed on or prior to the 180th day after the  closing of
the sale  transaction,  we will pay liquidated  damages to the purchasers of the
505,900  shares of our Common Stock and the warrants to purchase  252,950 shares
of our Common Stock equal to 1.0% per month of the aggregate  gross  proceeds of
$4,047,200.  We  intend  to use the net  proceeds  from  the  private  placement
transaction  primarily for general corporate  purposes and in buying controlling
equity stakes in companies  and/or assets in the medical  products,  health care
solutions, financial services and real estate industries.


                                       48
<PAGE>

            The Company's financial condition is dependent on the success of its
investments. A summary of the Company's investment portfolio is as follows:

                                           DECEMBER 31, 2004   DECEMBER 31, 2003
                                           -----------------   -----------------

Investments, at cost                          $ 4,782,808         $ 1,949,703
Unrealized (depreciation) appreciation            (49,236)          1,005,466
                                              -----------         -----------
Investments, at fair value                    $ 4,733,572         $ 2,955,169
                                              ===========         ===========

INVESTMENTS

            The Company's financial condition is dependent on the success of its
investments.  The Company has  invested a  substantial  portion of its assets in
thinly  capitalized  companies  including one development stage company that may
lack management depth.

            REAL ESTATE INVESTMENTS

            At  December  31,   2004,   the  Company  had  several  real  estate
investments,  valued at $738,518,  which represents 10.7% of the Company's total
assets and 20.7% of its net assets. The Company holds its real estate through an
investment  in Franklin  Capital  Properties,  LLC  ("Franklin  Properties"),  a
Delaware  limited  liability  company and a wholly  owned  subsidiary.  Franklin
Properties'  primary  focus  is on the  acquisition  and  management  of  income
producing  real estate  holdings.  Franklin  Properties'  real  estate  holdings
consist of eight vacant single family buildings and two multi-unit  buildings in
Baltimore,  Maryland,  approximately  8.5  acres  of  undeveloped  land in Heber
Springs,  Arkansas,  and various loans secured by real estate in Heber  Springs,
Arkansas.  Franklin  Properties  intends  to  renovate  the  single  family  and
multi-unit buildings and engage in an active rental program.

            ALACRA CORPORATION

            At  December  31,  2004,  the Company  had an  investment  in Alacra
Corporation  ("Alacra"),  valued at $1,000,000,  which  represents  14.4% of the
Company's total assets and 28.0% of its net assets.  Alacra,  based in New York,
is a leading  global  provider of business  and  financial  information.  Alacra
provides a diverse portfolio of fast,  sophisticated  online services that allow
users to quickly find, analyze,  package and present  mission-critical  business
information.   Alacra's  customers  include  more  than  750  leading  financial
institutions,   management  consulting,  law  and  accounting  firms  and  other
corporations throughout the world.

            On April 20, 2000, the Company purchased  $1,000,000 worth of Alacra
Series  F  Convertible  Preferred  Stock.  Franklin  has the  right  to have the
preferred  stock  redeemed by Alacra for face value plus  accrued  dividends  on
December 31, 2006.  In  connection  with this  investment,  Franklin was granted
observer rights on Alacra board of directors meetings.

            EXCELSIOR RADIO NETWORKS, INC.

            During the year ended December 31, 2004, the Company  liquidated its
investment in Excelsior Radio Networks, Inc.  ("Excelsior").  Excelsior produces
and  syndicates  programs and services  heard on more than 2,000 radio  stations
nationwide  across most major formats.  Through its Dial  Communications  Global
Media sales subsidiary, Excelsior sells the advertising inventory radio stations
provide in exchange  for the  Excelsior  content.  The  programming  and content
includes prep services as well as long


                                       49
<PAGE>

form and short form programming.  Additionally, Dial Communications Global Media
has a number of independent  producer  clients,  which range from talk and music
programs to news and traffic services.

            Franklin has stock appreciation rights on various sales transactions
of Excelsior  common stock to Sunshine  Wireless,  LLC  ("SUNSHINE")  and Quince
Associates,  LP ("QUINCE").  In the event that Excelsior is sold Franklin may be
entitled to additional proceeds from these stock appreciation  rights.  Franklin
has stock  appreciation  rights on 193,000  common  shares  sold to  Sunshine on
August  12,  2003  such that in the event  that  Excelsior  is sold on or before
August 8, 2005 for gross  proceeds of no less than  $40,000,000,  then  Franklin
shall be entitled to receive  fifty  percent  (50%) of any net value above $1.30
per share not to exceed  proceeds to Franklin of $1.625 per share.  Franklin has
stock appreciation  rights on 433,804 shares of common stock sold to Sunshine on
October 8, 2003,  and on March 19, 2004,  such that if Excelsior is sold and the
purchaser of the common shares from Franklin receives more than $3.50 per share,
Franklin is entitled to receive 80% of the value  greater  than $3.50 per share.
Franklin  has stock  appreciation  rights on the 200,000  shares of common stock
sold on June 30, 2004,  on the 100,000  shares of common stock sold on September
24, 2004, and on the 550,000 shares of common stock sold on October 22, 2004, to
Quince.  In the event that the per share net proceeds  from any  liquidation  of
Excelsior  exceeds  $3.00 (or an amount equal to $3.00 plus $.050  multiplied by
the number of years,  up to five,  elapsed  since the closing date of the sale),
Franklin  will be entitled to receive  80% of the value  greater  than $3.00 (or
such other  applicable  amount) per share. The purchase price adjustment for the
sale  will  expire  as of a date 5 years  following  the  closing  of each  sale
transaction.

SURGICOUNT

            On February 25, 2005, the Company purchased  SurgiCount Medical Inc.
("SURGICOUNT"),  a privately held,  California-based developer of patient safety
devices. Under the terms of the agreement, the Company paid to Brian Stewart and
Dr. William  Stewart,  the holders of 100% of the  outstanding  capital stock of
SurgiCount (the "Shareholders"), consideration in the amount of $340,000 in cash
and 200,000 shares of Common Stock,  of which 10,000 shares of Common Stock will
be held in escrow until August 2005.  In  addition,  if certain  milestones  are
satisfied,  the Company will issue up to an  additional  33,334 shares of Common
Stock to the Shareholders.

            SurgiCount is the Company's  first major  acquisition in its plan to
become a  leader  in the  multi-billion  dollar  patient  safety  field  market.
Management  believes  that the  acquisition  is a  significant  milestone in the
Company's plan to shift its focus from radio and  telecommunications to products
and services  targeting health care and patient safety.  SurgiCount owns patents
issued in the United States and Europe  related to patient  safety,  among them,
the Safety-Sponge(TM) System, an innovation which management believes will allow
the  Company  to capture a  significant  portion  of what we  believe,  based on
industry sources,  to be approximately $650 million in annual U.S., European and
Japanese surgical sponge sales.

            The  Safety-Sponge(TM)  System  allows for faster and more  accurate
counting of surgical sponges. SurgiCount has obtained FDA 510k exempt status for
the  Safety-Sponge(TM)  line. The  Safety-Sponge(TM)  line of sponges has passed
required FDA  biocompatibility  tests including ISO sensitization,  cytotoxicity
and skin irritation  tests.  SurgiCount is now a wholly-owned  subsidiary of the
Company.

CHINA NURSE

            On  November  23,  2004,  the  Company   entered  into  a  strategic
relationship   with  China  Nurse  LLC   ("China   Nurse"),   an   international
nurse-recruiting  firm based in New York that focuses on recruiting and training
qualified  nurses from China and Taiwan for job  placement  with  hospitals  and
other health care  facilities  in the United  States.  In  connection  with this
strategic  relationship,  the Company has agreed to provide  referrals and other
assistance and has also made a small capital investment in that company.

DIGICORP

            On December  29,  2004,  the  Company  entered  into a Common  Stock
Purchase Agreement with certain  shareholders of DigiCorp (the "Agreement"),  to
purchase an aggregate  of 3,453,527  shares of DigiCorp  common  stock.  Of such
shares,  2,229,527  shares were  purchased  for $.135 per share on December  29,
2004,  100,787  shares were  purchased for $.145 on December 29, 2004.  Franklin
agreed to purchase an additional  1,224,000 shares of DigiCorp common stock from
the selling  shareholders  at such time as the shares are  registered for resale
with the SEC.  The  purchase  price for such shares is $.135 or $.145 per share,
depending on when the closing occurs.  Digicorp's  common stock is traded on the
OTC Bulletin Board.  In connection  with the Agreement,  Franklin is entitled to
designate  two members to the Board of Directors of Digicorp.  Franklin's  first
designee,  Melanie  Glazer,  was appointed on December 29, 2004.  The Company is
currently evaluating several strategic  alternatives for the use of the DigiCorp
entity, however, no definitive plan has been decided upon at this time.

OTHER INVESTMENTS

            On March 2, 2005, the Company made an investment in the common stock
of Administration for International Credit & Investments,  Inc. ("AICI"), valued
at $450,000. As part of its investment, the Company received 225,000 warrants to
purchase common stock at $1.50 per share and 225,000 warrants to purchase common
stock at $2.00 per share.  The  warrants  are  exercisable  for a period of five
years and are callable by AICI in certain instances. AICI operates an electronic
market  for   collecting,   detecting,   converting,   enhancing   and   routing
telecommunication   traffic  and  digital  content.   Members  of  the  exchange
anonymously  exchange  information  based on route  quality and price  through a
centralized,   web   accessible   database  and  then  route   traffic.   AICI's
fully-automatic,  highly scalable Voice over Internet  Protocol routing platform
updates  routes  based on  availability,  quality  and  price and  executes  the
capacity  request of the orders using  proprietary  software  and delivers  them
through  AICI's  system.  AICI invoices and processes  payments for its members'
transactions and offsets credit risk through its credit management programs with
third  parties.  AICI's name changed to Ipex,  Inc and began  trading on the OTC
Bulletin Board on March 29, 2005.

            On March 16,  2005,  Ault Glazer  filed a Schedule  13D with the SEC
relating  to its  holdings in Tuxis  Corporation  ("Tuxis").  Tuxis,  a Maryland
corporation,  currently  is  registered  under  the 1940  Act,  as a  closed-end
management investment company.  Tuxis previously received Board of Directors and
shareholder  approval to change the nature of its  business so as to cease to be
an investment  company and on May 3, 2004,  filed an application with the SEC to
de-register.  At March 16, 2005,  the Company  directly  held 36,000  shares and
indirectly,  by virtue of its relationship with Ault Glazer,  held 98,000 shares
of  Tuxis  common  stock,  which  represented  approximately  3.66%  and  9.96%,
respectively,  of the total outstanding  shares. At December 31, 2004, Tuxis had
reportable net assets of approximately $9.1 million.

RESULTS OF OPERATIONS

            The  principal  measure  of our  financial  performance  is the "Net
increase  (decrease)  in net assets from  operations"  which is the sum of three
elements.  The first element is "Net investment  income (loss) from operations,"
which is the difference  between the Company's income from interest,  dividends,
fees and other income (such as management fees), and its operating expenses, net
of applicable  income tax  provision.  The second  element is "Net realized gain
(loss)  on  portfolio  of  investments,"  which is the  difference  between  the
proceeds  received from  dispositions  of portfolio  securities and their stated
cost,  net of applicable  income tax  provision.  The third  element,  "Increase
(decrease) in unrealized  appreciation on investments," is the net change in the
fair value of the Company's investment portfolio, net of any increase (decrease)
in  deferred   income  taxes  that  would  become   payable  if  the  unrealized
appreciation  were  realized  through  the  sale  or  other  disposition  of the
investment portfolio.

            The Company  generally earns interest  income from loans,  preferred
stocks,  corporate  bonds and  other  fixed  income  securities.  The  amount of
interest  income varies based upon the average  balance of the  Company's  fixed
income portfolio and the average yield on this portfolio.

            INVESTMENT INCOME

            The Company had  interest  and  dividend  income of $11,056 in 2004,
$3,159 in 2003,  and $5,081 in 2002.  The Company  earned no management  fees in
2004 as opposed to management fees of $180,000 in 2003, and $450,000 in 2002.

            The decrease in  investment  income was  primarily  the result of no
management fees being received by us from Excelsior,  an affiliate,  because our
management agreement with Excelsior expired on December 31, 2003.

            The Company has relied and  continues to rely to a large extent upon
proceeds from sales of  investments  rather than  investment  income to defray a
significant  portion of its  operating  expenses.


                                       50
<PAGE>

Because such sales cannot be predicted with certainty,  the Company  attempts to
maintain  adequate  working capital to provide for fiscal periods when there are
no such sales.

            EXPENSES

            Operating expenses were $2,951,173 in 2004,  $1,279,526 in 2003, and
$1,985,450 in 2002. A majority of the Company's  operating  expenses  consist of
employee  compensation,  office  and rent  expense,  other  expenses  related to
identifying and reviewing investment opportunities and professional fees as well
as the accrual of an expense related to the severance  package of Mr. Brown, our
former Chairman and Chief Executive Officer.  During 2004, the Company accrued a
severance  expense of  $483,000 of which  $160,142  was  reflected  as a current
liability at December 31, 2004.  Included in  compensation  was a $40,000  bonus
paid to Stephen L. Brown.  Professional  fees were $1,252,979 higher in 2004 due
to legal and other costs incurred in connection  with the negotiation of the LOU
with Ault  Glazer  and the filing of proxy  statements  in  connection  with the
Special Meeting of the Stockholders of the Company held on October 22, 2004, and
the 2004 Annual Shareholder Meeting of the Company to be held on March 30, 2005.
The Company was reimbursed approximately $108,000 for salary and benefit expense
for its chief financial officer under the terms of the management agreement with
Excelsior.  This  reimbursement  has been  recorded as a reduction  in operating
expenses.

            NET INVESTMENT LOSS FROM OPERATIONS

            Net  investment  losses from  operations  were  $2,940,117  in 2004,
$1,096,367 in 2003, and $1,530,369 in 2002. The change in such amounts  reflects
the increase in operating  expenses  versus the  decrease in  investment  income
during such periods.

            NET REALIZED GAIN ON PORTFOLIO OF INVESTMENTS

            During the three years ended December 31, 2004,  2003, and 2002, the
Company realized net gains before taxes of $1,591,156,  $430,883,  and $237,658,
respectively, from the disposition of various investments.

            During 2004, the Company realized a gain of $1,448,014 from the sale
of 908,804  shares and warrants to purchase  87,111  shares of Excelsior  common
stock.  Additionally,  the Company realized a net gain of $143,142 from the sale
of marketable securities.

            During 2003,  Franklin  realized a gain of $432,900 from the sale of
568,000 shares of Excelsior  Radio Networks,  Inc.  common stock.  This gain was
offset by a loss of $2,017 from the sale of marketable securities.

            During 2002,  Franklin  realized a gain of $726,804 from the sale of
773,196 shares of Excelsior  Radio Networks,  Inc.  common stock.  This gain was
offset by a loss of $300,000 from the sale of 188,425  shares of Structured  Web
common stock, a previous  portfolio  holding of the Company,  a loss of $140,000
from the write  down of Excom  Ventures,  a  previous  portfolio  holding of the
Company which was determined to be a worthless security,  a loss of $32,715 from
the sale of 363,938 shares of Primal common stock a previous  portfolio  holding
of the  Company  as well as a  realized  net  loss of  $16,430  from the sale of
marketable securities.

            The Company has relied and  continues to rely to a large extent upon
proceeds from sales of  investments  rather than  investment  income to defray a
significant  portion of its  operating  expenses.  Because  such sales cannot be
predicted with  certainty,  the Company  attempts to maintain  adequate  working
capital to provide for fiscal periods when there are no such sales.


                                       51
<PAGE>

            UNREALIZED APPRECIATION OF INVESTMENTS

            Unrealized  appreciation  of  investments  decreased  by  $1,054,702
during the year ended  December 31, 2004,  primarily  due to the sale of 908,804
shares and warrants to purchase 87,111 shares of Excelsior common stock. When we
exit an investment  and realize a gain,  we make an accounting  entry to reverse
any  unrealized   appreciation  we  had  previously   recorded  to  reflect  the
appreciated value of the investment.

            Unrealized  appreciation  of  investments,  net of  deferred  taxes,
decreased by $475,605 during the year ended December 31, 2003,  primarily due to
the sale of a portion  of the  Company's  holdings  of  Excelsior  offset by the
increased valuation of Excelsior.

            Unrealized  appreciation  of  investments,  net of  deferred  taxes,
increased by $1,663,304  during the year ended December 31, 2002,  primarily due
to the increased valuation of Excelsior.

            TAXES

            Franklin  does not  qualify  for pass  through  tax  treatment  as a
Regulated  Investment  Company under  Subchapter M of the Internal  Revenue Code
(the "CODE") for income tax purposes. The Company is taxed under Subchapter C of
the Code and,  therefore,  it is subject to federal income tax on the portion of
its  taxable  income  and  net  capital  as well  as  such  distribution  to its
stockholders.

            We have a net operating  loss  carryforward  of  approximately  $8.6
million to offset future  taxable  income for federal  income tax purposes.  The
utilization of the loss carryforward to reduce any such future income taxes will
depend  on our  ability  to  generate  sufficient  taxable  income  prior to the
expiration of the net operating loss  carryforwards.  The  carryforward  expires
beginning on 2011.

            A change in the  ownership of a majority of the fair market value of
the Company's  common stock can delay or limit the  utilization  of existing net
operating loss carryforwards  pursuant to the Internal Revenue Code Section 382.
The Company  believes that such a change occurred during the year ended December
31, 2004.  Based upon a detail  analysis of purchase  transactions of our equity
securities,  the  Company  believes  that its net  operating  loss  carryforward
utilization is limited to approximately $755,000 per year.

CONTRACTUAL OBLIGATIONS

The  following  table  sets  forth  information   relating  to  our  contractual
obligations as of December 31, 2004:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                   CONTRACTUAL OBLIGATIONS                            PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------------------------------
                                                                   TOTAL           LESS THAN 1 YEAR
---------------------------------------------------------------------------------------------------
<S>                                                               <C>                  <C>
Accrued purchase price of investment in DigiCorp                  $165,240             $165,240
---------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------
                                                      TOTAL       $165,240             $165,240
---------------------------------------------------------------------------------------------------
</TABLE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            The Company's  business  activities  contain  elements of risk.  The
Company  considers  a  principal  type  of  market  risk to be  valuation  risk.
Investments  are  stated at "fair  value" as  defined in the 1940 Act


                                       52
<PAGE>

and in the applicable regulations of the Securities and Exchange Commission. All
assets  are  valued at fair  value as  determined  in good faith by the Board of
Directors.

            Neither the Company's  investments  nor an investment in the Company
is  intended  to  constitute  a balanced  investment  program.  The  Company has
exposure  to  public-market  price  fluctuations  to the extent of its  publicly
traded portfolio.

