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


**FORM
      10-K/A**


**Amendment
      No. 1**




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




**PATIENT
      SAFETY TECHNOLOGIES, INC.**


**(F/K/A
      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**
              Common
                Stock, par value
              $1.00
                per share
            **Name
                of each exchange on which registered**
              The
                American Stock Exchange




**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   ̈ .








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.















**FRANKLIN
      CAPITAL CORPORATION**




**FORM
      10-K FOR THE FISCAL YEAR**


**ENDED
      DECEMBER 31, 2004**




**TABLE
      OF CONTENTS**




**PAGE**PART
                IItem
                1.
            
            Business
            
            1Item
                2.
            
            Properties
            
            36Item
                3.
            
            Legal
                Proceedings
            
            36Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            36PART
                IIItem
                5.
            
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            
            39Item
                6.
            
            Selected
                  Financial Data
            
            40Item
                7.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            41Item 7A.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            50Item
                8.
            
            Financial
                Statements and Supplementary Data
            
            51Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            74Item
                9A.
            
            Controls
                and Procedures
            
            74PART
                IIIItem
                10.
            
            Directors
                and Executive Officers of the Registrant
            
            74Item 11.
            
            Executive
                Compensation
            
            79Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and Management and
                Related
              Stockholder
                Matters
            
            85Item 13.
            
            Certain
                Relationships and Related Transactions
            
            87Item
                14.
            
            Principal
                Accountant Fees and Services
            
            88PART
                IVItem
                15.
            
            Exhibits,
                Financial Statement and Schedules
            
            89Signatures
            
            92








**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.





We
      anticipate that in the process of identifying opportunities that fall within
      our
      areas of focus we will often take a controlling interest in an entity, or
      alternatively establish a new entity to contribute assets that we acquire,
      which
      we believe will provide the basis for a compelling business. This may
      necessitate the need for capital investment into the entity and or services
      such
      as (i) identification of outside financing sources; (ii) providing capital
      introductions of financial institutions and/or strategic investors; (iii)
      evaluation and recommendation of candidates for appointment as officers,
      directors or employees; (iv) making personnel of the Company available to
      provide services on a temporary or permanent basis; or (v) evaluation and/or
      negotiation of merger or sale opportunities





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.”*





As
      part
      of the Restructuring Plan we formed two wholly-owned subsidiaries: Franklin
      Capital Properties, LLC, (“Franklin Capital”) a real estate development and
      management company and Franklin Medical Products, LLC, a healthcare consulting
      services company. Effective February 23, 2005, Franklin Medical Products, LLC
      changed its name to Patient Safety Consulting Group, LLC (“PSCG”).





Since
      both Franklin Capital and PSCG are wholly-owned subsidiaries we maintain control
      of the entities with full rights to their assets. However, in the event we
      elect
      to partner with a strategic third party the Limited Liability Company structure
      provides more flexibility than a traditional corporation with an equivalent
      level of liability protection. Further, by establishing distinct entities we
      believe that we are better able to segregate our core patient safety business
      from our other business segments.





**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.





1


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 acquisition in its plan to become a leader in what it believes
      to be the 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.





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
      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 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 the 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:





2


§
            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.





§
            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 have been lower than net asset value,
                making it much more difficult for BDC’s to raise equity capital. While
                this restriction provides stockholders of an investment company with
                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.





§
            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.





§
            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-à-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.





§
            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.





§
            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.





3


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 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 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.
      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


**FRANKLIN
      CAPITAL CORPORATION AND SUBSIDIARIES PRO FORMA**


**UNAUDITED
      PRO FORMA BALANCE SHEET**





**December
                31,**
            
            **2004**
            
            **2003****ASSETS**Cash
                and cash equivalents
            
            $
            846,404
            
            $
            224,225Trading
                assets
            
            
            4,020,154
            
            
            1,955,169Other
                current assets
            
            
            255,510
            
            
            58,432**TOTAL
                CURRENT ASSETS**
            
            
            5,122,068
            
            
            2,237,826Property,
                plant and equipment, net
            
            
            23,657
            
            
            20,206Other
                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
            
            $
            915,754Accounts
                payable and accrued liabilities
            
            
            939,568
            
            
            318,140Trading
                assets sold short
            
            
            1,075,100Due
                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 outstandingat
                December 31, 2004 and 2003(Liquidation
                preference $1,095,000)
            
            
            10,950
            
            
            10,950Common
                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
                sharesoutstanding
                at December 31, 2004 and 2003, respectively
            
            
            2,042,689
            
            
            1,505,888Paid-in
                capital
            
            
            13,925,253
            
            
            10,439,610Accumulated
                deficit
            
            
            (9,795,791
            )
            
            (7,315,478
            )6,183,101
            
            
            4,640,970Deduct:
                485,788 shares of common stock held in treasuryat
                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





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 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, of our shares.
      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.





5


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


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


***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 the United States and European surgical sponge sales. Based upon
      assumptions that take into consideration factors such as the approximate number
      of hospitals and operating rooms in the United States and Europe, the
      approximate number of surgeries performed annually, and estimates for the
      average cost of surgical sponges, incorporating the Safety-Sponge TM System,
      per surgery, we believe that the existing market for surgical sponge sales
      in
      the United States and Europe represents a market opportunity equal to or in
      excess of $650 million in annual sales. In addition, the Company believes that
      its innovative Safety-Sponge(TM) System could save up to an estimated $1.0
      billion annually in retained sponge litigation.