            The  Company  has  invested a  substantial  portion of its assets in
private development stage or start-up  companies.  These private businesses tend
to be thinly capitalized,  unproven,  small companies that lack management depth
and have not attained profitability or have no history of operations. Because of
the  speculative  nature and the lack of public  market  for these  investments,
there is  significantly  greater risk of loss than is the case with  traditional
investment  securities.  The Company  expects  that some of its venture  capital
investments  will be a complete loss or will be unprofitable  and that some will
appear to be likely to become successful but never realize their potential.

            Because there is typically no public market for the equity interests
of the small companies in which the Company invests, the valuation of the equity
interests in the Company's portfolio is subject to the estimate of the Company's
Board of  Directors.  In  making  its  determination,  the  Board  may  consider
valuation  information  provided by an independent  third party or the portfolio
company  itself.  In the absence of a readily  ascertainable  market value,  the
estimated  value of the  Company's  portfolio  of equity  interests  may  differ
significantly  from the values that would be placed on the  portfolio if a ready
market for the equity interests  existed.  Any changes in valuation are recorded
in  the  Company's  consolidated  statements  of  operations  as  "Net  increase
(decrease) in unrealized appreciation on investments."


                                       53
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          FRANKLIN CAPITAL CORPORATION

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

                                                                            PAGE
                                                                            ----

Report of Rothstein, Kass & Company, P.C..............................        55

Report of Ernst & Young LLP...........................................        56

Balance Sheets as of
         December 31, 2004 and 2003...................................        57

Statements of Operations for the years
         ended December 31, 2004, 2003 and 2002.......................        58

Statements of Cash Flows for the years
         ended December 31, 2004, 2003 and 2002.......................        59

Statements of Changes in Net Assets for the years
         ended December 31, 2004, 2003 and 2002.......................        60

Financial Highlights for the years ended December 31,
         2004, 2003, 2002, 2001 and 2000..............................        61

Portfolio of Investments as of
         December 31, 2004............................................        62

Notes to Financial Statements.........................................     63-74

The schedules for which  provision is made in the  applicable  regulation of the
Securities   and  Exchange   Commission  are  not  required  under  the  related
instruction or are inapplicable and, therefore, have been omitted


                                       54
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of
Franklin Capital Corporation

We have audited the accompanying  consolidated balance sheet of Franklin Capital
Corporation and Subsidiaries (the "Company") as of December 31, 2004,  including
the  consolidated  portfolio of  investments  as of December  31, 2004,  and the
related  consolidated  statements of  operations,  cash flows and changes in net
assets for the year ended  December 31, 2004,  and the financial  highlights for
the year ended December 31, 2004. These  consolidated  financial  statements and
financial  highlights are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and financial highlights based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  and  financial  highlights  are free of material  misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included  consideration of
internal  control  over  financial  reporting  as a basis  for  designing  audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the  effectiveness  of the Company's  internal  control
over  financial  reporting.  Accordingly,  we express no such opinion.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial statements and financial highlights,  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating  the overall  financial  statement  presentation.  Our  procedures
included   confirmation  of  securities  owned  as  of  December  31,  2004,  by
correspondence  with  the  custodian  and  brokers  or  by  physical  counts  of
securities.  We  believe  that our audit  provides  a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements and financial  highlights referred to
above present fairly, in all material  respects,  the financial  position of the
Company as of December 31,  2004,  and the results of its  operations,  its cash
flows and changes in its net assets for the year ended  December 31,  2004,  and
the  financial  highlights  for the year ended  December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.


                                             /s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 18, 2005


                                       55
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
Franklin Capital Corporation

We have audited the accompanying  balance sheet of Franklin Capital  Corporation
as of December 31, 2003,  including the portfolio of  investments as of December
31, 2003, and the related  statements of  operations,  cash flows and changes in
net assets for the two years in the period  ended  December  31,  2003,  and the
financial highlights for each of the four years in the period ended December 31,
2003. These financial statements and financial highlights are the responsibility
of the Corporation's management.  Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material  misstatement.  We were
not engaged to perform an audit of the Company's internal control over financial
reporting.  Our audit included  consideration of internal control over financial
reporting as a basis for designing audit  procedures that are appropriate in the
circumstances,  but  not  for  the  purpose  of  expressing  an  opinion  on the
effectiveness  of the  Company's  internal  control  over  financial  reporting.
Accordingly we express no such opinion. An audit also includes  examining,  on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements and financial highlights,  the confirmation of securities owned as of
December 31, 2003 by correspondence with the custodian, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement  presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion,  the financial  statements and financial  highlights referred to
above  present  fairly,  in all material  respects,  the  financial  position of
Franklin  Capital   Corporation  at  December  31,  2003,  the  results  of  its
operations, cash flows and changes in net assets for the two years in the period
ended December 31, 2003, and the financial highlights for each of the four years
in the period ended December 31, 2003, in conformity with accounting  principles
generally accepted in the United States.


/s/ ERNST & YOUNG LLP
New York, New York
March 5, 2004


                                       56
<PAGE>

                  FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

BALANCE SHEETS

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
December 31,                                                                       2004             2003
-----------------------------------------------------------------------------------------------------------
<S>                                                                           <C>              <C>
ASSETS

Marketable investment securities, at market value (cost: December 31,
    2004 - $4,058,383; December 31, 2003 - $40,899)                           $  4,020,154     $     33,899
Investments, at fair value (cost: December 31, 2004 - $1,788,518;
    December 31, 2003 - $1,908,804)
         Excelsior Radio Networks, Inc.                                                           1,921,270
         Other investments                                                       1,788,518        1,000,000
                                                                              ------------     ------------
                                                                                 1,788,518        2,921,270
                                                                              ------------     ------------

Cash and cash equivalents                                                          846,404          224,225
Other assets                                                                       279,167           78,638
                                                                              ------------     ------------

TOTAL ASSETS                                                                  $  6,934,243     $  3,258,032
                                                                              ============     ============

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

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Notes payable                                                                 $    892,530     $    915,754
Accounts payable and accrued liabilities                                           939,568          318,140
Marketable investments sold short, at market value (proceeds: December 31,
    2004 - $1,064,093; December 31, 2003 - $0)                                   1,075,100
Due to broker                                                                      460,776
                                                                              ------------     ------------

TOTAL LIABILITIES                                                                3,367,974        1,233,894
                                                                              ============     ============

STOCKHOLDERS' EQUITY

Convertible preferred stock, $1 par value, cumulative 7% dividend:
    10,000,000 shares authorized; 10,950 issued and outstanding
    at December 31, 2004 and 2003
    (Liquidation preference $1,095,000)                                             10,950           10,950
Common stock, $1 par value: 50,000,000 shares authorized;
    2,042,689 and 1,505,888 shares issued: 1,556,901 and 1,020,100 shares
    outstanding at December 31, 2004 and 2003, respectively                      2,042,689        1,505,888
Paid-in capital                                                                 13,925,253       10,439,610
Unrealized (depreciation) appreciation of investments                              (49,236)       1,005,466
Accumulated deficit                                                             (9,746,555)      (8,320,944)
                                                                              ------------     ------------

                                                                                 6,183,101        4,640,970
Deduct: 485,788 shares of common stock held in treasury,
    at cost, at December 31, 2004 and 2003, respectively                        (2,616,832)      (2,616,832)
                                                                              ------------     ------------

Net assets                                                                       3,566,269        2,024,138
                                                                              ------------     ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $  6,934,243     $  3,258,032
                                                                              ============     ============

-----------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       57
<PAGE>

                  FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,                                          2004            2003            2002
----------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>             <C>
INVESTMENT INCOME
    Interest on short term investments and money market accounts     $    11,056     $     3,159     $     5,081
    Income from affiliates                                                    --         180,000         450,000
                                                                     -----------     -----------     -----------

                                                                          11,056         183,159         455,081
                                                                     -----------     -----------     -----------

EXPENSES
    Salaries and employee benefits, net of reimbursements                494,167         548,269         862,970
    Officer's severance                                                  483,000              --              --
    Professional fees                                                  1,484,143         231,164         191,900
    Rent                                                                  76,276          71,942          98,982
    Insurance                                                             64,083          67,728          58,036
    Directors' fees                                                       10,550           9,158           2,003
    Taxes other than income taxes                                         50,697          29,708          39,709
    Newswire and promotion                                                 8,360              --           1,181
    Depreciation and amortization                                            863          16,972          16,969
    Interest expense                                                      32,284          42,903          35,401
    Expenses related to terminated merger                                     --          73,500         490,782
    General and administrative                                           246,750         188,182         187,517
                                                                     -----------     -----------     -----------

                                                                       2,951,173       1,279,526       1,985,450
                                                                     -----------     -----------     -----------

Net investment loss from operations                                   (2,940,117)     (1,096,367)     (1,530,369)

Net realized gain on portfolio of investments:
     Investment securities:
          Affiliated                                                   1,448,014         432,900         254,088
          Unaffiliated                                                   143,142          (2,017)        (16,430)
                                                                     -----------     -----------     -----------
Net realized gain on portfolio of investments                          1,591,156         430,883         237,658

Provision (benefit) for current income taxes                                  --              --             331
                                                                     -----------     -----------     -----------

Net realized loss                                                     (1,348,961)       (665,484)     (1,293,042)

(Decrease) increase in unrealized appreciation of investments
     Investment securities:
          Affiliated                                                  (1,012,466)       (479,392)      1,663,304
          Unaffiliated                                                   (42,236)          3,787              --
                                                                     -----------     -----------     -----------
(Decrease) increase in unrealized appreciation of investments,
 net of deferred income taxes                                         (1,054,702)       (475,605)      1,663,304
                                                                     -----------     -----------     -----------

Net (decrease) increase in net assets from operations                 (2,403,663)     (1,141,089)        370,262

Preferred dividends                                                       76,650          76,652         115,152
                                                                     -----------     -----------     -----------

Net (decrease) increase in net assets attributable
   to common stockholders                                            ($2,480,313)    ($1,217,741)    $   255,110
                                                                     ===========     ===========     ===========

Basic and diluted net (decrease) increase in net assets per share
  attributable to common stockholders                                ($     2.25)    ($     1.17)    $      0.24
                                                                     ===========     ===========     ===========

Weighted average number of common shares outstanding                   1,100,324       1,037,443       1,066,195
                                                                     ===========     ===========     ===========
----------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       58
<PAGE>

                      FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,                                                          2004             2003             2002
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>              <C>              <C>
Cash flows from operating activities:
  Net (decrease) increase in net assets from operations                             ($ 2,403,663)    ($ 1,141,089)    $    370,262
  Adjustments to reconcile net (decrease) increase in net assets from operations
    to net cash used in operating activities:
      Depreciation and amortization                                                          863           16,972           16,969
      Decrease (increase) in unrealized appreciation of investments                    1,054,702          475,605       (1,663,304)
      Net realized gain on portfolio of investments                                   (1,591,156)        (430,883)        (237,327)
      Changes in operating assets and liabilities:
        (Increase) in other assets                                                      (201,392)         (18,013)          (4,300)
        Increase (Decrease) in accounts payable and accrued liabilities                  456,188          (94,840)         235,529
                                                                                    ------------     ------------     ------------

          Total adjustments                                                             (280,795)         (51,159)      (1,652,433)
                                                                                    ------------     ------------     ------------

          Net cash used in operating activities                                       (2,684,458)      (1,192,248)      (1,282,171)
                                                                                    ------------     ------------     ------------

Cash flows from investing activities:
  Proceeds from sale of majority-owned affiliate                                              --               --        1,500,000
  Increase in due to broker                                                              460,776
  Proceeds from sale of affiliate                                                      2,356,818        1,000,900           78,715
  Proceeds from sale of marketable investment securities                              57,805,768           28,924            6,554
  Loan payments received from majority-owned affiliate                                        --               --           75,000
  Purchases of other investments                                                        (788,518)              --               --
  Purchases of marketable investment securities                                      (60,394,965)         (37,166)         (22,985)
                                                                                    ------------     ------------     ------------

          Net cash (used in) provided by investing activities                           (560,121)         992,658        1,637,284
                                                                                    ------------     ------------     ------------

Cash flows from financing activities:
  Proceeds from issuance of common stock, net of offering costs                        3,924,786               --               --
  Proceeds from exercise of stock options                                                 39,375               --               --
  Payments of preferred dividends                                                        (76,650)         (76,652)        (115,152)
  Decrease in note payable                                                               (23,224)         (36,063)         (48,183)
  Proceeds from conversion right                                                              --               --          300,000
  Redemption of preferred stock                                                               --               --         (137,500)
  Proceeds related to 16B filing                                                           2,471               --               --
  Purchases of treasury stock                                                                 --          (25,661)         (71,815)
                                                                                    ------------     ------------     ------------

          Net cash provided by (used in) financing activities                          3,866,758         (138,376)         (72,650)
                                                                                    ------------     ------------     ------------

Net (decrease) increase in cash and cash equivalents                                     622,179         (337,966)         282,463

Cash and cash equivalents at beginning of year                                           224,225          562,191          279,728
                                                                                    ------------     ------------     ------------

Cash and cash equivalents at end of year                                            $    846,404     $    224,225     $    562,191
                                                                                    ============     ============     ============

Supplemental disclosures of cash flow information:
Cash paid during the year for interest                                              $      2,452
   Issuance of common stock for purchase of investment                              $     55,812
   Accrued purchase price of investment                                             $    165,240

----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       59
<PAGE>

               FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
For the Year Ended December 31,                                         2004            2003            2002
---------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>             <C>
Decrease in net assets from operations:
   Net investment loss                                              ($2,940,117)    ($1,096,367)    ($1,530,369)
   Net realized gain on portfolio of investments                      1,591,156         430,883         237,327
   (Decrease) increase in unrealized appreciation of investments     (1,054,702)       (475,605)      1,663,304
                                                                    -----------     -----------     -----------

       Net (decrease) increase in net assets from operations         (2,403,663)     (1,141,089)        370,262

Capital stock transactions:
   Dividends on preferred stock                                         (76,650)        (76,652)       (115,152)
   Cash proceeds from issuance of common stock, net                   3,924,786              --              --
   Cash proceeds from exercise of stock options                          39,375              --              --
   Cash proceeds related to 16B filing                                    2,471              --              --
   Issuance of common stock for purchase of investments                  55,812              --              --
   Proceeds for conversion right                                             --              --         300,000
   Redemption of preferred stock                                             --              --        (137,500)
   Purchase of treasury stock                                                --         (25,661)        (71,815)
                                                                    -----------     -----------     -----------

       Total (decrease) increase in net assets                        1,542,131      (1,243,402)        345,795
                                                                    -----------     -----------     -----------

Net assets at beginning of year                                       2,024,138       3,267,540       2,921,745
                                                                    -----------     -----------     -----------

Net assets at end of year                                           $ 3,566,269     $ 2,024,138     $ 3,267,540
                                                                    ===========     ===========     ===========

---------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       60
<PAGE>

            FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,                                 2004(1)       2003(1)        2002(1)        2001(1)        2000(1)
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>            <C>            <C>            <C>
PER SHARE OPERATING PERFORMANCE (2):
Net asset value attributable to common stockholders,
     beginning of year                                          $0.91         $2.07          $1.19          $3.58          $7.70
                                                                -----         -----          -----          -----          -----

      Net investment loss                                        (2.67)        (1.06)         (1.44)         (1.28)         (2.07)
      Net (loss) gain on portfolio of
        investments (realized and unrealized) after taxes        0.49          (0.04)         1.78           (0.95)         (1.98)
                                                                -----         -----          -----          -----          -----

Total from investment operations                                 (2.18)        (1.10)         0.34           (2.23)         (4.05)
                                                                -----         -----          -----          -----          -----

Capital stock transactions                                       2.87          (0.06)         0.54           (0.16)         (0.07)
                                                                -----         -----          -----          -----          -----

Net asset value attributable to common stockholders,
     end of year                                                $1.59         $0.91          $2.07          $1.19          $3.58
                                                                =====         =====          =====          =====          =====

Market value per share, end of year                            $12.73         $1.06          $1.62          $4.18          $8.00
                                                               ======         =====          =====          =====          =====

TOTAL INVESTMENT RETURN:
Based on market value per share (%)                           1,100.94        (38.37)        (58.85)        (47.75)         17.13

RATIOS TO AVERAGE NET ASSETS:
Expenses (%)                                                    105.58         48.36          56.61          37.67          25.99
Net investment loss from operations (%)                        (105.18)       (41.44)        (43.64)        (33.08)        (24.73)

RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000 omitted)                       $3,566        $2,024         $3,268         $2,922         $5,579
Portfolio turnover rate (%)                                      2,179            26             37             89             24

----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) - Includes liquidation preference of preferred stockholders.

(2) - Calculated based on weighted average number of shares  outstanding  during
      the period.

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


                                       61
<PAGE>

                  FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES

PORTFOLIO OF INVESTMENTS

MARKETABLE INVESTMENT SECURITIES

<TABLE>
<CAPTION>
                                                                                               NUMBER OF
                                                                                               SHARES OR                    MARKET
                                                                                               PRINCIPAL                    VALUE
DECEMBER 31, 2004 (2)                                                                          AMOUNT ($)    COST(1)       (NOTE 2)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>         <C>           <C>
DigiCorp                                                                                       3,846,027   $  532,435    $  532,435
Dreamworks Animation SKG, Inc.                                                                     5,000      197,950       187,550
Google, Inc.                                                                                       2,500      495,404       481,975
Law Enforcements Associates Corp.                                                                 22,000      124,650       113,300
NASDAQ 100 Trust Series I Put, Exp. 1/21/2005, Strike $38.00                                         200        8,400         2,500
Palmone, Inc.                                                                                      8,000      254,878       252,400
Thermogenesis Corp.                                                                                5,000       32,266        31,700
Tuxis Corp.                                                                                       35,000      248,232       257,250
US Treasury - 2.875%, due 11/30/06                                                               500,000      498,672       498,516
US Treasury - 3.000%, due 11/15/07                                                             1,000,000      996,875       994,063
US Treasury - 3.500%, due 12/15/09                                                               500,000      497,734       497,578
Federal Home Loan Mtg. Corp., due 01/19/2035                                                   1,000,000      144,638       144,638
Certificate of Deposit - 0.7%, due 01/31/2005                                                                  26,249        26,249
                                                                                                           ==========    ==========

                                                                                                            4,058,383     4,020,154

Diamonds Trust Series 1, sold short                                                              (10,000)  (1,064,093)   (1,075,100)
                                                                                                           ----------    ----------
     Total Marketable Investment Securities (62.2% of total investments and
       82.6% of net assets)                                                                                $2,994,290    $2,945,054
                                                                                                           ==========    ==========
</TABLE>

INVESTMENTS, AT FAIR VALUE

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                 NUMBER OF
                                                                                                 SHARES OR               DIRECTORS'
                                                                                        EQUITY   PRINCIPAL                VALUATION
DECEMBER 31, 2004 (2)                                               INVESTMENT         INTEREST  AMOUNT ($)    COST(1)    (NOTE 2)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                           <C>        <C>       <C>          <C>
OTHER INVESTMENTS

Alacra Corporation (21.1% of total investments and 28.0%
    of net assets) (Internet-based information provider)  Convertible Preferred Stock     1.58%    321,543   1,000,000    1,000,000


China Nurse, LLC (1.1% of total investments and 1.4% of
    net assets) (Healthcare Services)                             LLC Interest            5.00%     50,000      50,000       50,000

Real Estate (7.7% of total investments and 10.2% of net
    assets) (Real estate development)                                 Owned             100.00%                363,053      363,053

Real Estate (7.9% of total investments and 10.5% of net
    assets) (Real estate development)                                  Loan                        375,465     375,465      375,465
                                                                                                            ----------   ----------
     Investments, at Fair Value (37.8% of total
       investments  and 50.1% of net assets)                                                                $1,788,518   $1,788,518
                                                                                                            ==========   ==========

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Book cost equals tax cost for all investments
(2)   Total investments refers to investments and marketable investment
      securities.