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





8


***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.





***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 Safety-Sponge TM System
      allows for faster and more accurate counting of surgical sponges. The
      Safety-Sponge TM System
      is a two-part system consisting of a SurgiCount handheld scanner/imager/computer
      and of SurgiCount supplied surgical dressings. Our sponges unique in that they
      are individually labeled with a “bar code” at the point of manufacture. The
      sponges are scanned in by a SurgiCount handheld scanner at the beginning of
      a
      surgical procedure, and then scanned out at the end of a procedure after their
      use. Each sponge, having a unique bar code, can accurately be accounted for
      at
      the end of the procedure. Without using our Safety-Sponge TM System,
      in a typical surgical procedure, a nurse and a scrub tech manually count all
      sponges used and un-used. The core of the Safety-Sponge TM System
      is the ability to uniquely identify an individual dressing. This is covered
      by
      SurgiCount’s patent #5,931,824, which solely permits the holder to label or
      identify a dressing with a unique identifier. Patent #5,931,824 will expire
      in
      August of 2019.





SurgiCount
      began development of the Safety-Sponge TM line of
      sponges in February 1994 and received confirmation from the FDA that the product
      line was granted 510k exempt status on November 8, 1999. The
      Safety-Sponge TM line of
      sponges has passed required FDA biocompatibility tests including ISO
      sensitization, cytotoxicity and skin irritation tests. The Center for Devices
      and Radiological Health ***(“CDRH”)*** handles
      the premarket notification process for medical devices at the FDA. The CDRH
      requires the biological evaluation of medical devices to determine the potential
      toxicity resulting from contact of the component materials of the device with
      the human body. Evaluation of any new device intended for human use requires
      data from systemic testing to ensure that the benefits provided by the final
      product will exceed any potential risk produced by device materials. CDRH Blue
      Book Memo G95-1 provides guidance for required biocompatibility testing
      procedures for medical devices. SurgiCount requested specific guidance from
      the
      CDRH as to the required biocompatibility tests for the Safety-Sponge TM line of
      products. The CDRH specifically guided SurgiCount to three required
      biocompatibility tests for the Safety-Sponge TM line:
      Cytotoxicity, Sensitization and Irritation/Intracutaneous Reactivity. SurgiCount
      Medical has performed and passed all three of these required biocompatibility
      tests. Cytotoxicity testing is to determine whether or not the materials used
      in
      a medical device are harmfully reactive to certain biological elements on a
      cellular level. Sensitization or hypersensitivity reactions usually occur as
      a
      result or prolonged contact with a chemical substance that interacts with the
      body’s immune system. The tests are used to eliminate the possibility that
      patients will be exposed to strong sensitizing chemicals extracted from the
      medical device





The
      Company’s current patient safety products such as the Safety-Sponge TM System
      are presently in the optimization and commercialization phase. Development
      of
      the Safety-Sponge TM System
      has been completed and the system is in final preparations to be rolled out
      into
      the market as a commercial product. 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 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. Through
      direct contracts and sponsorship of studies, recommendations from these
      professionals have improved various aspects of the Safety-Sponge TM .
      Examples where recommendations were utilized include: the ideal location for
      labels, label coarse and thickness, improved operating room procedures, label
      structure and scanner function. In addition, the Company is developing
      relationships with Universities to co-development and distribute patient safety
      continuing medical education (CME) products and well as University-developed
      patient safety products such as guides, specially designed notepads and bedside
      tools.





9


***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.





The
      Company currently owns patents issued in the United States and Europe related
      to
      patient safety, among them, 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.





10


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:





·
            Focus
                on innovative technologies, products and
                services;





·
            Network
                of well respected industry affiliations and medical
                expertise;





·
            Expertise
                in originating, structuring and monitoring
                investments;





·
            Flexible
                investment approach; and





·
            Established
                deal sourcing network.





Though
      by
      the nature of our patents, we can have no direct competition, there are several
      existing individuals/companies that are trying to address the same issues as
      SurgiCount's Safety-Sponge System.  Among these are a medical malpractice
      lawyer named Daniel Ballard and two radio frequency identification (RFID)-based
      companies, RF Surgical and ClearCount Medical.





Mr.
      Ballard’s invention and patent revolves around imbedding radio-opaque pellets
      (similar to BB’s) into the sponges. These would be read by placing the used
      sponges into a special machine after a surgery that would count the pellets,
      and
      thus the sponges placed in the machine.





The
      RFID
      companies both have similar approaches to solving retained sponges. Their
      approach is to “impregnate” sponges with RFID tags. RFID-reading wands would be
      held over the patients at the end of surgeries to ensure that no sponges are
      left behind. It is our understanding from limited discussions with the
      principals of RF Surgical and ClearCount Medical, and from discussions with
      sponge manufacturers, that the RFID companies are still in the development
      stage
      with their competing products. SurgiCount has received FDA exemption for its
      Safety-Sponge System and its scanner is currently registered in the FDA’s
      database as non-interfering medical equipment. With SurgiCount’s Safety-Sponge
      System is fully developed and ready for manufacturing and distribution, the
      Company believes this provides an advantage over the above competing products.





***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.





11


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 and financial advisory 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.





***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 is evaluating alternative uses for its real
      estate holdings, which range from development and capital investments as a
      means
      of generating recurring revenue to the liquidation of specific properties.
      As of
      December 31, 2004, the Company had not generated any revenue, nor does it expect
      to generate any recurring revenue during 2005, from rental activities on any
      of
      its real estate investments.