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


                                       62
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

1. DESCRIPTION OF BUSINESS

Franklin  Capital  Corporation  ("Franklin",  or the  "Company")  is a  Delaware
corporation that elected to be a Business  Development Company ("BDC") under the
Investment  Company Act of 1940 (the "1940 Act"). A BDC is a specialized type of
investment  company  under  the Act.  A BDC  must be  primarily  engaged  in the
business of  furnishing  capital and making  available  managerial  expertise to
companies  that  do not  have  ready  access  to  capital  through  conventional
financial channels.  Such companies are termed "eligible  portfolio  companies".
The Company, as a BDC, generally may invest in other securities;  however,  such
investments may not exceed 30% of the Company's total asset value at the time of
any such investment.

On June 23, 2004, the Company entered into a Letter of Understanding (the "LOU")
with Ault Glazer & Company Investment  Management LLC ("Ault Glazer").  This LOU
sets forth the understandings and agreements of the Company and Ault Glazer with
respect to the initial steps in the execution of a strategic  restructuring  and
recapitalization  plan for the Company (the "Restructuring  Plan"), as described
more  fully  in  Item 7  (Management's  discussion  and  Analysis  of  Financial
Condition and Results of  Operations)  of this Annual  Report on Form 10-K.  The
Restructuring  Plan was intended to maximize  stockholder  value through,  among
other things, (i) a shift in Franklin's  investment strategy away from the radio
and  telecommunications  industry toward a focus on the medical  products/health
care solutions and the financial  services  industries,  (ii) the liquidation of
Franklin's  investments  (including  Excelsior Radio Networks,  Inc.), (iii) the
raising of new  capital to fund new  investments  and (iv) the  election  of new
directors   and  officers   with   experience   and  expertise  in  the  medical
products/health care solutions and the financial services industries.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements for 2004 include the accounts
of Franklin and its wholly-owned subsidiary,  Franklin Capital Properties,  LLC.
While these financial statements have been consolidated, the financial position,
results of operations,  and cash flows do not represent  those of a single legal
entity.  All  significant  intercompany  transactions  have been  eliminated  in
consolidation.

USE OF ESTIMATES

The  financial  statements  have been  prepared in  accordance  with  accounting
principles generally accepted in the United States ("GAAP").  The preparation of
financial  statements  in  conformity  with  GAAP  requires  management  to make
estimates  and  assumptions  that affect the amounts  reported in the  financial
statements and  accompanying  notes.  These  estimates are based on knowledge of
current events and anticipated future events and accordingly, actual results may
differ from those estimates.

CASH AND CASH EQUIVALENTS

Franklin considers only highly liquid investments such as money market funds and
commercial  paper  with  maturities  of 90 days or  less  at the  date of  their
acquisition as cash and cash equivalents.

At  December  31,  2004 and 2003,  the  Company  held cash and cash  equivalents
primarily in money market funds at two commercial banking institutions,  and two
broker/dealers.


                                       63
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In the normal  course of business,  all of the Company's  marketable  securities
transactions,  money  balances  and security  positions  are  transacted  with a
broker.  The  Company is subject  to credit  risk to the extent any broker  with
which it conducts business is unable to fulfill  contractual  obligations on its
behalf. Management monitors the financial condition of such brokers and does not
anticipate any losses from these counterparties.

OFF-BALANCE SHEET RISK

The Company is subject to certain  inherent  risks  arising  from its  investing
activities  of selling  securities  short.  The ultimate  cost to the Company to
acquire these  securities may exceed the liability  reflected in these financial
statements.

VALUATION OF INVESTMENTS

Security  investments which are publicly traded on a national exchange or Nasdaq
Stock Market are stated at the last reported sales price on the day of valuation
or, if no sale was reported on that date,  then the securities are stated at the
last  quoted  bid price.  The Board of  Directors  of  Franklin  (the  "Board of
Directors") may determine, if appropriate,  to discount the value where there is
an impediment to the marketability of the securities held.

Investments for which there is no ready market are initially valued at cost and,
thereafter,  at fair value  based upon the  financial  condition  and  operating
results of the issuer and other pertinent factors as determined in good faith by
the Board of Directors.  The financial condition and operating results have been
derived  utilizing  both audited and  unaudited  data. In the absence of a ready
market for an  investment,  numerous  assumptions  are inherent in the valuation
process.  Some or all of these  assumptions may not  materialize.  Unanticipated
events and  circumstances  may occur subsequent to the date of the valuation and
values may change due to future events. Therefore, the actual amounts eventually
realized  from  each  investment  may vary  from the  valuations  shown  and the
differences  may be  material.  Franklin  reports  the  unrealized  gain or loss
resulting from such valuation in the Statements of Operations.

GAINS (LOSSES) ON PORTFOLIO OF INVESTMENTS

Amounts  reported as realized  gains  (losses)  are  measured by the  difference
between the  proceeds of sale or exchange  and the cost basis of the  investment
without regard to unrealized gains (losses) reported in the prior periods. Gains
(losses) are considered  realized when sales or  dissolution of investments  are
consummated.

INCOME TAXES

Franklin  does not  qualify  for  pass  through  tax  treatment  as a  Regulated
Investment  Company under Subchapter M of the Internal Revenue Code (the "Code")
for income tax purposes.  Therefore,  the Company is taxed under Subchapter C of
the Code.

Franklin accounts for income taxes in accordance with the provision of Statement
of  Financial  Accounting  Standards  ("SFAS") No. 109,  "ACCOUNTING  FOR INCOME
TAXES".  The  significant  components of deferred tax assets and liabilities are
principally  related to the Company's net operating  loss  carryforward  and its
unrealized appreciation of investments.

STOCK-BASED COMPENSATION

The Company has elected to follow the  recognition  and  measurement  principles
(the intrinsic-value  method) prescribed in Accounting  Principles Board ("APB")
Opinion No. 25,  "ACCOUNTING  FOR STOCK ISSUED TO EMPLOYEES," to account for its
Non-Qualified  Stock Option Plan under which no compensation  cost is recognized
because the option  exercise  price is equal to at least the market price of the
underlying stock on the date of grant.


                                       64
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In December 2002,  Statement of Financial  Accounting  Standards (SFAS) No. 148,
"ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE" was issued.
SFAS No. 148 provides alternative methods of transition to the fair value method
of accounting for equity-based employee compensation. It also amends and expands
the  disclosure  provisions  of SFAS No. 123 and APB  Opinion  No. 28,  "INTERIM
FINANCIAL  REPORTING,"  to require  disclosure  in the  summary  of  significant
accounting policies of the effects on an entity's accounting policy with respect
to  equity-based  employee  compensation on reported net income and earnings per
share in annual and interim  financial  statements.  While SFAS No. 148 does not
require  companies to account for employee  equity  options using the fair-value
method,  the  disclosure  provisions  of  SFAS  No.  148 are  applicable  to all
companies with equity-based  employee  compensation,  regardless of whether they
account for that compensation using the fair-value method of SFAS No. 123 or the
intrinsic-value  method of APB  Opinion  No. 25. The  Company  has  adopted  the
disclosure requirements of SFAS No. 148.

In December 2004,  SFAS No. 123(R),  "SHARE-BASED  PAYMENT," which addresses the
accounting  for employee  stock  options,  was issued.  SFAS 123(R)  revises the
disclosure provisions of SFAS 123, "ACCOUNTING FOR STOCK BASED COMPENSATION" and
supercedes APB Opinion No. 25,  "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." SFAS
123(R)  requires that the cost of all employee stock  options,  as well as other
equity-based compensation arrangements, be reflected in the financial statements
based on the estimated fair value of the awards. This statement is effective for
the Company as of the beginning of the first interim or annual  reporting period
that begins after June 15, 2005. The Company has not elected to early  implement
SFAS 123(R) for the year ended December 31, 2004.

The  following  table  illustrates  the  effect  on net  income  and net  income
attributable  to common  shareholders  if the fair value  based  method had been
applied to all awards.

<TABLE>
<CAPTION>
                                                 DECEMBER 31, 2004   DECEMBER 31, 2003   DECEMBER 31, 2002
                                                 -----------------   -----------------   -----------------
<S>                                                 <C>                <C>                  <C>
Net (decrease) increase in net assets
  attributable to common stockholders:
As reported                                         $(2,480,313)       $  (1,217,741)       $   255,110

Deduct:
Total stock-based employee compensation
  expense determined under fair value
  based method for all awards, net of related
  tax effect                                              5,094                   --              4,734
                                                    -----------        -------------        -----------
Pro forma                                           $(2,485,407)       $  (1,217,741)       $   250,376

Basic and diluted net (decrease) increase
   in net assets attributable to common
   stockholders:
As reported                                         $     (2.25)       $       (1.17)       $      0.24
Pro forma                                           $     (2.26)       $       (1.17)       $      0.23
</TABLE>

DEPRECIATION AND AMORTIZATION

Property and equipment are stated at cost.  Depreciation  is recorded  using the
straight-line  method  at  rates  based  upon  estimated  useful  lives  for the
respective assets.  Leasehold  Improvements are included in other assets and are
amortized over their useful lives or the remaining life of the lease,  whichever
is shorter.

NET INCREASE (DECREASE) IN NET ASSETS PER COMMON SHARE

Net increase  (decrease) in net assets  attributable to common  stockholders per
common share is calculated in  accordance  with the  provisions of SFAS No. 128,
"Earnings per Share".


                                       65
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. INCOME TAXES

For the years ended December 31, 2004, 2003 and 2002, Franklin's tax (provision)
benefit was based on the following:

<TABLE>
<CAPTION>
                                                                2004            2003            2002
                                                            -----------     -----------     -----------
<S>                                                         <C>             <C>             <C>
Net investment loss from operations                         $(2,940,117)    $(1,096,367)    $(1,530,369)
Net realized gain on portfolio of investments                 1,591,156         430,883         237,657
(Decrease) increase in unrealized appreciation               (1,054,702)       (475,605)      1,663,304
                                                            -----------     -----------     -----------
     Pre-tax book (loss) income                             $(2,403,663)    $(1,141,089)    $   370,592
                                                            ===========     ===========     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                2004            2003            2002
                                                            -----------     -----------     -----------
<S>                                                         <C>             <C>             <C>
Federal tax benefit (provision) at 34% on $(2,403,663),
     $(1,141,089), and $370,592, respectively               $   817,000     $   388,000     $  (126,000)
State and local, net of Federal benefit                          48,000          22,500              --
Other                                                             6,000          (5,500)        (22,000)
Change in valuation allowance                                  (871,000)       (405,000)        148,000
                                                            -----------     -----------     -----------
                                                           $         --     $        --     $        --
                                                           ============     ===========     ===========
</TABLE>

The components of the tax benefit are as follows:

<TABLE>
<CAPTION>
                                                                   2004            2003            2002
                                                            -----------     -----------     -----------
<S>                                                         <C>             <C>             <C>
Current state and local tax benefit                         $        --     $        --     $        --
                                                            ===========     ===========     ===========
</TABLE>

Deferred  income tax  benefit  (provision)  reflects  the  impact of  "temporary
differences"  between amounts of assets and liabilities for financial  reporting
purposes and such amounts as measured by tax laws.

A  change  in the  ownership  of a  majority  of the  fair  market  value of the
Company's  common  stock can  delay or limit the  utilization  of  existing  net
operating loss carryforwards  pursuant to the Internal Revenue Code Section 382.
The Company  believes that such a change occurred during the year ended December
31, 2004.  Based upon a detail  analysis of purchase  transactions of our equity
securities,  the  Company  believes  that its net  operating  loss  carryforward
utilization is limited to approximately $755,000 per year.

At December 31, 2004 and 2003,  significant  deferred tax assets and liabilities
consist of:

<TABLE>
<CAPTION>
                                                                     ASSET (LIABILITY)
                                                                ----------------------------
                                                                December 31,    December 31,
                                                                    2004            2003
                                                                ------------    ------------
<S>                                                             <C>             <C>
Deferred Federal and state benefit from net operating
  loss carryforward ........................................    $ 3,081,000     $ 2,605,000
Deferred Federal and state (provision) benefit on unrealized
  (appreciation) depreciation of investments ...............         18,000        (377,000)
Valuation allowance ........................................     (3,099,000)     (2,228,000)
                                                                -----------     -----------
  Deferred taxes ...........................................    $        --     $        --
                                                                ===========     ===========
</TABLE>

At December 31, 2004,  Franklin had net operating loss  carryforwards for income
tax purposes of approximately $8,559,000 that will begin to expire in 2011. At a
36%  effective  tax rate the  after-tax  net  benefit  from this  loss  would be
approximately $3,081,000.


                                       66
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. STOCKHOLDERS' EQUITY

The  accumulated  deficit at December  31,  2004,  consists of  accumulated  net
realized gains of $7,115,000 and accumulated investment losses of $16,862,000.

The convertible  preferred  stock has a cumulative 7% quarterly  dividend and is
convertible  into the number of shares of common  stock by dividing the purchase
price  for the  convertible  preferred  stock by  conversion  price  in  effect,
currently $13.33. The convertible  preferred stock has antidilution  provisions,
which can change the conversion price in certain circumstances. In the event the
Company  subdivides its outstanding shares of common stock into a greater number
of shares  of common  stock the  conversion  price in effect  would be  reduced,
thereby  increasing  the  total  number  of  shares  of  common  stock  that the
convertible  preferred  stock is  convertible  into. The holder has the right to
convert the shares of convertible preferred stock at any time until February 22,
2010 into  common  stock.  Upon  liquidation,  dissolution  or winding up of the
Company,  the  stockholders of the  convertible  preferred stock are entitled to
receive   $100  per  share  plus  any  accrued  and  unpaid   dividends   before
distributions to any holder of the Company's common stock.

On December 31, 2002, the Company redeemed from certain  preferred  stockholders
5,500 shares of convertible preferred stock for $25.00 per share.

The Board of Directors has authorized  Franklin to repurchase up to an aggregate
of 575,000  shares of its common stock in open market  purchases on the American
Stock  Exchange when such purchases are deemed to be in the best interest of the
Company  and  its  stockholders.  As of  December  31,  2003,  the  Company  had
repurchased  536,950  shares of its common  stock of which  485,788  remained in
treasury. No shares were purchased during the year ended December 31, 2004.

On November 3, 2004, Franklin entered into a Subscription Agreement with several
accredited  investors  (the  "Investors"),  relating to the issuance and sale by
Franklin of shares of its common stock (the  "Shares")  and  five-year  warrants
(the "Warrants") to purchase additional shares of its common stock (the "Warrant
Shares")  in  one  or  more  closings  of  a  private  placement  (the  "Private
Placement"). Pursuant to the Subscription Agreement, Franklin may issue and sell
to  accredited  investors an  aggregate  of up to 625,000  Shares at a price per
Share of $8.00. Each investor that purchases Shares pursuant to the Subscription
Agreement  will also receive a Warrant to purchase that number of Warrant Shares
equal to 50% of the number of Shares  purchased by that  investor at an exercise
price per Warrant Share equal to 110% of the closing price of Franklin's  common
stock on the date of the issuance and sale of the Shares to such investor.  Each
Warrant  further  specifies  that  Franklin  may require  the holder  thereof to
exercise the Warrant in accordance  with its terms in the event that the average
closing price of Franklin's  common stock during any period of five  consecutive
trading days exceeds 200% of the Warrant's exercise price per share. Pursuant to
the  Subscription  Agreement,  Franklin has agreed to register for resale all of
the Shares and Warrant Shares  issuable upon exercise of the Warrants issued and
sold to investors in connection with the Private  Placement.  Securities  issued
under the terms of the  Subscription  Agreement  were made in reliance  upon the
exemption  provided in Section 4(2) of the Securities Act and the safe harbor of
Rule 506 under  Regulation D promulgated  under the  Securities  Act of 1933, as
amended (the "Securities Act").

During the period November 3, 2004,  through December 21, 2004,  Franklin held a
series of four  closings  of the  Private  Placement.  In  conjunction  with the
closings  Franklin  issued and sold to the  Investors  an  aggregate  of 505,900
Shares and  Warrants to purchase an aggregate  of up to 252,950  Warrant  Shares
pursuant to the terms of the Subscription  Agreement.  At December 31, 2004, the
Warrants weighted average exercise price was $11.58 with a weighted average life
of 4.8 years.  These issuances resulted in aggregate net proceeds to Franklin of
$3,924,786.  The Company is required to file a  registration  statement with the
SEC on or before May 2, 2005,  which is 180 days  after  initial  closing of the
sale  transaction,  registering  the resale of the  shares of our  common  stock
(including the shares of common stock issuable upon exercise of the warrants) on
a continuous or delayed basis under the  Securities  Act of 1933. The Company is
required to use its reasonable best efforts to cause the registration  statement
to  become  effective  within 90 days  after the date we file such  registration
statement with the SEC. If the registration statement


                                       67
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

does not become effective when required, the Company will pay liquidated damages
to the purchasers equal to 1.0% of the purchase price.

5. COMMITMENTS AND CONTINGENCIES

Rent  expense  for the  years  ended  December  31,  2004,  2003 and  2002,  was
approximately $76,000, $72,000, and $99,000,  respectively.  For the years ended
December  31,  2004,  2003 and 2002,  the  Company  collected  rents of $30,000,
$37,500, and $59,000, respectively, from subtenants under month-to-month leases,
for a portion of its  existing  office space that is reflected as a reduction in
rent expense for that period.

On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family  Partnership,  L.P.
filed a lawsuit against Franklin, Sunshine Wireless, LLC ("Sunshine"),  and four
other defendants  affiliated with Winstar  Communications,  Inc. On February 25,
2003, the case against Franklin and Sunshine was dismissed,  however, on October
19, 2004,  Jeffrey A. Leve and Jeffrey Leve Family  Partnership,  L.P. exercised
their right to appeal.  The initial lawsuit alleged that the Winstar  defendants
conspired to commit fraud and breached their fiduciary duty to the plaintiffs in
connection  with  the  acquisition  of  the  plaintiff's  radio  production  and
distribution  business. The complaint further alleges that Franklin and Sunshine
joined the alleged conspiracy. The plaintiffs seek recovery of damages in excess
of $10,000,000,  costs and attorneys' fees. An unfavorable outcome in an appeal,
together with an unfavorable  outcome in the lawsuit may have a material adverse
effect on Franklin's  business,  financial  condition and results of operations.
The  Company  believes  the lawsuit is without  merit and intends to  vigorously
defend itself. These financial statements do not include any adjustments for the
possible outcome of this uncertainty.

6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

On May 17, 2004, as a result of the  acquisition by Ault Glazer of more than 30%
of the  outstanding  shares of the common  stock of  Franklin  without the prior
approval of the Board, Mr. Stephen Brown,  Chairman and Chief Executive  Officer
of Franklin became  entitled,  if his employment with Franklin were to terminate
within one year  thereafter,  to receive  certain  severance  payments under the
terms of his  employment  agreement and severance  compensation  agreement  with
Franklin.  In connection  with the  Restructuring  Plan Franklin  entered into a
Termination  Agreement (the "Termination  Agreement") which replaces Mr. Brown's
employment  agreement and  severance  compensation  agreement  and provides,  as
amended, Mr. Brown with a severance payment of $250,000. Franklin also agreed to
continue to provide coverage to Mr. Brown and his wife under its medical, dental
and vision plans for a period of three years  following the date of termination.
The total cost of the medical  coverage  for Mr. Brown and his wife is estimated
to be  approximately  $11,000 per year. Mr. Brown also entered into a consulting
agreement  with  Franklin,  whereby,  Franklin  would pay Mr. Brown an aggregate
amount of $200,000 payable over eight months. During the quarter ended September
30,  2004,  the  Company  recorded  the charge to  operations  of  approximately
$483,000 under the Termination Agreement.

Accounts  payable  and  accrued  liabilities  at  December  31, 2004 and 2003 is
comprised of the following:

                                                    December 31,    December 31,
                                                       2004             2003
                                                    ------------    ------------
Professional Fees - legal                            $351,867        $ 92,470
Accrued purchase price on investment                  165,240              --
Officer's severance                                   160,142              --
Accrued interest                                      112,432          82,650
Professional fees - other                              52,950         102,000
Accrued - other                                        96,937          41,020
                                                     --------        --------
                                                     $939,568        $318,140
                                                     ========        ========


                                       68
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INVESTMENTS

ALACRA CORPORATION

At  December  31,  2004,  the Company  had an  investment  in shares of Series F
convertible preferred stock of Alacra Corporation,  valued at $1,000,000,  which
represented  14.4% of the  Company's  total  assets and 28.0% of its net assets.
Franklin has the right to have the Series F convertible preferred stock redeemed
by Alacra for face value plus accrued  dividends  on December 31, 2006.  Alacra,
based in New York, is a global  provider of business and financial  information.
Alacra provides a diverse portfolio of fast,  sophisticated online services that
allow users to quickly  find,  analyze,  package  and  present  mission-critical
business  information.  Alacra's  customers  include  more  than  750  financial
institutions,   management  consulting,  law  and  accounting  firms  and  other
corporations throughout the world.

DIGICORP.

At December  31,  2004,  the Company  held  3,846,027  shares of common stock of
DigiCorp valued at cost, or  approximately  $0.14 per share.  Digicorp's  common
stock is traded on the OTC Bulletin  Board,  which reported a closing price,  at
December 31, 2004, of $0.35.  Based upon the illiquid  nature of the  investment
and the short  period of time the  investment  has been held,  the  Company  has
elected to value the  investment  at its cost basis of  approximately  $0.14 per
share.  This represents a 60% discount to the December 31, 2004 closing price of
$0.35.

EXCELSIOR RADIO NETWORKS, INC.

During the year ended December 31, 2004,  the Company  liquidated its investment
in  Excelsior  Radio  Networks,  Inc.  ("Excelsior").   Excelsior  produces  and
syndicates  programs  and  services  heard on more  than  2,000  radio  stations
nationwide  across most major formats.  Through its Dial  Communications  Global
Media sales subsidiary, Excelsior sells the advertising inventory radio stations
provide in exchange  for the  Excelsior  content.  The  programming  and content
includes  prep  services  as well as  long  form  and  short  form  programming.
Additionally,  Dial  Communications  Global  Media has a number  of  independent
producer  clients,  which range from talk and music programs to news and traffic
services.

Franklin along with Sunshine initially  purchased  Excelsior on August 28, 2001.
As part of the purchase price Franklin  issued a $1,000,000  note. This note was
due February 28, 2002 with interest at 3.54% but has a right of set-off  against
certain  representations and warranties made by Winstar Radio Networks, Inc. The
due date of the note has been extended  indefinitely  until the action described
in Note 5 is settled.

On October 3, 2002,  Franklin sold 773,196 common shares for $1.94 per share for
$1,500,000 realizing a gain of $726,804. On January 31, 2003, Franklin purchased
and  subsequently  on May 29, 2003,  Franklin  cancelled  the purchase of 33,750
common  shares for $1.625 per share and  65,199  warrants  to acquire  shares of
Excelsior  common  stock at an exercise  price of $1.125 per share for $0.50 per
warrant.  On August 12, 2003,  Franklin sold 193,000 common shares for $1.30 per
share for $250,900 realizing a gain of $57,900.  Franklin has stock appreciation
rights on these  common  shares such that in the event  Excelsior  is sold on or
before  August 8,  2005 for gross  proceeds  of no less than  $40,000,000,  then
Franklin shall be entitled to receive fifty percent (50%) of any net value above
$1.30 per share not to exceed  proceeds  to  Franklin  of $1.625 per  share.  On
October 8, 2003, Franklin sold to Sunshine 375,000 shares of the common stock of
Excelsior  for an  aggregate  purchase  price of  $750,000,  realizing a gain of
$375,000,  pursuant to a stock purchase agreement between Sunshine and Franklin.
On March 19, 2004 Franklin sold an additional  58,804 shares of the common stock
of Excelsior to Sunshine for an aggregate purchase price of $117,608,  $2.00 per
common share.  Franklin has stock appreciation  rights on the common shares sold
to Sunshine on October 8, 2003 and March 19,  2004,  such that if  Excelsior  is
sold and the  purchaser of the common  shares from  Franklin  receives more than
$3.50 per share,  Franklin is entitled to receive 80% of the value  greater than
$3.50 per share.

On June 30, 2004,  Franklin  sold 200,000  common  shares of Excelsior to Quince
Associates,  LP ("Quince") for an aggregate purchase price of $500,000, or $2.50
per common share. On July 5, 2004, Franklin entered into an


                                       69
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

agreement with Quince to sell Franklin's  remaining  interest in Excelsior.  The
transactions   contemplated  by  this  agreement  were  subject  to  shareholder
approval.  On October 22, 2004,  Franklin's  shareholders  approved the sale and
Franklin agreed to sell its remaining  550,000 shares of Excelsior  common stock
at $2.50 per share and  warrants  exercisable  for  74,232  shares of  Excelsior
common  stock at an exercise  price of $1.20 per share for $1.30 per warrant and
warrants  exercisable for 12,879 shares of Excelsior common stock at an exercise
price of $1.125 per share for $1.375 per warrant. On September 24, 2004, 100,000
shares of common stock of Excelsior were sold for an aggregate purchase price of
$250,000 as an advance to the final sale. On October 22, 2004, Franklin sold its
remaining  interest in Excelsior to Quince for an  aggregate  purchase  price of
$1,489,210.  Cumulative realized gains on the sale of Excelsior common stock and
warrants to purchase Excelsior common stock to Quince amounted to $1,389,210.

The purchase price in connection with the June 30, 2004,  September 24, 2004 and
October 22, 2004 sales of the Company's  equity interests in Excelsior to Quince
is subject to a potential  adjustment  whereby,  in the event that the per share
net proceeds from any liquidation of Excelsior exceeds $3.00 (or an amount equal
to $3.00 plus $.050 multiplied by the number of years, up to five, elapsed since
the closing date of the sale),  Franklin  will be entitled to receive 80% of the
value  greater  than  $3.00 (or such other  applicable  amount)  per share.  The
purchase  price  adjustment  for  the  sale  will  expire  as of a date 5  years
following the closing of each sale transaction.

INVESTMENTS IN REAL ESTATE

At December 31, 2004, the Company had several real estate investments, valued at
$738,518,  which represents 10.0% of the Company's total assets and 18.3% of its
net assets.  These  investments  are reflected in the Portfolio of Investments -
Investments,  at Fair Value.  The Company holds its real estate  investments  in
Franklin Capital  Properties,  LLC ("Franklin  Properties"),  a Delaware limited
liability company and a wholly-owned  subsidiary.  Franklin  Properties  primary
focus is on the  acquisition  and  management  of income  producing  real estate
holdings.  Franklin  Properties'  real estate  holdings  consist of eight vacant
single family  buildings and two  multi-unit  buildings in Baltimore,  Maryland,
approximately  8.5 acres of  undeveloped  land in Heber Springs,  Arkansas,  and
various  loans  secured  by real  estate in Heber  Springs,  Arkansas.  Franklin
Properties  intends to renovate the single family and  multi-unit  buildings and
engage in an active rental program.

8. STOCK OPTION PLANS

On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock  Incentive  Plan  ("SIP")  to be  offered  to the  Company's  consultants,
officers and employees (including any officer or employee who is also a director
of the Company) and a  Non-Statutory  Stock Option Plan ("SOP") to be offered to
the  Company's  "outside"  directors,  (i.e.,  those  directors who are not also
officers or employees of Franklin). 112,500 shares of the Company's Common Stock
have been reserved for issuance  under these plans,  of which 67,500 shares have
been  reserved  for the SIP and 45,000  shares have been  reserved  for the SOP.
Shares  subject to options that  terminate  or expire prior to exercise  will be
available for future grants under the Plans.  Because the issuance of options to
"outside" directors is not permitted under the Act without an exemptive order by
the  Securities and Exchange  Commission,  the issuance of options under the SOP
was  conditioned  upon the granting of such order.  The order was granted by the
Commission on January 18, 2000.

The  following  is a summary of the status of the Stock  Option Plans during the
years ended:

<TABLE>
<CAPTION>
                                           DECEMBER 31, 2004          DECEMBER 31, 2003           DECEMBER 31, 2002
                                           -----------------          -----------------           -----------------
                                                      WEIGHTED                    WEIGHTED                    WEIGHTED
                                                      AVERAGE                     AVERAGE                     AVERAGE
                                                      EXERCISE                    EXERCISE                    EXERCISE
                                         SHARES        PRICE         SHARES        PRICE         SHARES        PRICE
                                         ------       -------        ------       -------        ------       -------
<S>                                      <C>          <C>            <C>          <C>            <C>          <C>
Outstanding at beginning of year         20,625       $ 11.39        20,625       $ 11.39        39,375       $ 11.27
Granted                                  26,250       $  1.50            --            --            --            --
Exercised                                26,250       $  1.50            --            --            --            --
Forfeited                                18,750       $ 11.13            --            --        18,750       $ 11.13
Expired                                      --            --            --            --            --            --
                                         ------                      ------                      ------
Outstanding at end of year                1,875       $ 14.00        20,625       $ 11.39        20,625       $ 11.39
                                         ======                      ======                      ======
Exercisable at end of year                1,875       $ 14.00        20,625       $ 11.39        20,625       $ 11.39
                                         ======                      ======                      ======
</TABLE>


                                       70
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The options issued under the SIP have a remaining contractual life of 0.1 years.

9. NET (DECREASE) INCREASE IN NET ASSETS PER COMMON SHARE

The following  table sets forth the  computation  of basic and diluted change in
net assets per common share:

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                     -----------------------------------------------
                                                         2004              2003              2002
                                                     -----------       -----------       -----------
<S>                                                  <C>               <C>               <C>
Numerator:
         Net (decrease) increase in net
            assets from operations                   $(2,403,663)      $(1,141,089)      $   370,262
         Preferred stock dividends                       (76,650)          (76,652)         (115,152)
                                                     -----------       -----------       -----------
         Numerator for basic and diluted
            earnings per share - net (decrease)
            increase in net assets attributable
            to common stockholders                   $(2,480,313)      $(1,217,741)      $   255,110
                                                     ===========       ===========       ===========

Denominator:
         Denominator for basic and diluted
            (decrease) increase in net assets
            from operations - weighted -
            average shares                             1,100,324         1,037,443         1,066,195
                                                     ===========       ===========       ===========

Basic and diluted net (decrease) increase in
         net assets from operations per share        $     (2.25)      $     (1.17)      $      0.24
                                                     ===========       ===========       ===========
</TABLE>

Common shares which would be issued upon exercise of warrants have been included
in the dilutive per share computation.  Common shares which would be issued upon
conversion  of the  Company's  preferred  stock or exercise of options have been
excluded from the dilutive per share  computation as they are antidilutive  (see
Notes 4 and 8):

                                                       YEAR ENDED DECEMBER 31,
                                                    ----------------------------
                                                     2004       2003       2002
                                                    ----------------------------
Preferred stock convertible into common stock       82,125     82,125    123,375
Stock options                                        1,875     20,625     20,625

10. NET ASSET VALUE PER SHARE

The  following  table sets forth the  computation  of net asset value per common
share attributable to common stockholders:


                                       71
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,      DECEMBER 31,
                                                                            ------------------------------
                                                                                2004              2003
                                                                            ------------------------------
<S>                                                                         <C>               <C>
Numerator:
         Numerator for net asset value per
           common share, as if converted basis                              $ 3,566,269       $ 2,024,138
         Liquidation value of convertible preferred
           stock                                                             (1,095,000)       (1,095,000)
                                                                            -----------       -----------
         Numerator for net asset value per share
           attributable to common stockholders                              $ 2,471,269       $   929,138
                                                                            ===========       ===========

Denominator:
         Number of common shares outstanding,
           denominator for net asset value per share
           attributable to common stockholders                                1,556,901         1,020,100
         Number of shares of common stock to be
           issued upon conversion of preferred stock                             82,125            82,125
                                                                            -----------       -----------
         Denominator for net asset value per common
           share as if converted basis                                        1,639,026         1,102,225
                                                                            ===========       ===========

         Net asset value per share attributable to common stockholders      $      1.59       $      0.91
                                                                            ===========       ===========

         Net asset value per common share, as if converted basis            $      2.18       $      1.84
                                                                            ===========       ===========
</TABLE>

11. PURCHASES AND SALES OF INVESTMENT SECURITIES

The  cost of  purchases  and  proceeds  from  sales  of  investment  securities,
excluding  short-term  investments,   aggregated  $61,404,535  and  $60,162,586,
respectively,  for the year ended  December  31, 2004;  $37,166 and  $1,021,398,
respectively,  for the year ended December 31, 2003; and $22,985 and $1,660,269,
respectively, for the year ended December 31, 2002.

12. SELECTED QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                2004
                                                                                ----
                                                  QUARTER 1         QUARTER 2         QUARTER 3         QUARTER 4
                                                  ---------------------------------------------------------------
<S>                                              <C>               <C>               <C>               <C>
Total investment income                          $       165       $        50       $       155       $    10,686
Net investment loss from operations                 (292,683)         (396,647)       (1,296,010)         (954,777)
Net (decrease) increase in net assets
  attributable to common stockholders               (159,610)           15,577        (1,315,172)       (1,021,108)
Basic and diluted earnings per common share            (0.16)             0.02             (1.26)            (0.85)

<CAPTION>
                                                                                2003
                                                                                ----
                                                  QUARTER 1         QUARTER 2         QUARTER 3         QUARTER 4
                                                  ---------------------------------------------------------------
<S>                                              <C>               <C>               <C>               <C>
Total investment income                          $    45,678       $    45,080       $    45,090       $    47,311
Net investment loss from operations                 (273,727)         (277,926)         (271,683)         (273,031)
Net (decrease) increase in net assets
  attributable to common stockholders               (245,347)         (821,688)          145,013          (295,719)
Basic and diluted earnings per common share            (0.23)            (0.79)             0.14             (0.29)
</TABLE>

13. RELATED PARTY TRANSACTIONS

In conjunction  with the  Restructuring  Plan, the Company's  headquarters  were
relocated from New York, New York to Santa Monica, California. Office facilities
are  currently  being  provided to the Company at no cost by Ault  Glazer.  Ault
Glazer is a private  investment  management  firm that manages an estimated  $20
million in individual client accounts and private  investment funds. Ault Glazer
has been given discretionary authority to buy, sell, and vote


                                       72
<PAGE>

FRANKLIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

securities  on behalf of each of those  client  accounts  and  funds.  Together,
Milton "Todd" Ault III  ("Ault"),  Chairman and Chief  Executive  Officer of the
Company,  and Louis Glazer, Chief Health and Science Officer of Franklin Medical
Products,  LLC (a  wholly-owned  subsidiary of Franklin) and Class I Director of
the Company, and Melanie Glazer, Manager of Franklin Properties,  (together, the
"Glazers") own approximately 99% of the outstanding membership interests in Ault
Glazer.  As of December 31, 2004, Ault Glazer,  Ault and the Glazers  indirectly
beneficially own or control  approximately 25.5% of the outstanding common stock
of the Company  and  beneficially  own  approximately  98.2% of the  outstanding
preferred stock of the Company.

At December 31, 2004,  the Company had an amount due from Strome  Securities  of
$65,735 recorded in other assets. Until December 31, 2004, Ault was a registered
representative of Strome Securities.

14. SUBSEQUENT EVENTS

On February 25, 2005, the Company acquired all of the outstanding  securities of
Surgicount Medical, Inc. in exchange for approximately $340,000 in cash payments
and 200,000 shares of Franklin common stock valued at  approximately  $3,695,600
and  incurred   approximately  $60,000  of  direct  costs  associated  with  the
transaction.  The value  assigned to the stock portion of the purchase  price is
$18.48 per share based on the average  closing price of Franklin's  common stock
for the five days beginning two days prior to and ending two days after February
4, 2005,  the date of the Agreement and Plan of Merger and  Reorganization  (the
"Merger").  In addition, in the event that prior to the fifth anniversary of the
closing  of the  Merger the  cumulative  gross  revenues  of  SurgiCount  exceed
$500,000  the  Company is  obligated  to issue an  additional  16,667  shares of
Franklin common stock to certain SurgiCount shareholders.  Should the cumulative
gross  revenues  exceed  $1,000,000  during the five-year  period the additional
shares would be increased by 16,667,  for a total of 33,334  additional  shares.
Such amount is not included in the aggregate purchase price and will be recorded
when and if issued.