**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.  Since the Company has not generated any
      revenue from its real estate holdings, the relative competitive position of
      the
      properties cannot be determined. 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.





12


**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 acquisition in its plan to become a leader in the 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. As of March 31, 2005, excluding shares
      issuable to the Company upon exercise of the warrants, the Company owned 1.6%
      of
      the outstanding common stock of IPEX, Inc.




On
      March
      16, 2005, Ault Glazer filed a Schedule 13D with the SEC relating to its holdings
      in Tuxis Corporation, a Maryland corporation (“Tuxis”). Tuxis is currently
      registered under the 1940 Act, as a closed-end management investment company.
      Tuxis is a real estate development and service company. Tuxis is currently
      following through on shareholder approval to change the nature of its business
      so as to cease to be an investment company and to concentrate in real estate
      and
      related services and in that connection its management is conducting a real
      estate review, development, and acquisition program. On May 3, 2004, Tuxis
      filed
      an application with the SEC to de-register as an investment company. 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
      University hospitals such as those operated by Harvard and the University of
      California, San Francisco. Several Factors are considered in determining what
      opportunities we will ultimately invest. Among the factors that may influence
      our decision are the size of the investment and the potential need for follow
      on
      investments, our expertise in the industry, the expected duration of the
      investment, the level of management assistance required to devote to the
      investment, as well as the cash and personnel needs of our core businesses.
      Typically an investment will not be in excess of 10% of our total assets at
      the
      time the investment is made unless the investment is complimentary to our core
      target industries and the investment results in the Company owning a controlling
      stake in the investee upon making of the investment. 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.





Investments
      are typically disposed of on the basis of three primary factors, (i) when market
      conditions allow, (ii) when our management role in the investee company has
      been
      eliminated or significantly diminished, and (iii) the investment is no longer
      deemed complimentary to our core target industries.





13





**Portfolio
      of Investments**





The
      Company has historically invested in equity securities of start-up and early
      stage companies in the radio and telecommunications industry. Short selling
      is a
      component of the Company’s investment strategy and these trades typically range,
      in any particular month, from 0% to 20% of total trading activity. As a result
      of the Company’s 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 industries. These private businesses
      may
      be thinly 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."*





***Current
      Investments & Relationships***





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 acquisition in its plan to become a leader in the 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 to be approximately $650 million in
      annual U.S. and European 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 an agreement 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 agreement, the Company received a 5.0% ownership
      interest in China Nurse, agreed to provide referrals and other assistance and
      has also made a small capital investment of $50,000 in that company.





14


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. At December 31, 2004, excluding the
      1,224,000 additional shares the Company agreed to purchase, the Company had
      an
      approximate 26.9% ownership interest in Digicorp. Digicorp's common stock is
      traded on the OTC Bulletin Board. Since June 30, 1995, DigiCorp has been in
      the
      developmental stage and has had no operations other than issuing shares of
      common stock for financing the preparation of financial statements and for
      preparing filings for the SEC. 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 Company’s total assets and 28.0% of its net assets.
      This investment equates to an approximate 1.6% ownership interest in Alacra.
      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.





Alacra’s
      online service allows users to search, locate and extract business information
      from the Internet and from the Alacra library of premium content. The company’s
      team of information professionals selects, categorizes and indexes more than
      45,000 sites on the Web containing reliable and comprehensive business
      information. Simultaneously, users can search more than 100 premium commercial
      databases that contain financial information, economic data, business news,
      and
      investment and market research. Alacra provides the requisite information in
      a
      user friendly format, gleaned from such prestigious content partners as Thomson
      FinancialTM, Barra, The Economist Intelligence Unit, Factiva, Mergerstat® and
      many others.





On
      April
      20, 2000, the Company purchased $1,000,000 worth of Alacra Series F Convertible
      Preferred Stock. In connection with this investment, Franklin was granted
      observer rights at Alacra board of director meetings. Alacra has recorded
      revenue growth in every year since the Company’s original investment, further,
      2004 revenues were in excess of the prior years revenues by greater than 20%.





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. Each real estate
      investment was made during the fourth quarter of 2004 and, based upon Company’s
      assessment of the respective real estate markets, on prices that the Company
      believes to be favorable. 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 is evaluating alternative
      uses for its real estate holdings, which range from development and capital
      investments as a means of generating recurring revenue to the liquidation of
      specific properties. As of December 31, 2004, the Company had not generated
      revenue from rental activities on any of its real estate investments..




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.”*





15


***Investments
      Disposed of in 2004***





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.





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.
      Franklin along with Sunshine
      Wireless, LLC ***(“*** ***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 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.





16


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.