On March 2, 2005,  the Company filed a proxy  statement  with the Securities and
Exchange  Commission (the "SEC") relating to its 2004 annual stockholder meeting
to be held on  March  30,  2005.  One of the  proposals  included  in the  proxy
statement,  which was unanimously  approved by the Company's Board of Directors,
seeks stockholder approval to withdraw the Company's election to be regulated as
a business development company under the 1940 Act. If approved the Company shall
be  required  to  present  its  financial  statements  in  accordance  with  the
provisions of the  Securities  Exchange Act of 1934,  as amended.  The pro forma
unaudited  balance sheet  presented  below gives effect to the withdrawal of the
Company's election to be regulated as a business  development  company.  The pro
forma unaudited  balance sheet assumes the withdrawal had occurred as of January
1, 2003. The pro forma unaudited  balance sheet includes the historical  amounts
of the Company  adjusted to reflect the effects of the  Company's  withdrawal of
its election to be regulated as a business  development  company.  The pro forma
information  should  be  read  in  conjunction  with  the  historical  financial
statements of the Company.


                                       73
<PAGE>

             FRANKLIN CAPITAL CORPORATION AND SUBSIDIARIES PRO FORMA
                        UNAUDITED PRO FORMA BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,                                                                      2004             2003
----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>              <C>
ASSETS

Cash and cash equivalents                                                    $    846,404     $    224,225
Trading assets                                                                  4,020,154        1,955,169
Other current assets                                                              255,510           58,432
                                                                             ------------     ------------
TOTAL CURRENT ASSETS                                                            5,122,068        2,237,826

Property, plant and equipment, net                                                 23,657           20,206
Other long-term investments                                                     1,788,518        1,000,000
                                                                             ------------     ------------

TOTAL ASSETS                                                                 $  6,934,243     $  3,258,032
                                                                             ============     ============

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

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Notes payable                                                                $    892,530     $    915,754
Accounts payable and accrued liabilities                                          939,568          318,140
Trading assets sold short                                                       1,075,100                `
Due to broker                                                                     460,776                `

TOTAL CURRENT LIABILITIES                                                       3,367,974        1,233,894
                                                                             ------------     ------------

STOCKHOLDERS' EQUITY

Convertible preferred stock, $1 par value, cumulative 7% dividend:
    10,000,000 shares authorized; 10,950 issued and outstanding
    at December 31, 2004 and 2003

    (Liquidation preference $1,095,000)                                            10,950           10,950
Common stock, $1 par value: 50,000,000 shares authorized;
    2,042,689 and 1,505,888 shares issued: 1,556,901 and 1,020,100 shares
    outstanding at December 31, 2004 and 2003, respectively                     2,042,689        1,505,888
Paid-in capital                                                                13,925,253       10,439,610
Accumulated deficit                                                            (9,795,791)      (7,315,478)
                                                                             ------------     ------------

                                                                                6,183,101        4,640,970
Deduct: 485,788 shares of common stock held in treasury
    at cost, at December 31, 2004 and 2003, respectively                       (2,616,832)      (2,616,832)
                                                                             ------------     ------------

Total stockholders' equity                                                      3,566,269        2,024,138
                                                                             ------------     ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $  6,934,243     $  3,258,032
                                                                             ============     ============
</TABLE>

On  March 2,  2005,  the  Company  made an  investment  in the  common  stock of
Administration for International Credit & Investments,  Inc. ("AICI"), valued at
$440,000,  which represented 6.3% of the Company's total assets and 12.3% of its
net assets at December  31, 2004.  Additionally,  the Company  received  225,000
warrants to  purchase  common  stock at $1.50 per share and 225,000  warrants to
purchase  common stock at $2.00 per share.  The warrants are  exercisable  for a
period  of five  years  and are  callable  by AICI in  certain  instances.  AICI
operates an electronic market for collecting,  detecting,  converting, enhancing
and  routing  telecommunication  traffic  and  digital  content.  Members of the
exchange  anonymously  exchange  information  based on route  quality  and price
through a centralized,  web accessible  database and then route traffic.  AICI's
fully-automatic,  highly scalable Voice over Internet  Protocol routing platform
updates  routes  based on  availability,  quality  and  price and  executes  the
capacity  request of the orders using  proprietary  software  and delivers  them
through  AICI's  system.  AICI invoices and processes  payments for its members'
transactions and offsets credit risk through its credit management programs with
third  parties.  AICI's name changed to Ipex,  Inc. and began trading on the OTC
Bulletin Board on March 29, 2005.

On March 16, 2005, Ault Glazer filed a Schedule 13D with the SEC relating to its
holdings  in  Tuxis  Corporation  ("Tuxis").   Tuxis,  a  Maryland  corporation,
currently is registered under the 1940 Act as a closed-end management investment
company.  Tuxis previously received Board of Directors and shareholder  approval
to change the nature of its business so as to cease to be an investment  company
and on May 3, 2004, filed an application  with the SEC to de-register.  At March
16, 2005, the Company  directly held 36,000 shares and indirectly,  by virtue of
its  relationship  with Ault Glazer,  held 98,000  shares of Tuxis common stock,
which  represented  approximately  3.66% and 9.96%,  respectively,  of the total
outstanding  shares.  At December 31, 2004,  Tuxis had  reportable net assets of
approximately $9.1 million.


                                       74
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

            On July 6, 2004, Ernst & Young, LLP ("E&Y") indicated to the Company
that, due to economic reasons, E&Y would not stand for re-election as Franklin's
independent accountants for the year ended December 31, 2004 and that the client
auditor  relationship  between the Company and E&Y will cease upon the filing of
the Company's  quarterly report on Form 10-Q for the quarterly period ended June
30, 2004. As such, there was a change in accountants.  However,  the decision to
change  accountants  was not presented to,  recommended or approved by the Audit
Committee or the Board.  Further,  during Franklin's fiscal years ended December
31, 2002 and 2003, and the interim periods preceding the date hereof, there were
no disagreements  with E&Y on any matter of accounting  principles or practices,
financial  statement   disclosure,   or  auditing  scope  or  procedure,   which
disagreements, if not resolved to the satisfaction of E&Y, would have caused E&Y
to make reference to the subject matter of the  disagreements in connection with
its report.

            As a  result  of the  resignation  of E&Y,  the  Company,  upon  the
approval and  recommendation  of the Audit Committee  (which consisted solely of
directors who are not "interested  persons" of the Company),  engaged  Rothstein
Kass on October 28, 2004 to serve as the Company's  independent  accountants for
the fiscal year ending December 31, 2004.  Prior to this  engagement,  Rothstein
Kass had not performed  any services on behalf of the Company or been  consulted
in respect of the Company  during the  Company's two most recent fiscal years or
any  subsequent  interim  period.  Rothstein  Kass has advised the Company  that
neither  the firm nor any present  member or  associate  of it has any  material
financial interest, direct or indirect, in the Company or its subsidiaries.

ITEM 9A. CONTROLS AND PROCEDURES.

            The Corporation's  chief executive officer and the person performing
the functions as chief financial officer have evaluated the effectiveness of the
Company's  disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities  Exchange Act of 1934 (the "Exchange Act")) as of
a date  (the  "Evaluation  Date")  within  90 days  as of the end of the  period
covered  by  this  annual  report  (the  "Evaluation  Period").  Based  on  such
evaluation,  they have concluded that, as of the Evaluation  Date, the Company's
disclosure   controls  and   procedures  are  effective  in  ensuring  that  the
information required to be disclosed by the Company in the reports that it files
or  submits  under the  Exchange  Act is  recorded,  processed,  summarized  and
reported,  within  the time  periods  specified  in the  rules  and forms of the
Securities and Exchange Commission.

            There  were  no  changes  in the  Company's  internal  control  over
financial reporting that have materially  affected,  or are reasonably likely to
materially  affect,  the Company's  internal  control over  financial  reporting
during the period covered by this annual report.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

            Pursuant  to the  Company's  Amended  and  Restated  Certificate  of
Incorporation  and its ByLaws,  the number of directors  constituting  the Board
shall be fixed  from  time to time by  resolution  passed by a  majority  of the
Board.  The  number  of  directors  on the  Board  is  currently  fixed at five.
Directors  are  elected by class for a  staggered  term of three  years for each
class,  with the term of office of one class of  directors  expiring  each year.
Directors  serve until their  successors are elected and  qualified.  No current
disagreement  exists  between the Company and any of the current  members of the
Board regarding the operations, policies or practices of the Company.

            The current  directors  of the  company  are as  follows:  Brigadier
General (Ret.) Lytle Brown III (Class I Director (Served since 2004) - nominated
for  re-election  to the Board for a three-year  term  expiring in 2007);  Alice
Campbell  (Class II  Director  (Served  since  2004) -  term expiring  in 2005);
Herbert  Langsam  (Class II Director - (Served  since 2004) -  term  expiring in
2005);  Milton  "Todd" Ault III (Class III Director  (Served  since 2004) - term
expiring in 2006);  and Louis  Glazer,  M.D.,  Ph.G (Class III Director  (Served
since 2004) - term expiring in 2006).

            All of the Company's directors are independent with the exception of
Milton "Todd" Ault III and Louis Glazer, M.D., Ph.G.

COMMON STOCK DIRECTORS

            MILTON "TODD" AULT III, age 35, is the Chairman and Chief  Executive
Officer of the Company  and has served as a director  of the Company  since June
23, 2004. He is the co-founder, in 1998, the controlling and managing member and
chief investment  officer of Ault Glazer, a private  investment  management firm
headquartered in Santa Monica, California that manages approximately $20 million
in individual client accounts and private investment funds. Mr. Ault also serves
on the board of directors of Definitely for Kids, a  philanthropic  organization
devoted to assisting  hearing-impaired  children. Prior to founding Ault Glazer,
Mr. Ault served as a portfolio  manager  and  regional  institutional  financial
advisor


                                       75
<PAGE>

for  Prudential   Securities.   Mr.  Ault  has  also  previously  served  as  an
institutional  account  executive for Dean Witter  Reynolds.  Until December 31,
2004, Mr. Ault was a registered representative of Strome.

            ALICE  M.  CAMPBELL,  (1),  (2) age 55,  has  served  as a Class  II
Director of the Company since  October 22, 2004.  Ms.  Campbell  also  currently
serves  as  an  investigator  and  consultant,   specializing  in  research  and
litigation services,  financial investigations and computer forensics, for major
companies  and law  firms  throughout  the  United  States.  Ms.  Campbell  is a
certified fraud specialist,  as well as a certified  instructor for the Regional
Training  Center of the United States  Internal  Revenue Service (the "IRS") and
for the  National  Business  Institute.  Previously,  Ms.  Campbell  served as a
special  agent for the United  States  Treasury  Department  where she conducted
criminal  investigations  and worked  closely with the United States  Attorney's
Office and with several federal  agencies,  including the IRS, Federal Bureau of
Investigation,   Secret  Service,   Customs  Service,  State  Department,   Drug
Enforcement  Agency,  Bureau of Alcohol,  Tobacco and Firearms  and U.S.  Postal
Service.  Ms. Campbell  received her B.A. from the University of North Carolina,
Chapel Hill and has attended various  specialized schools dealing with financial
matters.

            BRIGADIER  GENERAL  (RET.)  LYTLE  BROWN III,  (1),  (2) age 72, has
served as a Class I Director of the Company  since  October 22, 2004.  Mr. Brown
also  currently  serves as a senior tax  professional  with H&R Block  Inc.,  in
Nashville,  Tennessee.  Mr. Brown also owns and manages Marmatic Enterprises,  a
private company in Nashville,  Tennessee that manages and invests in residential
real estate principally in Tennessee and Florida.  Mr. Brown is a former partner
and executive vice president of Hart Freeland Roberts,  Inc., one of the largest
architectural engineering firms in Tennessee. Mr. Brown previously served as the
head of the United  States  Army Corps of  Engineers  from 1984 to 1988,  during
which time he acted as commander of all  engineering  in  Tennessee,  as well as
engineering  units in Louisiana and Mississippi.  Mr. Brown received his B.S. in
engineering from Vanderbilt University and his J.D. from the Nashville School of
Law.

PREFERRED STOCK DIRECTORS

            LOUIS GLAZER,  M.D.,  PH.G., age 73, is the Chief Health and Science
Officer of Franklin  Medical  Products,  LLC (a  wholly-owned  subsidiary of the
Company) and has served as a Class III Director of the Company since October 22,
2004.  Dr. Glazer also  currently  serves as a member of Ault Glazer's  advisory
board and as an independent  biotechnology and medical  consultant.  Until 2002,
Dr. Glazer  served as the chief  anesthesiologist  and medical  director for the
Vitreo-Retinal  Clinic in Memphis,  Tennessee.  Prior to that, Dr. Glazer taught
obstetrics   anesthesia  at  the  University  of  Tennessee,   while  practicing
anesthesiology  at  Baptist  East  Hospital,  Methodist  Hospital,  St.  Francis
Hospital and Baptist  Memorial  Hospital in Memphis,  Tennessee.  Dr. Glazer was
also  responsible  for  establishing  anesthesia  programs  at Baptist  Memorial
Hospital and Methodist Hospital South in Memphis, Tennessee. Dr. Glazer received
his B.S. in pharmacy  from the  University  of  Oklahoma  and his M.D.  from the
University of Bologna School of Medicine in Italy.

            HERBERT LANGSAM,  (1), (2) age 73, has served as a Class II Director
of the Company  since October 22, 2004.  Mr.  Langsam also  currently  serves as
president of Medicare  Recoveries,  Inc., a private  company located in Oklahoma
City,  Oklahoma focused on providing Medicare claims and recovery services.  Mr.
Langsam  serves as a member of the board of trustees for the Geriatric  Research
Drug Therapy Institute and as an adjunct professor at the University of Oklahoma
Pharmacy School.  Previously,  Mr. Langsam was the founder,  president and chief
executive  officer of Langsam Health  Services,  a  conglomerate  of health care
companies that serviced 17,000  long-term care  residents,  that was acquired by
Omnicare,  Inc.  in 1991.  Mr.  Langsam  also  served as the vice  president  of
pharmacy services for Omnicare, Inc. following its acquisition of Langsam Health
Services.  Mr.  Langsam  received his B.S. in pharmacy  from the  University  of
Oklahoma.

1 - Member of Compensation Committee, 2 - Member of Audit Committee


                                       76
<PAGE>

                   EXECUTIVE OFFICERS AS OF FEBRUARY 28, 2005

The executive officers of the Company and its subsidiaries are as follows:

<TABLE>
<CAPTION>
                                                                                                               SERVED AS AN
                                                                                                                 OFFICER
NAME AND AGE                                                       OFFICE                                         SINCE
---------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                                                                           <C>
Milton "Todd" Ault III (35)          Chief Executive Officer                                                       2004
Lynne Silverstein (34)               President and Secretary                                                       2004
Louis Glazer, M.D., Ph.G. (73)       Chief Health and Science Officer of Franklin Medical Products, LLC            2005
Melanie Glazer (63)                  Manager of Franklin Capital Properties, LLC                                   2005
</TABLE>

            Certain  family  relationships  exist  among  the  directors  and/or
executive officers of the Company. Specifically,  Silverstein, the President and
Secretary of the Company, is the step-daughter of Louis Glazer.  Louis Glazer is
the Chief  Health and  Science  Officer of  Franklin  Medical  Products,  LLC (a
wholly-owned subsidiary of the Company) and a Class III Director of the Company.

EXECUTIVE OFFICERS

            MILTON "TODD" AULT III,  Chairman and Chief Executive  Officer.  For
additional  information about Mr. Ault,  please see the Directors'  biographical
information section above.

            LYNNE  SILVERSTEIN,  age 34, is the  President  and Secretary of the
Company. She has been Chief Executive Officer of Ault Glazer since October 2003.
Prior thereto,  she was Director of Operations since January 2001, having joined
Ault Glazer in January 1999 as a Manager. From February 1996 to October 1998 she
was employed by STV  Communications,  a media content and preview kiosk company,
serving as Marketing Director since February 1998. Ms. Silverstein  received her
B.S. in Communications from the University of Miami.

            LOUIS  GLAZER,  M.D.,  PH.G.,  Chief  Health and Science  Officer of
Franklin  Medical  Products,  LLC (a wholly-owned  subsidiary of Franklin).  For
additional information about Dr. Glazer, please see the Directors'  biographical
information section above.

            MELANIE  GLAZER,  age 63,  is as the  Manager  of  Franklin  Capital
Properties,  LLC (a wholly-owned subsidiary of Franklin). Mrs. Glazer co-founded
Ault Glazer in 1998 and serves as a Banking/ Special  Situations  Analyst.  Mrs.
Glazer began her career in banking in 1976 as Officer of United  American  Bank,
responsible for business development, government relations and public relations.
From 1978 to 1985 she was Vice President of Investors Savings & Loan Association
in Nashville,  Tennessee,  where she managed a branch office and was responsible
for business development, advertising for all offices, public relations, and was
in charge of the savings incentive program. Mrs. Glazer joined Dobson & Johnson,
Inc.  in  1986,  where  she was a Real  Estate  Broker.  In  1989,  Mrs.  Glazer
established  her  own  Realty  company,  Morris  Glazer  Realty,  which  she ran
successfully  until 2003.  Ms. Glazer  received her B.A. in History in 1964 from
George Peabody College, part of Vanderbilt University.

CERTAIN SIGNIFICANT CONSULTANTS

         On December 10, 2004, the Company entered into a consulting agreement
with William Horne (the "HORNE CONSULTING AGREEMENT"). The Horne Consulting
Agreement provides that Mr. Horne will serve as a consultant to the Company on
financial and accounting related matters of the Company. The term of the
agreement is month-to-month. Pursuant to the terms of the Horne Consulting
Agreement, Mr. Horne is entitled to receive a monthly consulting fee of
approximately $4,200, which the Board may increase at its discretion from time
to time. The Board may also award options to Mr. Horne in the future, subject to
applicable laws, including the provisions of the 1940 Act.


BUSINESS EXPERIENCE


         Certain information, with respect to each of the executive officers and
directors as well as the nominee for election as Class I Director at the Annual
Meeting, is set forth below, including their names, ages, a brief description of
their recent business experience, including present occupations and employment,
certain directorships that each director or nominee holds, and the year in which
each nominee or person became a director or officer of the Company.