**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. Distributions of cash or property by us to our stockholders, if
      any,
      will be taxable as dividends only to the extent that we have current or
      accumulated earnings and profits. 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 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
      FDA
      administers the Food, Drug and Cosmetics Act (the “FDC Act”). Under the FDC Act,
      most medical devices must receive FDA clearance through the Section 510(k)
      notification process (“510(k)”) or the more lengthy premarket approval (“PMA”)
      process before they can be sold in the United States. All of our products,
      currently comprising only the Safety-SpongeTM System, must receive 510(k)
      clearance or PMA approval. The Center for Devices and Radiological Health
      (“DRH”) handles the PMA approval process for medical devices at the FDA. The
      CDRH places medical devices into one of many predefined groups, then classifies
      each group into one of three classes (Class I, II or III) based on the levels
      of
      controls necessary to assure the safety and effectiveness of the specific device
      group. Class I and II devices also have subsets of “exempt devices” which are
      exempt from the PMA approval requirement subject to certain limitations. 21
      CFR
      878.4450 (”Gauze/Sponge, Internal, X-Ray Detectable”) is the defined device
      group that the Safety-Sponge line of products falls into. This defined device
      group is specifically denoted as being “exempt” from the premarket notification
      process. SurgiCount submitted specific information on its Safety-Sponge product
      directly to the CDRH and received confirmation of the 501(k) exempt status
      of
      this line of products.





17


To
      obtain
      510(k) marketing clearance, a company must show that a new product is
“substantially equivalent” in terms of safety and effectiveness to a product
      already legally marketed and which does not require a PMA. Therefore, it is
      not
      always necessary to prove the actual safety and effectiveness of the new product
      in order to obtain 510(k) clearance for such product. To obtain a PMA, we must
      submit extensive data, including clinical trial data, to prove the safety,
      effectiveness and clinical utility of our products. FDA’s quality system
      regulations also require companies to adhere to certain good manufacturing
      practices requirements, which include testing, quality control, storage, and
      documentation procedures. Compliance with applicable regulatory requirements
      is
      monitored through periodic site inspections by the FDA. In addition, we are
      required to comply with FDA requirements for labeling and promotion. The Federal
      Trade Commission also regulates most device advertising.





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.





18


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.





19


**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 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.





***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:





·
            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”).





·
            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





·
            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.





20


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.





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.
      The Code of Business Conduct and Ethics is also posted on the Company’s Internet
      website, which is located at www.patientsafetytechnologies.com.





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





21


***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:





·
            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;





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





·
            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





·
            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.





**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:*





*•*
            *changes
                in or conditions affecting the economy;**•*
            *risk
                associated with possible disruption in the Company’s operations due to
                terrorism;**•*
            *future
                regulatory actions and conditions in the Company’s operating areas or
                target industries for investments; and**•*
            *other
                risks and uncertainties as may be detailed from time to time in the
                Company’s public announcements and SEC
                filings.*





22


**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
      and financial services 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. 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.





23


**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.





**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.





24


**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 portfolio companies 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 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 our portfolio companies to successfully market their products
      would
      have a negative impact on our investment returns**





Even
      if
      our portfolio companies 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 may 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.





25


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, 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:





26


***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, 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.





27


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.





**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.





28


**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:





·
            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;





·
            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;





·
            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” 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;





·
            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





·
            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.





29


***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.





30


**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
      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.





31


**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 based upon the recommendation of its Valuation Committee. The types
      of
      factors that the Valuation Committee takes into account in providing its fair
      value 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 asset quarterly, and Franklin is required to carry the
      portfolio 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 Franklin makes investments, the board of directors estimates
      the fair value of these loans and equity securities pursuant to written
      valuation policy and a consistently applied valuation process. 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 portfolio investment while employing a consistently
      applied valuation process for the types of investments we make. 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, Franklin is not permitted to provide a general reserve for anticipated
      loan losses; instead, Franklin is required by the 1940 Act to specifically
      value
      each individual investment and record an unrealized loss for an asset that
      it
      believes has become impaired. Without a readily ascertainable market value,
      the
      estimated value of the portfolio of loans and equity securities may differ
      significantly from the values that would be placed on the portfolio if there
      existed a ready market for the loans and equity securities. Franklin adjusts
      quarterly the valuation of the portfolio to reflect the board of directors’
      estimate of the current realizable value of each investment in the Company’s
      portfolio. Any changes in estimated value 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.





32


**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:





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





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





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





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





·
            general
                economic conditions and trends;





·
            loss
                of a major funding source; or





·
            departures
                of key personnel.





33


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 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.





34


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 invest,
      may become obsolete.**





Neither
      we, nor the companies in which we 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 we, or any of 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 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 other,
      the
      following statements related to:





·
              our
                  strategy for growing our operations in the target
                  industries;
 
 ·
              our ability to operate successfully
                in highly
                regulated environments;
 
 ·
              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;
 
 ·
              a contraction of available credit
                and/or an
                inability to access the equity markets could impair our investment
                activities;
 
 ·
              interest rate volatility could adversely
                affect our results; and
 
 ·
              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.





35


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.





**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:





36


**No.
                of Shares****Nominees**
            
            **Shares
                For**
            
            **Shares
                Withheld**
            
            **Broker
                non-votes*****Common
                and Preferred Stock Nominees***Lytle
                Brown III
            
            
            976,510
            
            
            3,693
            
            
            N/AAlice
                Campbell
            
            
            976,510
            
            
            3,693
            
            
            N/A***Preferred
                Stock Nominees***Louis
                Glazer
            
            
            9,750
            
            
            None
            
            
            N/AHerbert
                Langsam
            
            
            9,750
            
            
            None
            
            
            N/A





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:





**No.
                of Shares****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock
            
            
            914,280
            
            
            55,006
            
            
            1,167
            
            
            0Preferred
                Stock
            
            
            9,750
            
            
            0
            
            
            0
            
            
            0Common
                Stock and Preferred Stock
            
            
            924,030
            
            
            55,006
            
            
            1,167
            
            
            0





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:





**No.
                of Shares****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock
            
            
            713,793
            
            
            53,521
            
            
            2,667
            
            
            200,472Preferred
                Stock
            
            
            9,750
            
            
            0
            
            
            0
            
            
            0Common
                Stock and Preferred Stock
            
            
            723,543
            
            
            53,521
            
            
            2,267
            
            
            200,472





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:





**No.
                of Shares****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock and Preferred Stock
            
            
            924,860
            
            
            55,119
            
            
            224
            
            
            0





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:





**No.
                of Shares****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock and Preferred Stock
            
            
            723,552
            
            
            8,409
            
            
            47,800
            
            
            200,472





37


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:





**No.
                of Shares****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock and Preferred Stock
            
            
            773,540
            
            
            5,779
            
            
            412
            
            
            200,472





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:





**No.
                of Shares****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock and Preferred Stock
            
            
            723,058
            
            
            55,586
            
            
            1,087
            
            
            200,472





**No.
                of Shares (after subtraction)****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock and Preferred Stock
            
            
            158,474
            
            
            55,586
            
            
            1,087
            
            
            200,472





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:





**No.
                of Shares****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock and Preferred Stock
            
            
            771,633
            
            
            7,386
            
            
            712
            
            
            200,472





**No.
                of Shares (after subtraction)****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock and Preferred Stock
            
            
            259,199
            
            
            7,386
            
            
            712
            
            
            200,472





38


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) 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.


**2004
                  Quarter Ending**
              
              **Low**
              
              **High**December
                  31
              
              $
              9.20
              
              $
              12.75September
                  30
              
              $
              3.20
              
              $
              14.75June
                  30
              
              $
              0.90
              
              $
              8.90March
                  31
              
              $
              1.05
              
              $
              1.52
  39





**2003
                Quarter Ending**
            
            **Low**
            
            **High**December
                31
            
            $
            0.50
            
            $
            1.55September
                30
            
            $
            0.75
            
            $
            1.05June
                30
            
            $
            0.77
            
            $
            1.26March
                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 related notes thereto and “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” included elsewhere in
      this report.





**BALANCE
                  SHEET DATA****Financial
                  Position as of December 31:****2004**
              
              **2003**
              
              **2002**
              
              **2001**
              
              **2000**Total
                  assets
              
              $
              6,934,243
              
              $
              3,258,032
              
              $
              4,632,338
              
              $
              4,098,866
              
              $
              5,766,712Liabilities
              
              $
              3,367,974
              
              $
              1,233,894
              
              $
              1,364,798
              
              $
              1,177,121
              
              $
              187,632Net
                  assets
              
              $
              3,566,269
              
              $
              2,024,138
              
              $
              3,267,540
              
              $
              2,921,745
              
              $
              5,579,080Net asset
                value per
                share attributable to common stockholders
              
              $
              1.59
              
              $
              0.91
              
              $
              2.07
              
              $
              1.19
              
              $
              3.58Net
                  asset value per share, as if converted basis
              
              $
              2.18
              
              $
              1.84
              
              $
              2.89
              
              $
              2.44
              
              $
              4.57Shares
                  outstanding
              
              
              1,556,901
              
              
              1,020,100
              
              
              1,049,600
              
              
              1,074,700
              
              
              1,098,200
  40
 **Operating
                    Data for the year ended December 31:****2004**
                
                **2003**
                
                **2002**
                
                **2001**
                
                **2000***Investment
                    income
                
                $
                11,056
                
                $
                183,159
                
                $
                455,081
                
                $
                192,697
                
                $
                115,015Expenses
                
                $
                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, net of tax
                
                $
                1,591,156
                
                $
                430,883
                
                $
                237,327
                
                $
                522,131
                
                $
                1,195,875Net
                    (decrease) increase inunrealized
                    appreciation of investments
                
                $
                (1,054,702
                )
                $
                (475,605
                )
                $
                1,663,304
                
                $
                (1,553,756
                )
                $
                (3,365,513
                )Net
                    (decrease) increase in netassets
                    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 netassets
                    from operations per weightedaverage
                    number of shares outstanding
                
                $
                (2.25
                )
                $
                (1.17
                )
                $
                0.24
                
                $
                (2.34
                )
                $
                (4.14
                )


*
              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 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.





41


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 the 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 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 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.





42


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 “(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:





§
            “Net
                investment loss from operations,” which is the difference between the
                Company’s income from interest, dividends and fees and its operating
                expenses;





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





§
            any
                applicable income tax provisions (benefits); and





§
            “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. Such
      investments are typically short-term and focus on mispriced domestic public
      equities and instruments. Short selling is a component of this strategy and
      these trades typically range, in any particular month, from 0% to 20% of the
      total trading activity. The
      making of such investments entails risks related to the loss of investment
      and
      price volatility.





43


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 those 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.




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 $460,776 due to the Company’s broker is directly attributable to
      purchases of marketable investment securities, which includes approximately
      $2,000,000 of U.S. Treasuries. 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 holding 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.





44


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.





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
            
            $
            1,949,703Unrealized
                (depreciation) appreciation
            
            
            (49,236
            )
            
            1,005,466Investments,
                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 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 is evaluating alternative
      uses for its real estate holdings, which range from development and capital
      investments as a means of generating recurring revenue to the liquidation of
      specific properties. As of December 31, 2004, the Company had not generated
      revenue from rental activities on any of its real estate
      investments.