<TABLE>
<CAPTION>

                                                                                            PRINCIPAL
                                                                    TERM OF OFFICE         OCCUPATION(S)    OTHER DIRECTORSHIPS
                                              POSITION(S) HELD       AND LENGTH OF          DURING PAST     HELD BY DIRECTOR OR
          NAME AND ADDRESS               AGE    WITH COMPANY          TIME SERVED            5 YEARS        NOMINEE FOR DIRECTOR
---------------------------------------  ---  ----------------    ------------------    ----------------    --------------------
<S>                                      <C>  <C>                 <C>                   <C>                 <C>
INTERESTED PERSONS
MILTON "TODD" AULT
III(2)(8)................................35  Chairman and         Term of one year;     Member and                   None
100 Wilshire Boulevard                       Chief Executive      served as Chairman    Investment
Santa Monica, California 90401               Officer Class        and CEO since         adviser of Ault
                                             III Director         October 22,           Glazer(3)
                                                                  2004 and as
                                                                  director since
                                                                  June 23, 2004

LOUIS GLAZER, M.D., PH.G(1)(8)...........73  Class III Director   Served as director    Member of Ault               None
100 Wilshire Boulevard                                            since October 22,     Glazer (3);
Santa Monica, California 90401                                    2004 and Chief        independent
                                                                  Health and Science    medical and
                                                                  Officer of            biotechnology
                                                                  Franklin Medical      consultant
                                                                  Products LLC
                                                                  since January 1,
                                                                  2005

NON-INTERESTED PERSONS

BRIGADIER GENERAL (RET.)
LYTLE BROWN III(1)(6)....................72  Class.I Director     Served since          Owner and manager            None
1601 Ardenwood Court                                              October 22, 2004      of Marmatic
Nashville, Tennessee 37215                                                              Enterprises (4);
                                                                                        senior tax
                                                                                        professional for
                                                                                        H&R Block Inc.

HERBERT LANGSAM(1)(7)....................73  Class.II Director    Served since          President of                 None
5300 Wisteria Drive                                               October 22, 2004      Medicare
Oklahoma City, Oklahoma 73142                                                           Recoveries,
                                                                                        Inc.(5)

ALICE CAMPBELL(1)(7).....................55  Class.II Director    Served since          Independent private          None
1211 Ridgeway Road #130                                           October 22, 2004      investigator/
Memphis, Tennessee 38119                                                                consultant

EXECUTIVE OFFICERS
LYNNE SILVERSTEIN(2).....................33  President and        Served since          CEO, Director of             None
100 Wilshire Boulevard                       Secretary            October 22, 2004      Operations and
Santa Monica, California 90401                                                          Member of Ault
                                                                                        Glazer (3)
</TABLE>

--------------------
(1)  On October 22, 2004, Irving Levine, David T. Lender and Laurence Foster
     were replaced as directors of the Company by Lytle Brown, Herbert Langsam,
     Alice Campbell, and Louis Glazer.

(2)  On October 22, 2004, Mr. Stephen L. Brown, resigned from his positions as
     the Company's Chairman and Chief Executive Officer. Similarly, Hiram M.
     Lazar also resigned from his positions as the Company's Chief Financial
     Officer and Secretary. To fill the vacancies created by these resignations,
     the newly elected Board (consisting of Louis Glazer, Alice Campbell,
     Herbert Langsam, and Lytle Brown III) appointed Ault to serve as the
     Company's Chairman and Chief Executive Officer and Silverstein to serve as
     the Company's President and Secretary.

(3)  Ault Glazer is a private investment management firm headquartered in Santa
     Monica, California that manages individual client accounts and private
     investment funds.

(4)  Marmatic Enterprises is a private company located in Nashville, Tennessee
     that holds, buys, sells, rents and repairs residential real estate.

(5)  Medicare Recoveries, Inc. is a private company located in Oklahoma City,
     Oklahoma which provides Medicare claims and recovery services.

(6)  Class I Director -- nominee up for re-election -- Term Expiring 2007.

(7)  Class II Director -- Term Expiring 2005.

(8)  Class III Director -- Term Expiring 2006.

AUDIT COMMITTEE

            The  primary  function  of the Audit  Committee  is to  oversee  and
monitor the Company's  accounting and reporting  processes and the audits of the
Company's  financial  statements.  The Audit Committee is presently  composed of
three persons,  including  Messrs.  Herbert  Langsam and Lytle Brown III and Ms.
Alice  Campbell,  each  of whom  are  considered  independent  under  the  rules
promulgated by the AMEX and under Rule 10A-3 under the Exchange Act, and each of
whom is  financially  literate as required  by the rules of AMEX.  Ms.  Campbell
serves as the chairman of the Audit Committee. The Board


                                       77
<PAGE>

has determined that Ms.  Campbell is an "audit  committee  financial  expert" as
defined under Item 401 of Regulation  S-K of the Exchange Act, and  "financially
sophisticated"  as defined by the rules of AMEX. Ms.  Campbell meets the current
independence and experience  requirements of Rule 10A-3 of the Exchange Act and,
in addition,  is not an "interested person" of the Company as defined in Section
2(a)(19) of the Investment Company Act.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's  officers and directors,  and persons who own more than 10 percent
of the Company's  common stock to file reports  (including a year-end report) of
ownership and changes in ownership with the  Securities and Exchange  Commission
(the "SEC") and to furnish the Company with copies of all reports filed.

      To the  Company's  knowledge,  based solely on its review of the copies of
such forms  received by it, or written  representations  from certain  reporting
persons that no additional  forms were required for those  persons,  the Company
believes that its executive officers,  directors and greater than 10% beneficial
owners have complied with the Section  16(a) filing  requirements  applicable to
them for the fiscal  year ended  December  31,  2004,  except that Brown did not
timely file two reports on Form 4 covering nine  transactions,  one  transaction
and eight transactions respectively in 2004; Laurence Foster did not timely file
one report on Form 4 covering three  transactions  in 2004;  Hiram Lazar did not
timely file one report on Form 4 covering  twelve  transactions  in 2004;  David
Lender did not timely file one report on Form 4 covering three  transactions  in
2004;  Irving  Levine did not timely file three  reports on Form 4 covering  six
transactions,   three  transactions,   two  transactions,  and  one  transaction
respectively  in 2004;  Ault  Glazer  did not  timely  file  two Form 4  reports
covering 22  transactions,  one transaction and 21 transactions  respectively in
2004;  Louis  Glazer  did not timely  file one  report on Form 3 covering  three
transactions in 2004; Lynne  Silverstein did not timely file on report of Form 3
covering  three  transactions  in 2004;  Alice  Campbell did not timely file one
report on Form 3 covering two transactions and one report on Form 4 covering two
transactions  in 2004;  Herbert Langsam did not timely file one report on Form 3
covering one transaction  and one report on Form 4 covering two  transactions in
2004;  Lytle  Brown  did not  timely  file one  report  on Form 3  covering  one
transaction  and one report on Form 4 covering  two  transactions  in 2004;  and
Steven  Bodnar and Bodnar  Capital  Management  LLC each did not timely file one
report on Form 3 covering two transactions in 2004.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth information for the fiscal years ended
December 31, 2004, December 31, 2003 and December 31, 2002, with respect to all
cash remuneration paid or accrued by the Company for each of the Company's
directors for services as directors and for each of the Company's officers whose
aggregate compensation exceeded $60,000 for the fiscal years ended December 31,
2004, December 31, 2003 and December 31, 2002.


<TABLE>
<CAPTION>
                                                       2004 SUMMARY COMPENSATION
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           TOTAL
                                                                     AGGREGATE   PENSION OR RETIREMENT    ESTIMATED    COMPENSATION
                                                                   COMPENSATION   BENEFITS ACCRUED AS      ANNUAL        FROM THE
                                                                     FROM THE    PART OF THE COMPANY'S  BENEFITS UPON  COMPANY PAID
         NAME OF PERSON                      POSITION                 COMPANY          EXPENSES          RETIREMENT    TO DIRECTORS
----------------------------     ----------------------------     -------------  ---------------------  -------------  -------------
<S>                              <C>                              <C>            <C>                    <C>            <C>
INTERESTED PERSONS
                                 Chairman and Chief Executive
Stephen L. Brown(1).........     Officer                            $ 607,500          $ 4,869              $ 0         $ 612,369
Hiram M. Lazar(2)...........     Chief Financial Officer            $  38,750          $     4              $ 0         $  38,754
Milton "Todd" Ault III(3)...     Chairman, Chief Executive
                                 Officer, and Class III
                                 Director                           $     500          $     0              $ 0         $     500
Louis Glazer, M.D., Ph.G.(5.     Class III Director                 $       0          $     0              $ 0         $       0
NON-INTERESTED PERSONS
Irving Levine(4)............     Director                           $   3,000          $     0              $ 0         $   3,000
David T. Lender(4)).........     Director                           $   3,000          $     0              $ 0         $   3,000
Laurence I. Foster(4).......     Director                           $   3,000          $     0              $ 0         $   3,000
Brigadier General (Ret.)....     Class I Director                   $       0          $     0              $ 0         $       0
Lytle Brown III(5)..........
Herb Langsam(5).............     Class II Director                  $       0          $     0              $ 0         $       0
Alice Campbell(5)...........     Class II Director                  $       0          $     0              $ 0         $       0
EXECUTIVE OFFICERS
Lynne Silverstein...........     President                          $       0          $     0              $ 0         $       0

</TABLE>


<TABLE>
<CAPTION>
                                                  2003 SUMMARY COMPENSATION
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           TOTAL
                                                                     AGGREGATE   PENSION OR RETIREMENT    ESTIMATED    COMPENSATION
                                                                   COMPENSATION   BENEFITS ACCRUED AS      ANNUAL        FROM THE
                                                                     FROM THE    PART OF THE COMPANY'S  BENEFITS UPON  COMPANY PAID
         NAME OF PERSON                     POSITION                  COMPANY          EXPENSES          RETIREMENT    TO DIRECTORS
----------------------------     ----------------------------     -------------  ---------------------  -------------  -------------
<S>                              <C>                              <C>            <C>                    <C>            <C>
INTERESTED PERSONS
                                 Chairman and Chief Executive
Stephen L. Brown(1).........     Officer                          $   427,500            $0                 $0       $          0
Hiram M. Lazar(2)...........     Chief Financial Officer          $   163,750            $0                 $0                  --
NON-INTERESTED PERSONS
Irving Levine(4)............     Director                         $     3,000            $0                 $0       $      3,000
David T. Lender(4)..........     Director                         $     3,000            $0                 $0       $      3,000
Laurence I. Foster(4).......     Director                         $     3,000            $0                 $0       $      3,000

</TABLE>


<TABLE>
<CAPTION>
                                                  2002 SUMMARY COMPENSATION
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           TOTAL
                                                                     AGGREGATE   PENSION OR RETIREMENT    ESTIMATED    COMPENSATION
                                                                   COMPENSATION   BENEFITS ACCRUED AS      ANNUAL        FROM THE
                                                                     FROM THE    PART OF THE COMPANY'S  BENEFITS UPON  COMPANY PAID
         NAME OF PERSON                     POSITION                  COMPANY          EXPENSES          RETIREMENT    TO DIRECTORS
----------------------------     ----------------------------     -------------  ---------------------  -------------  -------------
<S>                              <C>                              <C>            <C>                    <C>            <C>
INTERESTED PERSONS
                                 Chairman and Chief Executive
Stephen L. Brown(1).........     Officer                          $   450,000            $0                 $0       $          0
Hiram M. Lazar(2)...........     Chief Financial Officer          $   133,750            $0                 $0                  --
NON-INTERESTED PERSONS
Irving Levine(4)............     Director                         $       500            $0                 $0       $        500
David T. Lender(4)..........     Director                         $       500            $0                 $0       $        500
Laurence I. Foster(4).......     Director                         $       500            $0                 $0       $        500

</TABLE>

------------------
(1) Mr. Brown resigned from his positions as Chairman and Chief Executive
    Officer on October 22, 2004.

(2) Mr. Lazar resigned from his position as Chief Financial Officer on October
    22, 2004.

(3) Mr. Ault was appointed as a director on June 23, 2004. Mr. Ault received
    $500 in directors fees for his attendance at a Board meeting held in 2004.
    Mr. Ault was hired as Chairman and Chief Executive Officer of the Company on
    October 22, 2004.

(4) Irving Levine, David T. Lender and Laurence I. Foster were replaced as
    directors at the Special Meeting of the stockholders held on October 22,
    2004.

(5) Brigadier General (Ret.) Lytle Brown III (Class I Director), Herbert Langsam
    (Class II Director) Alice Campbell (Class II Director) and Louis Glazer,
    M.D., Ph.G (Class III- Director) were elected as directors at the Special
    Meeting of stockholders held on October 22, 2004.


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<PAGE>

COMPENSATION OF DIRECTORS

            As of December 31, 2004, each director of the Company is eligible to
receive a fee of $500 plus  reimbursement of expenses incurred in attending each
board meeting.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

            The Compensation  Committee  members  currently are Messrs.  Herbert
Langsam  and Lytle  Brown  III and Ms.  Alice  Campbell,  each of whom is not an
"interested  person" as defined in Section  2(a)(19) of the  Investment  Company
Act, and is  "independent"  for  purposes of the AMEX rules.  Each member of the
Compensation  Committee is a "non-employee  director" for purposes of Rule 16b-3
under  Section 16 of the Exchange Act and an "outside  director" for purposes of
Section  162(m)  of  the  Code.  Mr.  Langsam  serves  as  the  chairman  of the
Compensation Committee. None of these individuals is a present or former officer
or employee of the Company.  Messrs.  Levine and Lender were replaced as members
of the Compensation Committee on October 22, 2004.

            During the last fiscal  year,  no  executive  officer of the Company
served  either as: (1) a member of the  compensation  committee  (or other board
committee  performing  equivalent  functions  or,  in the  absence  of any  such
committee,  the  entire  board of  directors)  of another  entity,  one of whose
executive  officers  served  on  the  compensation  committee  (or  other  board
committee  performing  equivalent  functions  or,  in the  absence  of any  such
committee,  the entire board of  directors)  of the  Company;  (2) a director of
another  entity,  one of whose  executive  officers  served on the  compensation
committee (or other board committee  performing  equivalent functions or, in the
absence of any such committee, the entire board of directors) of the Company; or
(3) a member of the compensation  committee (or other board committee performing
equivalent functions or, in the absence of any such committee,  the entire board
of directors) of another  entity,  one of whose  executive  officers served as a
director of the Company.

OPTION GRANTS

            No options were granted  during the year ended December 31, 2004, to
the Chief Executive  Officer of the Company or the other  executive  officers of
the Company.


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<PAGE>

OPTION EXERCISES

            No options were  exercised  during the year ended December 31, 2004,
by the Chief Executive Officer of the Company or the other executive officers of
the Company.

EMPLOYMENT AGREEMENTS

            In connection with the Restructuring  Plan, the Company entered into
a Termination  Agreement and Release (the "TERMINATION  AGREEMENT") with Stephen
L. Brown that contained the terms of his resignation from the Company. Mr. Brown
resigned from his positions as Chairman and Chief  Executive  Officer on October
22, 2004. Pursuant to the terms of the Termination Agreement,  we paid Mr. Brown
a severance  payment of $250,000.  In  addition,  we also agreed to: (i) pay Mr.
Brown an aggregate  amount of $200,000  payable over eight months for consulting
services  to  the  Company  on  historical   matters  concerning  the  Company's
operations and stock portfolio as may be reasonably  requested from time to time
by a designee of the Board,  and (ii) continue to provide  coverage to Mr. Brown
and his wife under our  medical,  dental and vision  plans for a period of three
years  following  the date of  termination.  The  Company  recorded  a charge to
operations of approximately $483,000 in 2004 under the Termination Agreement.

            On July 26,  2002,  the Board had  authorized  an  amendment  to Mr.
Brown's  Employment  Agreement with the Company (as amended,  the "Stephen Brown
Employment  Agreement").  The  Stephen  Brown  Employment  Agreement  would have
expired on December 31, 2004 ("the Term").

            The Stephen Brown Employment Agreement provided that Mr. Brown would
serve  as the  Chairman  and  Chief  Executive  Officer  of the  Company  and be
responsible for the general management of the affairs of the Company,  reporting
directly to the Board.  It also  provided that he would serve as a member of the
Board for the period of which he was elected or reelected.

            Mr. Brown received  compensation  under the Stephen Brown Employment
Agreement in the form of base salary of $420,000. In addition, the Board had the
authority to increase such salary at its discretion from time to time. Mr. Brown
was  also  entitled  to be paid  bonuses  as the  Board  determined  in its sole
discretion.  Under the Stephen Brown Employment Agreement, the Company furnished
Mr. Brown with an automobile and reimbursed him for certain  expenses related to
such automobile.  In addition,  Mr. Brown was reimbursed for expenses related to
membership in a club to be used primarily for business  purposes.  Mr. Brown was
entitled  under the Stephen Brown  Employment  Agreement to  participate  in any
employee benefit plans or programs and to receive all benefits,  perquisites and
emoluments  for  which  salaried  employees  are  eligible.  Mr.  Brown was also
entitled  to  severance  pay in the  event of  termination  without  cause or by
constructive  discharge  equal to the  remaining  base salary  payable under the
Stephen Brown  Employment  Agreement and provided death benefits  payable to his
surviving spouse equal to Mr. Brown's base salary for a period of one year.

            In addition,  on July 26, 2002 the Board  authorized an amendment to
Stephen L. Brown's Severance Agreement (as amended, the "Stephen Brown Severance
Agreement"). Under the terms of the Stephen Brown Severance Agreement, Mr. Brown
was  entitled to receive  severance if following a change in control (as defined
in the Stephen Brown  Severance  Agreement)  his employment is terminated by the
Company  without  cause or by the  executive  within one year of such  change in
control.  The amendment  increased the amount of the severance payment Mr. Brown
was entitled to receive upon the  occurrence of such event from 1.5 to 2.5 times
his average compensation over the past five years.

            A copy of the  Termination  Agreement  was included as an exhibit to
the Company's  report on Form 8-K filed with the SEC on June 24, 2004 and a copy
of Amendment  No. 1 to the  Termination  Agreement was included as an exhibit to
the  Company's  current  report on Form 8-K filed with the SEC on September  30,
2004.


                                       80
<PAGE>

            All of the  foregoing  events are  discussed  in more  detail in the
definitive  proxy  materials filed with the SEC on September 30, 2004, and March
3, 2005.

            Mr. Lazar resigned from his positions as Chief Financial Officer and
Secretary on October 22, 2004.  On January 1, 2003,  Mr. Hiram Lazar had entered
into an  employment  agreement  with the Company,  the "Hiram  Lazar  Employment
Agreement".  The Hiram Lazar Employment  Agreement  expired on December 31, 2003
("the  Term").  The Term  automatically  renewed  from year to year  thereafter,
unless the Company  notified Mr. Lazar not less than 90 days prior to the end of
any Term in  writing  that the  Company  will not be  renewing  the Hiram  Lazar
Employment Agreement.

            The Hiram Lazar Employment  Agreement  provided that Mr. Lazar would
serve as the Chief  Financial  Officer of the Company and be responsible for the
financial  affairs of the  Company,  reporting  directly to the Chief  Executive
Officer.

            Mr. Lazar  received  compensation  under the Hiram Lazar  Employment
Agreement in the form of base salary of $160,000. In addition, the Board had the
authority to increase such salary at its discretion from time to time. Mr. Lazar
was also  entitled  to be paid  bonuses  up to 20% of base  salary  as the Board
determined in its sole discretion.  Mr. Lazar was entitled under the Hiram Lazar
Employment  Agreement to participate  in any employee  benefit plans or programs
and to receive all  benefits,  perquisites  and  emoluments  for which  salaried
employees  are  eligible.  Mr. Lazar was also  entitled to severance  pay in the
event of termination  without cause or by  constructive  discharge  equal to the
remaining  base salary  payable under the Hiram Lazar  Employment  Agreement and
provided for death benefits payable to his surviving spouse equal to Mr. Lazar's
base salary for a period of six months. Excelsior reimbursed the Company for 80%
of Mr. Lazar's total compensation.

CONSULTING AGREEMENT

            On  December  10,  2004,  the  Company  entered  into  a  consulting
agreement  with  William  Horne (the "HORNE  CONSULTING  AGREEMENT").  The Horne
Consulting  Agreement  provides that Mr. Horne will serve as a consultant to the
Company on financial and accounting related matters of the Company.  The term of
the agreement is  month-to-month.  Pursuant to the terms of the Horne Consulting
Agreement,  Mr.  Horne is  entitled  to  receive  a  monthly  consulting  fee of
approximately  $4,200,  which the Board may increase at its discretion from time
to time. The Board may also award options to Mr. Horne in the future, subject to
applicable laws, including the provisions of the 1940 Act.

COMPENSATION PLANS

            On September 9, 1997, Franklin Capital's  stockholders  approved two
Stock Option  Plans:  a Stock  Incentive  Plan ("SIP") to be offered to Franklin
Capital's consultants, officers and employees (including any officer or employee
who is also a director of Franklin  Capital)  and a  Non-Statutory  Stock Option
Plan  ("SOP") to be offered to Franklin  Capital's  "outside"  directors,  I.E.,
those  directors  who are not also  officers or employees  of Franklin.  112,500
shares of Franklin  Capital's common stock have been reserved for issuance under
these plans,  of which 67,500  shares have been  reserved for the SIP and 45,000
shares have been reserved for the SOP.

            Shares subject to options that terminate or expire prior to exercise
will be available  for future  grants  under the plans.  Because the issuance of
options to "outside" directors is not permitted under the Investment Company Act
without an  exemptive  order by the  Securities  and  Exchange  Commission,  the
issuance  of options  under the SOP was  conditioned  upon the  granting of such
order. The order was granted by the Commission on January 18, 2000.

            On December 31, 2004,  there were 1,875  options to purchase  common
stock outstanding and 18,750 remain available for future issuance.

            The  following  is a  description  of each of the Stock Option Plans
followed by a  description  of the  provisions  applicable  to both Stock Option
Plans.


                                       81
<PAGE>

STOCK INCENTIVE PLAN (SIP)

            PURPOSE

            The purpose of the SIP is to give the Company and its  Affiliates  a
competitive   advantage  in  attracting,   retaining  and  motivating  officers,
employees and consultants of the Company and to provide the Company with a stock
plan that provides incentives linked to the financial results of the Company and
increase in stockholder value.

            TYPE OF AWARDS

            The SIP permits, at the discretion of the Committee, the granting to
SIP participants of options to purchase Common Stock (including  incentive stock
options within the meaning of Section 422 of the Code ("ISOs") or "non-statutory
stock options"  ("non-ISOs")),  stock appreciation rights,  restricted stock and
tax offset bonuses. A stock appreciation right entitles an optionee to an amount
equal to the excess of the fair market  value of one share of common  stock over
the per share  exercise  price  multiplied by the number of shares in respect of
which the stock appreciation right is exercised.  Stock appreciation  rights may
only be granted in conjunction with all or part of an option grant.

            Restricted  stock may be  awarded  to any  participant,  for no cash
consideration  and  may  be  subject  to  such  conditions,  including  vesting,
forfeiture and restrictions on transfer, as the Committee shall determine.  Such
terms and conditions will be specified in an agreement evidencing the award.

            Finally,  the SIP permits the  granting of a right to receive a cash
payment at such time or times as an award under the SIP results in  compensation
income to the participant for the purpose of assisting the participant in paying
the resulting taxes.

            Upon exercise of an ISO or non-ISO,  the Committee may elect to cash
out all or any  portion  of the  shares of  common  stock for which an option is
being  exercised by paying the optionee the excess of the fair market value of a
share of common  stock over the per share  exercise  price for each such  option
share being cashed out. All options  granted under the SIP become  automatically
exercisable upon a "change of control" and remain  exercisable  until expiration
of their respective  terms. A "change in control" is defined in the Stock Option
Plans as the acquisition by any person or group (other than Stephen L. Brown and
his  Affiliates)  of more than 25% of the voting  securities of the Company or a
sale or other  disposition  of all or  substantially  all of the  assets  of the
Company to any person.

            ADMINISTRATION

            The  SIP  will  be  administered  by a  committee  of the  Board  of
Directors  composed  of not fewer than two outside  directors  each of whom will
qualify as a  "non-employee  director"  within the  meaning of Rule 16b-3 of the
1934 Act and an "outside  Director"  within the meaning of Section 162(m) of the
Code with all grants  under the SIP  approved  pursuant to Section  57(o) of the
1940 Act.  Section  57(o) of the 1940 Act requires  that grants be approved by a
majority of the directors with no financial interest in the grant and a majority
of non-interested directors. The Committee will have the authority,  among other
rights,  to select the  participants  to whom awards may be  granted,  determine
whether to grant ISOs, non-ISOs,  stock appreciation rights or restricted stock,
or any combination  thereof and determine the vesting terms and other conditions
of an award to an SIP participant.

            PARTICIPANTS

            SIP  participants  will be the officers,  employees  (including such
officers and employees who are also directors) or consultants of the Company and
its Affiliates who are responsible  for or contribute to the management,  growth
and profitability of the business of the Company and its Affiliates. Each grant


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<PAGE>

of an  award  under  the SIP  will be  evidenced  by an  agreement  between  the
participant  and the Company,  which shall include such terms and  provisions as
the Committee may determine from time to time.

            TRANSITION OF AWARDS

            Under the SIP, generally, upon an SIP participant's death or when an
SIP  participant's  employment is terminated for any reason,  all unvested stock
options will be  forfeited.  Upon the  termination  of employment of an optionee
other than as a result of the optionee's  death,  unless  otherwise  provided in
such  optionee's  option  agreement,  an  optionee's  right to exercise a vested
option  will  expire  three  months  after  termination  of  employment.  If  an
optionee's  employment is terminated by reason of death,  the period of exercise
for  options  vested  at the  optionee's  death is 12  months.  Options  are not
transferable except on the death of the optionee,  by will or the laws of decent
and distribution.  Stock appreciation rights may be exercised and transferred to
the same  extent  that the  options to which they  relate  may be  exercised  or
transferred.

            The Board of Directors may terminate,  suspend,  amend or revise the
SIP at any time subject to limitations  in the plan. The Board may not,  without
the consent of the optionee,  alter or impair rights under any award  previously
granted except in order to comply with applicable law.

NON-STATUTORY STOCK OPTION PLAN (SOP)

            PURPOSE

            The purpose of the SOP is to further the  interests  of the Company,
its stockholders  and its employees by providing the "outside"  directors of the
Company (I.E., those who are not also officers and employees of the Company) the
opportunity to purchase the Common Stock of the Company as an appropriate reward
for the dedication and loyalty of the "outside" directors.

            TYPE OF AWARDS

            The SIP only  permits the  granting  of options to  purchase  common
stock. Only non-ISOs can be granted under the SOP.

            ADMINISTRATION

            The SOP  will be  administered  by the  Board  of  Directors  of the
Company  with all grants  approved  pursuant  to Section  57(o) of the 1940 Act.
Options granted under the SOP are intended to comply with the exemption afforded
by Rule 16b-3 of the 1934 Act.  The  Board,  in its  discretion,  can impose any
vesting or other restrictions on options granted under the SOP.

            PARTICIPANTS

            SOP participants will be outside directors of the Company.

            TERMINATION OF AWARDS

            Under  the  SOP,  options  expire  30 days  after  the date of a SOP
participant's  appointment  with  the  Company  is  terminated  except  if  such
termination is by reason of death or disability.  In the event of termination by
reason of disability,  options expire 12 months after such  termination.  In the
event of the


                                       83
<PAGE>

participant's  death  while  serving as  director  or within  the 30-day  period
following termination of the participant's appointment, options expire 12 months
following the date of death.

PROVISIONS APPLICABLE TO BOTH STOCK OPTION PLANS

            AVAILABLE SHARES

            The aggregate number of shares of common stock reserved for issuance
under the Stock Option Plans will be 112,500,  of which 67,500  shares have been
reserved for issuance  under the SIP and 45,000 have been  reserved for issuance
under the SOP.  Shares  subject to options  that  terminate  or expire  prior to
exercise will be available for future grants under the Stock Option Plan.

            The number of shares of common stock reserved for issuance under the
Stock Option Plans,  the number of shares  issuable upon the exercise of options
or subject to stock  appreciation  rights, the exercise price of such awards and
the number of restricted  stock awards  granted under the Stock Option Plans may
be  subject  to  "anti-dilution"  adjustments,  in the  sole  discretion  of the
Committee,   in  the  event  of  any  merger,   reorganization,   consolidation,
separation,   liquidation,  stock  dividend,  stock  split,  share  combination,
recapitalization   or  other  change  in  corporate   structure   affecting  the
outstanding common stock of the Company.

            GRANT AND EXERCISE OF AWARDS

            The exercise  price for options under the Stock Option Plans will be
determined,  in the case of the SIP,  by the  Committee,  and in the case of the
SOP,  by the Board of  Directors,  but will not be less  than the  "Fair  Market
Value" of the  Company's  common  stock at the date of grant (as  defined in the
Stock  Option  Plans as the  closing  market  price of the  common  stock on the
American Stock Exchange on the date of such grant).

            Options  granted under the Stock Option Plans are  exercisable for a
period of 10 years  from the date of grant  (five  years  with  respect  to ISOs
granted to optionees who own more than 10% of the voting power of the Company or
any subsidiary) or such shorter period as the administrator of such plan (either
the  Committee or the Board,  as the case may be) may establish as to any or all
shares of common stock subject to any option. Options will become exercisable in
accordance  with the  vesting  schedule  prescribed  in such  optionee's  option
agreement,  and may be subject to satisfaction  of such other  conditions as the
administrator may determine. Stock appreciation rights granted under the SIP are
exercisable  to the same  extent as the  options to which  they  relate and upon
exercise terminate the related option.

            An employee,  officer or director  exercising a non-ISO  pursuant to
the SIP may elect to have the Company  withhold  shares of the Company's  common
stock to satisfy tax  liabilities  arising  from the  exercise of such  options.
Initially,  there will be three  employees of the Company,  two of whom are also
directors,  who will be  eligible  to  participate  in the SIP.  There  are five
outside directors eligible to participate in the SOP.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS

            The following  discussion  of certain  relevant  federal  income tax
effects  applicable to stock  options  granted under the Stock Option Plans is a
brief summary only,  and reference is made to the Code and the  regulations  and
interpretations  issued  thereunder  for a complete  statement  of all  relevant
federal tax consequences.


                                       84
<PAGE>

            INCENTIVE STOCK OPTIONS

            No taxable  income will be realized by an optionee upon the grant or
timely  exercise of an ISO. If shares are issued to an optionee  pursuant to the
timely exercise of an ISO and a disqualifying  disposition of such shares is not
made by the optionee  (I.E.,  no  disposition is made within two years after the
date of grant or within one year after the  receipt of shares by such  optionee,
whichever is later),  then (i) upon sale of the shares,  any amount  realized in
excess  of the  exercise  price of the ISO will be  taxed to the  optionee  as a
long-term  capital gain and any loss sustained  will be long-term  capital loss,
and (ii) no  deduction  will be  allowed  to the  Company.  However,  if  shares
acquired upon the timely  exercise of an ISO are disposed of prior to satisfying
the holding  period  described  above,  generally  (a) the optionee will realize
ordinary  income in the year of disposition in an amount equal to the excess (if
any) of the fair  market  value of the shares at the time of  exercise  (or,  if
less,  the amount  realized on the  disposition of the shares) over the exercise
price thereof, and (b) the Company will be entitled to deduct an amount equal to
such income.  Any additional  gain recognized by the optionee upon a disposition
of shares prior to satisfying the holding period  described  above will be taxed
as a short-term  or  long-term  capital  gain,  as the case may be, and will not
result in any deduction for the Company.

            If an ISO is not  exercised  on a timely  basis,  the option will be
treated as a nonqualified stock option. Subject to certain expectations,  an ISO
generally  will not be exercised on a timely basis if it is exercised  more than
three months following termination of employment.

            The amount that the fair market  value of shares of common  stock on
the exercise date of an ISO exceeds the exercise price generally will constitute
an item that increases the optionee's alternative minimum taxable income.

            In general,  the Company will not be required to withhold  income or
payroll taxes on the timely exercise of an ISO.

            NON-ISOS

            In  general,  an  optionee  will not be subject to tax at the time a
non-ISO is granted.  Upon exercise of a non-ISO where the exercise price is paid
in cash, the optionee  generally must include in ordinary  income at the time of
exercise an amount equal to the excess,  if any, of the fair market value of the
shares of common  stock at the time of exercise  over the  exercise  price.  The
optionee's  tax  basis in the  shares  acquired  upon  exercise  will  equal the
exercise price plus the amount taxable as ordinary  income to the optionee.  The
federal income tax  consequences  of an exercise of a non-ISO where the exercise
price is paid in previously  owned shares of common stock are generally  similar
to those where the exercise  price is paid in cash.  However,  the optionee will
not be subject to tax on the surrender of such shares,  and the tax basis of the
shares  acquired on exercise that are equal in number to the shares  surrendered
will be the same as the optionee's tax basis in such surrendered shares. Special
timing rules may apply to an optionee who is subject to reporting  under Section
16(a) of the 1934 Act (generally an executive  officer of the Company) and would
be subject to liability under Section 16(b) of the 1934 Act.

            The Company  generally will be entitled to a deduction in the amount
of an  optionee's  ordinary  income at the time such income is recognized by the
optionee  upon the exercise of a non-ISO.  Income and payroll taxes are required
to be withheld for employees on the amount of ordinary income resulting from the
exercise of a non-ISO.

            On May 11, 2004,  26,250 options were granted under the SOP to three
eligible  "outside"  directors.  The strike  price of the  options was $1.50 per
share, which represented the closing price of


                                       85
<PAGE>

Franklin's common stock as reported by the American Stock Exchange on that date.
The options granted vested immediately and were exercised in June 2004.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

            The following  tables set forth certain  information with respect to
beneficial  ownership (as that term is defined in the rules and  regulations  of
the  Commission)  of the  Company's  common stock as of February 28, 2005, by 1)
each person who is known by the Company to be the beneficial  owner of more than
five percent of the  outstanding  common stock, 2) each director of the Company,
3) each current executive officer listed in the Summary  Compensation  Table and
4) all  directors and  executive  officers of the Company as a group.  Except as
otherwise  indicated,  to the Company's  knowledge,  all shares are beneficially
owned and  investment and voting power is held as stated by the persons named as
owners. The address for all beneficial owners, unless stated otherwise below, is
c/o Franklin  Capital  Corporation  450 Park Avenue,  Suite 2002,  New York,  NY
10022.

COMMON STOCK

        NAME AND ADDRESS OF              AMOUNT AND NATURE OF           PERCENT
         BENEFICIAL OWNER                BENEFICIAL OWNERSHIP           OF CLASS
         ----------------                --------------------           --------
Ault Glazer & Company Investment
   Management LLC
   100 Wilshire Boulevard
   Santa Monica, CA 90401                       476,900      (1)          27.1%
Melanie Glazer
   100 Wilshire Boulevard
   Santa Monica, CA 90401                       476,900      (1)          27.1%
Steven Bodnar & Bodnar Capital
   Management LLC
   680 Old Academy Road
   Fairfield, CT 06824                          281,250      (2)          16.0%
Brian Stewart
   222 Seventh Street, No. 105
   Santa Monica, CA 90402                        95,000      (3)           5.4%
Dr. William Stewart
   222 Seventh Street, No. 105
   Santa Monica, CA 90402                        95,000      (3)           5.4%
Milton "Todd" Ault III
   100 Wilshire Boulevard
   Santa Monica, CA 90401                       476,900      (1)          27.1%
Louis Glazer, M.D., Ph.G
   100 Wilshire Boulevard
   Santa Monica, CA 90401                       476,900      (1)          27.1%
Brigadier General (Ret.)
   Lytle Brown III
   1601 Ardenwood Court
   Nashville, TN 37215                             3,000                     *
Herbert Langsam
   5300 Wisteria Drive
   Oklahoma City, Oklahoma, 73142                  7,000                     *
Alice Campbell
   1211 Ridgeway Road #130
   Memphis, TN 38119                               5,850     (4)             *


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<PAGE>

        NAME AND ADDRESS OF              AMOUNT AND NATURE OF           PERCENT
         BENEFICIAL OWNER                BENEFICIAL OWNERSHIP           OF CLASS
         ----------------                --------------------           --------
Lynne Silverstein
   100 Wilshire Boulevard
   Santa Monica, CA 90401                       476,900      (1)          27.1%
All current officers and directors
     as a group (6 persons)                     476,900      (1)          27.1%

----------
* Represents less than 1.0%

(1)  Pursuant to Amendment  No. 10 to the  Schedule  13D jointly  filed by Ault,
Silverstein,  Ault Glazer and the Glazers on January 21, 2005 (the "AULT  GLAZER
13D") pursuant to which Ault Glazer, Ault, Silverstein, and the Glazers have all
reported  beneficial  ownership  of these  shares of Common  Stock.  The 476,900
reported above include 80,625 shares of Common Stock issuable upon conversion of
the 10,750  shares of  Preferred  Stock  reported  below.  According to the Ault
Glazer 13D:  (i) Ault  Glazer's  beneficial  ownership of these shares of Common
Stock is direct as a result of Ault  Glazer's  discretionary  authority  to buy,
sell and vote such shares of Common Stock for its investment fund clients;  (ii)
Ault's  beneficial  ownership  of these  shares of Common Stock is indirect as a
result  of  Ault's  control  of  Ault  Glazer;  (iii)  Silverstein's  beneficial
ownership  of  these  shares  of  Common  Stock  is  indirect  as  a  result  of
Silverstein's  control  of Ault  Glazer;  and (iv)  the  Glazers  have  reported
beneficial  ownership of these shares of Common  Stock  because,  as a result of
certain  relationships  they may be deemed  to be  members,  together  with Ault
Glazer,  Ault and Silverstein,  of a group that beneficially owns such shares of
Common  Stock.  Also  includes  44,146  shares  of  Common  Stock  held  by Zeal
Aggressive Partners, L.P., 70,466 shares beneficially owned by Zealous Partners,
L.L.C., and 252,756 shares beneficially owned by Zodiak Investments, L.P.