*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.





45


Alacra’s
      online service allows users to search via a set of robust, sophisticated tools
      designed to locate and extract business information from the Internet and from
      the Alacra library of premium content. The company’s team of information
      professionals selects, categorizes and indexes more than 45,000 sites on the
      Web
      containing the most reliable and comprehensive business information.
      Simultaneously, users can search more than 100 premium commercial databases
      that
      contain financial information, economic data, business news, and investment
      and
      market research. Alacra provides the requisite information in the appropriate
      format, gleaned from such prestigious content partners as Thomson FinancialTM,
      Barra, The Economist Intelligence Unit, Factiva, Mergerstat® and many others.





On
      April
      20, 2000, the Company purchased $1,000,000 worth of Alacra Series F Convertible
      Preferred Stock. Alacra has recorded revenue growth in every year since the
      Company’s original investment, further, 2004 revenues were in excess of the
      prior years revenues by greater than 20%. 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 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 acquisition in its plan to become a leader in the 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.





46


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 an agreement 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 agreement, the Company received a 5% ownership
      interest in China Nurse, agreed to provide referrals and other assistance and
      has also made a small capital investment of $50,000 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. Since June 30, 1995, DigiCorp has been in the developmental
      stage and has had no operations other than issuing shares of common stock for
      financing the preparation of financial statements and for preparing filings
      for
      the SEC. 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.




47


**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. 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.





48


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.





*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:


**Contractual
                obligations**
            
            **Payments
                due by period****Total**
            
            **Less
                than 1 year**Accrued
                purchase price of investment in Digicorp
            
            $
            165,240
            
            $
            165,240Note
                Payable to Excelsior Radio Networks, Inc. (1)
            
            $
            892,530
            
            $
            892,530**Total**
            
            $
            $1,057,770
            
            $
            $1,057,770




49


(1)
      Franklin initially purchased Excelsior securities 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 under
      Item
      3. Legal Proceedings is settled.





**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 and in the applicable regulations of
      the
      Securities and Exchange Commission. All assets are valued at fair value as
      determined in good faith by, or under the direction of, 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."





50





**Item
      8.**  **Financial
      Statements and Supplementary Data**




**FRANKLIN
        CAPITAL CORPORATION**
  **INDEX
        TO FINANCIAL STATEMENTS AND SCHEDULES**





PageReport
                of Rothstein, Kass & Company, P.C.
            52Report
                of Ernst & Young LLP
            53Balance
                Sheets as ofDecember
                31, 2004 and 2003
            54Statements
                of Operations for the yearsended
                December 31, 2004, 2003 and 2002
            55Statements
                of Cash Flows for the yearsended
                December 31, 2004, 2003 and 2002
            56Statements
                of Changes in Net Assets for the yearsended
                December 31, 2004, 2003 and 2002
            57Financial
                Highlights for the years ended December 31,2004,
                2003, 2002, 2001 and 2000
            58Portfolio
                of Investments as ofDecember
                31, 2004
            59Portfolio
                  of Investments as ofDecember
                31, 2003
            60Notes
                to Financial Statements
            61-73





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





51


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





52


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





53
 
 **FRANKLIN
                      CAPITAL CORPORATION AND SUBSIDIARIES****Balance
                      Sheets****December
                      31,**
                  
                  **2004**
                  
                  **2003****ASSETS**Marketable
                      investment securities, at market value (cost: December 31,2004
                      - $4,058,383; December 31, 2003 - $40,899)
                  
                  $
                  4,020,154
                  
                  $
                  33,899Investments,
                      at fair value (cost: December 31, 2004 - $1,788,518;December
                      31, 2003 - $1,908,804)Excelsior
                      Radio Networks, Inc.
                  
                  
                  
                  
                  
                  1,921,270Other
                      investments
                  
                  
                  1,788,518
                  
                  
                  1,000,0001,788,518
                  
                  
                  2,921,270Cash
                      and cash equivalents
                  
                  
                  846,404
                  
                  
                  224,225Other
                      assets
                  
                  
                  279,167
                  
                  
                  78,638**TOTAL
                      ASSETS**
                  
                  $
                  6,934,243
                  
                  $
                  3,258,032**LIABILITIES
                      AND STOCKHOLDERS' EQUITY****LIABILITIES**Notes
                      payable
                  
                  $
                  892,530
                  
                  $
                  915,754Accounts
                      payable and accrued liabilities
                  
                  
                  939,568
                  
                  
                  318,140Marketable
                      investments sold short, at market value (proceeds: December
                      31,2004
                      - $1,064,093; December 31, 2003 - $0)
                  
                  
                  1,075,100Due
                      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 outstandingat
                      December 31, 2004 and 2003(Liquidation
                      preference $1,095,000)
                  
                  
                  10,950
                  
                  
                  10,950Common
                      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
                      sharesoutstanding
                      at December 31, 2004 and 2003, respectively
                  
                  
                  2,042,689
                  
                  
                  1,505,888Paid-in
                      capital
                  
                  
                  13,925,253
                  
                  
                  10,439,610Unrealized
                      (depreciation) appreciation of investments
                  
                  
                  (49,236
                  )
                  
                  1,005,466Accumulated
                      deficit
                  
                  
                  (9,746,555
                  )
                  
                  (8,320,944
                  )6,183,101
                  
                  
                  4,640,970Deduct:
                      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
 The
            accompanying notes are an integral part of these financial
            statements.
   54
 **FRANKLIN
                    CAPITAL CORPORATION AND SUBSIDIARIES****Statements
                    of Operations****For
                    the Year Ended December 31,**
                
                **2004**
                
                **2003**
                
                **2002****INVESTMENT
                    INCOME**Interest
                    on short term investments and money market accounts
                
                $
                11,056
                
                $
                3,159
                
                $
                5,081Income
                    from affiliates
                
                
                -
                
                
                180,000
                
                
                450,00011,056
                
                
                183,159
                
                
                455,081**EXPENSES**Salaries
                    and employee benefits, net of reimbursements
                
                
                494,167
                
                
                548,269
                
                
                862,970Officer's
                    severance
                
                
                483,000
                
                
                -
                
                
                -Professional
                    fees
                
                
                1,484,143
                
                
                231,164
                
                
                191,900Rent
                
                
                76,276
                
                
                71,942
                
                
                98,982Insurance
                
                
                64,083
                
                
                67,728
                
                
                58,036Directors'
                    fees
                
                
                10,550
                
                
                9,158
                
                
                2,003Taxes
                    other than income taxes
                
                
                50,697
                
                
                29,708
                
                
                39,709Newswire
                    and promotion
                
                
                8,360
                
                
                -
                
                
                1,181Depreciation
                    and amortization
                
                
                863
                
                
                16,972
                
                
                16,969Interest
                    expense
                
                
                32,284
                
                
                42,903
                
                
                35,401Expenses
                    related to terminated merger
                
                
                -
                
                
                73,500
                
                
                490,782General
                    and administrative
                
                
                246,750
                
                
                188,182
                
                
                187,5172,951,173
                
                
                1,279,526
                
                
                1,985,450Net
                    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
                
                
                254,088Unaffiliated
                
                
                143,142
                
                
                (2,017
                )
                
                (16,430
                )Net
                    realized gain on portfolio of investments
                
                
                1,591,156
                
                
                430,883
                
                
                237,658Provision
                    (benefit) for current income taxes
                
                
                -
                
                
                -
                
                
                331Net
                    realized loss
                
                
                (1,348,961
                )
                
                (665,484
                )
                
                (1,293,042
                )(Decrease)
                    increase in unrealized appreciation of investmentsInvestment
                    securities:Affiliated
                
                
                (1,012,466
                )
                
                (479,392
                )
                
                1,663,304Unaffiliated
                
                
                (42,236
                )
                
                3,787
                
                
                -(Decrease)
                    increase in unrealized appreciation of investments,net
                    of deferred income taxes
                
                
                (1,054,702
                )
                
                (475,605
                )
                
                1,663,304Net
                    (decrease) increase in net assets from operations
                
                
                (2,403,663
                )
                
                (1,141,089
                )
                
                370,262Preferred
                    dividends
                
                
                76,650
                
                
                76,652
                
                
                115,152Net
                    (decrease) increase in net assets attributableto
                    common stockholders
                
                
                ($2,480,313
                )
                
                ($1,217,741
                )
                $
                255,110Basic
                    and diluted net (decrease) increase in net assets per
                    shareattributable
                    to common stockholders
                
                
                ($2.25
                )
                
                ($1.17
                )
                $
                0.24Weighted
                    average number of common shares outstanding
                
                
                1,100,324
                
                
                1,037,443
                
                
                1,066,195
 The
        accompanying notes are an integral part of these financial
        statements.
  55
 **FRANKLIN
                    CAPITAL CORPORATION AND SUBSIDIARIES****Statements
                    of Cash Flows****For
                    the Year Ended December 31,**
                
                **2004**
                
                **2003**
                
                **2002**Cash
                    flows from operating activities:Net
                    (decrease) increase in net assets from operations
                
                
                ($2,403,663
                )
                
                ($1,141,089
                )
                $
                370,262Adjustments
                    to reconcile net (decrease) increase in net assets from
                    operationsto
                    net cash used in operating activities:Depreciation
                    and amortization
                
                
                863
                
                
                16,972
                
                
                16,969Decrease
                    (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
                )
                
                235,529Total
                    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
                
                
                -
                
                
                -
                
                
                1,500,000Increase
                    in due to broker
                
                
                460,776Proceeds
                    from sale of affiliate
                
                
                2,356,818
                
                
                1,000,900
                
                
                78,715Proceeds
                    from sale of marketable investment securities
                
                
                57,805,768
                
                
                28,924
                
                
                6,554Loan
                    payments received from majority-owned affiliate
                
                
                -
                
                
                -
                
                
                75,000Purchases
                    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
                
                
                1,637,284Cash
                    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
                
                
                -
                
                
                -
                
                
                300,000Redemption
                    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
                )
                
                282,463Cash
                    and cash equivalents at beginning of year
                
                
                224,225
                
                
                562,191
                
                
                279,728Cash
                    and cash equivalents at end of year
                
                $
                846,404
                
                $
                224,225
                
                $
                562,191Supplemental
                    disclosures of cash flow information:Cash
                    paid during the year for interest
                
                $
                2,452Issuance
                    of common stock for purchase of investment
                
                $
                55,812Accrued
                    purchase price of investment
                
                $
                165,240
  The
          accompanying notes are an integral part of these financial statements.
 56
 **FRANKLIN
                    CAPITAL CORPORATION AND SUBSIDIARIES****Statements
                    of Changes in Net Assets****For
                    the Year Ended December 31,**
                