(2) Pursuant to the  Schedule  13D filed by Steven  Bodnar on December 17, 2004,
Bodnar  Capital  Management  LLC ("BCM") owns 187,500 shares of Common Stock and
warrants  exercisable to purchase 93,750 shares of Common Stock.  Mr. Bodnar has
the power to vote and direct the disposition of all shares of Common Stock owned
by BCM.

(3) The shares listed above are being reported by the Company in connection with
its  acquisition  of  SurgiCount.  On February 25, 2005, the Company closed this
acquisition and issued 200,000 shares of Common Stock, of which 10,000 shares of
Common Stock will be held in escrow until August 2005.  In addition,  if certain
milestones  are  satisfied,  the Company will issue up to an  additional  33,334
shares of Common Stock.

(4) Includes 1,100 shares that Ms. Campbell  beneficially  owns by virtue of her
minority  ownership  interest  in Zeal  Aggressive  Partners,  L.P.,  a  private
investment fund managed by Ault Glazer.

PREFERRED STOCK

        NAME AND ADDRESS OF              AMOUNT AND NATURE OF            PERCENT
         BENEFICIAL OWNER                BENEFICIAL OWNERSHIP           OF CLASS
         ----------------                --------------------           --------
Ault Glazer & Company Investment
   Management LLC
   100 Wilshire Boulevard
   Santa Monica, CA 90401                         10,750    (1)            98.2%
Melanie Glazer
   100 Wilshire Boulevard
   Santa Monica, CA 90401                         10,750    (1)            98.2%
Milton "Todd" Ault III
   100 Wilshire Boulevard
   Santa Monica, CA 90401                         10,750    (1)            98.2%
Louis Glazer, M.D., Ph.G
   100 Wilshire Boulevard
   Santa Monica, CA 90401                         10,750    (1)            98.2%
Lynne Silverstein
   100 Wilshire Boulevard
   Santa Monica, CA 90401                         10,750    (1)            98.2%


                                       87
<PAGE>

        NAME AND ADDRESS OF              AMOUNT AND NATURE OF            PERCENT
         BENEFICIAL OWNER                BENEFICIAL OWNERSHIP           OF CLASS
         ----------------                --------------------           --------
All officers and directors
     As a group (6 persons)                       10,750    (1)            98.2%

----------
* Represents less than 1.0%

(1)  Consists  of:  (i) 1,500  shares  beneficially  owned by Zodiak  Investment
Partners,  L.P.;  (ii) 2,600  shares  beneficially  owned by  Zealous  Partners,
L.L.C.;  and  (iii) an  aggregate  of  6,650  shares  beneficially  owned by six
separate trust  accounts for which Melanie  Glazer acts as trustee.  Pursuant to
the Ault  Glazer 13D,  Ault  Glazer,  Ault,  Silverstein,  and the Glazers  have
reported  beneficial  ownership of these shares of Preferred Stock because, as a
result of certain  relationships  they may be deemed to be  members,  of a group
that beneficially owns such shares of Preferred Stock.

      The  following   table  sets  forth  the  dollar  range  of  Common  Stock
beneficially  owned by each of our current directors and nominees as of December
31, 2004:

                                                               DOLLAR RANGE OF
                                                              EQUITY SECURITIES
NAME OF DIRECTOR OR NOMINEE                                 OF THE COMPANY(1)(2)
---------------------------                                 --------------------
INTERESTED PERSONS
Milton "Todd" Ault III(3)...................................   $10,001-$50,000
Louis Glazer, M.D., Ph.G.(3)................................     over $100,000
NON-INTERESTED PERSONS
Brigadier General (Ret.) Lytle Brown III(3).................   $10,001-$50,000
Herb Langsam(3).............................................   $10,001-$50,000
Alice Campbell(3)...........................................   $10,001-$50,000

----------
(1)   Pursuant to  Instruction 2 of Item  22(b)(5) of Schedule  14A,  beneficial
      ownership has been determined in accordance  with Rule  16a-1(a)(2) of the
      Exchange Act.

(2)   The Company has not provided  information  with  respect to the  aggregate
      dollar range of equity  securities in all funds  overseen by each director
      or nominee for director named above because the Company is not part of any
      family of investment companies.

(3)   Ault became a director on June 23, 2004.  Louis Glazer,  Gen. Lytle Brown,
      Herbert Langsam, and Alice Campbell became directors on October 22, 2004.

EQUITY COMPENSATION PLAN INFORMATION

            The  following  table  summarizes  information  about  the  options,
warrants and rights and other equity  compensation  under the  Company's  equity
plans as of December 31, 2004.

<TABLE>
<CAPTION>
                                                                                            NUMBER OF SECURITIES REMAINING
                                                                                            AVAILABLE FOR FUTURE ISSUANCE
                                    NUMBER OF SECURITIES TO      WEIGHTED-AVERAGE           UNDER EQUITY COMPENSATION PLANS
                                    BE ISSUED UPON EXERCISE      EXERCISE PRICE OF          (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY                       OF OUTSTANDING OPTIONS       OUTSTANDING OPTIONS        IN COLUMN (A))
<S>                                          <C>                        <C>                             <C>
Equity compensation plans
approved by security holders (1)             1,875                      $14.00                          18,750
</TABLE>

(1)  Includes  options to  purchase  shares of Company  common  stock  under the
following stockholder approved plans: Stock Incentive Plan and the Non-Statutory
Stock Option Plan both approved on September 9, 1997.


                                       88
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            Certain of the  Company's  officers,  directors  and/or their family
members have existing  responsibilities  and, in the future, may have additional
responsibilities,  to act  and/  or  provide  services  as  executive  officers,
directors,  owners  and/  or  managers  of  Ault  Glazer.  Accordingly,  certain
conflicts of interest between the Company and Ault Glazer may occur from time to
time.  The Company will attempt to resolve any such conflicts of interest in its
favor.  The officers and directors of the Company are accountable to the Company
and to its  stockholders  as  fiduciaries,  which requires that the officers and
directors exercise good faith and integrity in handling the Company's affairs.

            The Board does not believe  that the Company  has any  conflicts  of
interest with the business of Ault Glazer, other than Ault's, Silverstein's, and
the Glazers'  responsibility  to provide certain  management and  administrative
services to Ault Glazer and its clients from time-to-time.  However,  subject to
applicable  law,  the  Company may engage in  transactions  with Ault Glazer and
related parties in the future,  including but not limited to acquisitions and/or
joint investments in the target industries. These related party transactions may
raise  conflicts  of interest  and,  although the Company does not have a formal
policy to address such  conflicts of interest,  the Audit  Committee  intends to
evaluate  relationships  and transactions  involving  conflicts of interest on a
case by case basis.

            The Audit  Committee  will  conduct a review  of all  related  party
transactions for potential conflict of interest  situations on an ongoing basis,
and  the  approval  of the  Audit  Committee  will  be  required  for  all  such
transactions.  The Audit Committee  intends that any related party  transactions
will be on terms and  conditions  no less  favorable  to the Company  than those
terms and conditions  reasonably obtainable from third parties and in accordance
with applicable law.

            Ault Glazer  provides  the Company  with  office  space,  telephone,
computer,  and  internet  service,   office  supplies,  and  administrative  and
secretarial  support,  all without  charge.  The Company  has no  obligation  to
reimburse Ault Glazer for any of these goods and services in the future.  In the
event that the Company  pays for such  services in the future,  it will do so on
market terms approved by the Audit Committee.

            In addition,  Strome  Securities,  L.P.  ("STROME") a broker  dealer
registered with the National  Association of Securities  Dealers,  Inc. ("NASD")
provides the Company with brokerage and execution services. Strome provides such
services to the Company on market  terms which have been  approved by the Board.
Until December 31, 2004 Ault was a registered representative of Strome.

            For addition  information  see Items 10 through 12 and Footnote 6 to
the Financial Statements.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

            AUDIT FEES.  The  aggregate  fees billed for  professional  services
rendered by Ernst & Young LLP and  Rothstein,  Kass & Company,  P.C for 2004 for
the audit of the Corporation's  annual financial statements for 2004 and for the
review of the financial  statements included in the Corporation's Forms 10-Q for
2004 were $101,550.  The amounts paid or  attributable to Ernst & Young LLP were
approximately $28,600 and the amounts paid or attributable to Rothstein,  Kass &
Company, P.C were approximately $72,950.

            AUDIT-RELATED  FEES.  Audit-related  fees consist of fees billed for
assurance and related services that are reasonably related to the performance of
the  audit  or  review  of our  consolidated  financial  statements  and are not
reported under "AUDIT FEES." These services include attest services that are not
required  by  statute  or  regulation  and  consultations  concerning  financial
accounting and reporting standards.  The Company incurred  audit-related fees of
approximately $17,000 for 2004.

            TAX FEES. Tax fees consist of fees billed for professional  services
for tax compliance.  These services include assistance regarding federal,  state
and local tax compliance. The Company incurred tax fees of approximately $10,000
for 2004.

            ALL OTHER FEES.  All other fees would  include fees for products and
services other than the services reported above. The Company did not incur other
fees for 2004.

AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES

            In  accordance  with its Amended and  Restated  Charter of the Audit
Committee,  the Audit Committee's  policy is to expressly  pre-approve all audit
and permissible  non-audit services provided by the Company's independent public
accountants before the independent public accountants are engaged by the Company
to provide any such services.  These services may include audit services,  audit
related  services,  tax services and other  related  services.  Pre-approval  is
generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of service and is subject to a specific budget.

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

The following financial statements are set forth under Item 8.

      (a)   (1)   Financial Statements

                        Report of Rothstein, Kass & Company, P.C
                        Report of Ernst & Young LLP
                        Balance Sheets as of December 31, 2004 and 2003
                        Statements  of Operations  for the years ended  December
                        31, 2004, 2003 and 2002
                        Statements  of Cash Flows for the years  ended  December
                        31, 2004, 2003 and 2002
                        Statements  of Changes in Net Assets for the years ended
                        December 31, 2004, 2003 and 2002
                        Financial  Highlights  for the years ended  December 31,
                        2004, 2003, 2002, 2001 and 2000
                        Portfolio of Investments as of December 31, 2004
                        Notes to Financial Statements


                                       89
<PAGE>

The following exhibits are filed herewith or incorporated as set forth below:

            (2)   Exhibits

                        (2.1)    Stock Purchase Agreement,  dated as of June 30,
                                 2004,  between Franklin and Quince  Associates,
                                 LP(1)

                        (2.2)    Stock Purchase  Agreement,  dated as of July 5,
                                 2004,  between Franklin and Quince  Associates,
                                 LP(1)

                        (2.3)    Agreement    and    Plan    of    Merger    and
                                 Reorganization,  dated as of  February 3, 2005,
                                 by and among Franklin,  SurgiCount  Acquisition
                                 Corp.,  SurgiCount Medical, Inc., Brian Stewart
                                 and Dr. William Stewart(2)

                        (3.1)    Articles of Incorporation(3)

                        (3.2)    By-Laws(3)

                        (3.3)    Amended    and    Restated    Certificate    of
                                 Incorporation

                        (4.1)    Certificate of Designation(4)

                        (4.2)    Registration Rights Agreement(5)

                        (4.3)    Preferred Stock Purchase Agreement(6)

                        (10.1)   Employment Agreement - Stephen L. Brown(7)

                        (10.2)   Employment Agreement - Spencer L. Brown(8)

                        (10.3)   Severance Agreement - Stephen L. Brown(9)

                        (10.4)   Severance Agreement - Spencer L. Brown(10)

                        (10.5)   Stock Incentive Plan(11)

                        (10.6)   Stock Option Plan(12)

                        (10.7)   Management   Agreement  with  Excelsior   Radio
                                 Networks(13)

                        (10.8)   Registration  Rights  Agreement,  dated  as  of
                                 February 3, 2005, by and among Franklin,  Brian
                                 Stewart and Dr. William Stewart(2)

                        (10.9)   Common Stock  Purchase  Agreement,  dated as of
                                 December 29, 2004, between Franklin and certain
                                 selling stockholders(14)

                        (10.10)  Subscription Agreement, dated November 3, 2004,
                                 by and among Franklin and accredited investors

                        (10.11)  Amendment  to  Subscription  Agreement,   dated
                                 March  2,  2005,  by  and  among  Franklin  and
                                 accredited investors

                        (10.12)  Letter of  Understanding,  dated as of June 23,
                                 2004, between Franklin and Ault Glazer(15)

                        (10.13)  Amendment to Letter of Understanding,  dated as
                                 of August 26, 2004,  between  Franklin and Ault
                                 Glazer(16)

                        (10.14)  Amendment  No. 2 to  Letter  of  Understanding,
                                 dated   September  30,  2004,  by  and  between
                                 Franklin and Ault Glazer(17)

                        (10.15)  Termination Agreement and Release,  dated as of
                                 June  23,  2004,   between  Franklin  and  Ault
                                 Glazer(15)

                        (10.16)  First  Amendment to  Termination  Agreement and
                                 Release,   dated  as  of  September  30,  2004,
                                 between Franklin and Ault Glazer(17)

                        (14.1)   Code of Business Conduct and Ethics(18)

                        (16.1)   Letter from Ernst & Young LLP to the SEC, dated
                                 July 9, 2004(19)

                        (21)     List of Subsidiaries

                        (23.1)   Consent of Rothstein, Kass & Company, P.C.

                        (23.2)   Consent of Ernst & Young LLP


                                       90
<PAGE>

                        (31.1)   Certification  of the Chief  Executive  Officer
                                 and the person  performing the functions of the
                                 Chief Financial Officer pursuant to Rule 13a-14
                                 of Securities Exchange Act of 1934, as amended

                        (32.1)   Certification  Pursuant  To 18  U.S.C.  Section
                                 1350,   As  Adopted  By  Section   906  of  The
                                 Sarbanes-Oxley Act of 2002

FINANCIAL STATEMENT SCHEDULES

No financial  statement  schedules are filed herewith because (1) such schedules
are not required or (2) the information has been presented in the aforementioned
financial statements.

----------
(1)   Incorporated by reference to the Current Report on Form 8-K filed July 23,
      2004

(2)   Incorporated by reference to the Current Report on Form 8-K filed February
      9, 2005

(3)   Incorporated  by reference to the  Company's  Form N-2, as amended,  filed
      July 31, 1992

(4)   Incorporated  by  reference to Exhibit 4.1 filed on the  Company's  Annual
      Report filed on Form 10-K for the year ended December 31, 2000

(5)   Incorporated  by  reference to Exhibit 4.2 filed on the  Company's  Annual
      Report filed on Form 10-K for the year ended December 31, 2000

(6)   Incorporated  by  reference to Exhibit 4.3 filed on the  Company's  Annual
      Report filed on Form 10-K for the year ended December 31, 2000

(7)   Incorporated  by reference to Exhibit 10.1 filed on the  Company's  Annual
      Report filed on Form 10-K for the year ended December 31, 2000

(8)   Incorporated  by reference to Exhibit 10.2 filed on the  Company's  Annual
      Report filed on Form 10-K for the year ended December 31, 2000

(9)   Incorporated  by reference to Exhibit 10.3 filed on the  Company's  Annual
      Report filed on Form 10-K for the year ended December 31, 2000

(10)  Incorporated  by reference to Exhibit 10.4 filed on the  Company's  Annual
      Report filed on Form 10-K for the year ended December 31, 2000

(11)  Incorporated  by reference to Exhibit 10.5 filed on the  Company's  Annual
      Report filed on Form 10-K for the year ended December 31, 2001

(12)  Incorporated  by reference to Exhibit 10.6 filed on the  Company's  Annual
      Report filed on Form 10-K for the year ended December 31, 2001

(13)  Incorporated  by reference to Exhibit 10.7 filed on the  Company's  Annual
      Report filed on Form 10-K for the year ended December 31, 2001

(14)  Incorporated  by reference to the Current Report on Form 8-K filed January
      4, 2005

(15)  Incorporated by reference to the Current Report on Form 8-K filed June 24,
      2004

(16)  Incorporated  by reference to the Current  Report on Form 8-K filed August
      27, 2004

(17)  Incorporated  by  reference  to the  Current  Report  on  Form  8-K  filed
      September 30, 2004

(18)  Incorporated by reference to Appendix D of the Company's  Definitive Proxy
      Materials filed on March 2, 2005

(19)  Incorporated  by reference to the Current Report on Form 8-K filed July 9,
      2004


                                       91
<PAGE>

                                   SIGNATURES

            Pursuant  to  the  requirements  of  Section  13  or  15(d)  of  the
Securities  Exchange Act of 1934,  the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                          FRANKLIN CAPITAL CORPORATION


Date: March 30, 2005                      By: /s/ Milton "Todd" Ault III
                                              ----------------------------------
                                              Milton "Todd" Ault III
                                              CHAIRMAN & CHIEF EXECUTIVE OFFICER

            Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Company in
the capacities and on the dates indicated.

         SIGNATURES                           TITLE                    DATE
         ----------                           -----                    ----


/s/ Milton "Todd" Ault III         Chairman &
----------------------------        Chief Executive Officer       March 30, 2005
Milton "Todd" Ault III


/s/ Lytle Brown III
----------------------------
Brigadier General (Ret.)
Lytle Brown III                     Director                      March 30, 2005


/s/ Alice Campbell
----------------------------
Alice Campbell                      Director                      March 30, 2005


/s/ Louis Glazer
----------------------------
Louis Glazer, M.D., Ph.G            Director                      March 30, 2005


/s/ Herbert Langsam                 Director                      March 30, 2005
----------------------------
Herbert Langsam


                                       92