                **2004**
                
                **2003**
                
                **2002**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
                )
                
                1,663,304Net
                    (decrease) increase in net assets from operations
                
                
                (2,403,663
                )
                
                (1,141,089
                )
                
                370,262Capital
                    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
                
                
                -
                
                
                -
                
                
                300,000Redemption
                    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
                )
                
                345,795Net
                    assets at beginning of year
                
                
                2,024,138
                
                
                3,267,540
                
                
                2,921,745Net
                    assets at end of year
                
                $
                3,566,269
                
                $
                2,024,138
                
                $
                3,267,540
 The
        accompanying notes are an integral part of these financial statements.
  57
 **FRANKLIN
                    CAPITAL CORPORATION AND SUBSIDIARIES****Financial
                    Highlights****For
                    the Year Ended December 31,**
                
                **2004****(1)**
                
                **2003****(1)**
                
                **2002****(1)**
                
                **2001****(1)**
                
                **2000****(1)**PER
                    SHARE OPERATING PERFORMANCE(2):Net
                    asset value attributable to common stockholders,beginning
                    of year
                
                $
                0.91
                
                $
                2.07
                
                $
                1.19
                
                $
                3.58
                
                $
                7.70Net
                    investment loss
                
                
                (2.67
                )
                
                (1.06
                )
                
                (1.44
                )
                
                (1.28
                )
                
                (2.07
                )Net
                    (loss) gain on portfolio ofinvestments
                    (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
                
                $
                3.58Market
                    value per share, end of year
                
                $
                12.73
                
                $
                1.06
                
                $
                1.62
                
                $
                4.18
                
                $
                8.00TOTAL
                    INVESTMENT RETURN:Based
                    on market value per share (%)
                
                
                1,100.94
                
                
                (38.37
                )
                
                (58.85
                )
                
                (47.75
                )
                
                17.13RATIOS
                    TO AVERAGE NET ASSETS:Expenses
                    (%)
                
                
                105.58
                
                
                48.36
                
                
                56.61
                
                
                37.67
                
                
                25.99Net
                    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
                
                $
                5,579Portfolio
                    turnover rate (%)
                
                
                2,179
                
                
                26
                
                
                37
                
                
                89
                
                
                24
 (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.
  58
 **FRANKLIN
                        CAPITAL CORPORATION AND SUBSIDIARIES****Portfolio
                        of Investments****Marketable
                        Investment Securities****Number
                        of****Shares
                        or**
                    
                    
                    
                    **Market****Principal**
                    
                    
                    
                    **Value****December
                        31, 2004****(2)**
                    
                    **Amount
                        ($)**
                    
                    **Cost****(1)**
                    
                    **(Note
                        2)**DigiCorp
                    
                    
                    3,846,027
                    
                    $
                    532,435
                    
                    $
                    532,435Dreamworks
                        Animation SKG, Inc.
                    
                    
                    5,000
                    
                    
                    197,950
                    
                    
                    187,550Google,
                        Inc.
                    
                    
                    2,500
                    
                    
                    495,404
                    
                    
                    481,975Law
                        Enforcements Associates Corp.
                    
                    
                    22,000
                    
                    
                    124,650
                    
                    
                    113,300NASDAQ
                        100 Trust Series I Put, Exp. 1/21/2005, Strike $38.00
                    
                    
                    200
                    
                    
                    8,400
                    
                    
                    2,500Palmone,
                        Inc.
                    
                    
                    8,000
                    
                    
                    254,878
                    
                    
                    252,400Thermogenesis
                        Corp.
                    
                    
                    5,000
                    
                    
                    32,266
                    
                    
                    31,700Tuxis
                        Corp.
                    
                    
                    35,000
                    
                    
                    248,232
                    
                    
                    257,250US
                        Treasury - 2.875%, due 11/30/06
                    
                    
                    500,000
                    
                    
                    498,672
                    
                    
                    498,516US
                        Treasury - 3.000%, due 11/15/07
                    
                    
                    1,000,000
                    
                    
                    996,875
                    
                    
                    994,063US
                        Treasury - 3.500%, due 12/15/09
                    
                    
                    500,000
                    
                    
                    497,734
                    
                    
                    497,578Federal
                        Home Loan Mtg. Corp., due 01/19/2035
                    
                    
                    1,000,000
                    
                    
                    144,638
                    
                    
                    144,638Certificate
                        of Deposit - 0.7%, due 01/31/2005
                    
                    
                    
                    
                    
                    26,249
                    
                    
                    26,2494,058,383
                    
                    
                    4,020,154Diamonds
                        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
  **Investments,
                        at Fair Value****Number
                        of****Shares
                        or**
                    
                    
                    
                    **Directors'****Equity**
                    
                    **Principal**
                    
                    
                    
                    **Valuation****December
                        31, 2004****(2)**
                    
                    **Investment**
                    
                    **Interest**
                    
                    **Amount
                        ($)**
                    
                    **Cost****(1)**
                    
                    **(Note
                        2)****Other
                        Investments**Alacra
                        Corporation(21.1%
                        of total investments and 28.0% of net assets)
                    
                    
                    Convertible
                        Preferred Stock
                    
                    
                    1.58
                    %
                    
                    321,543
                    
                    
                    1,000,000
                    
                    
                    1,000,000(Internet-based
                        information provider)China
                        Nurse, LLC(1.1%
                        of total investments and 1.4% of net assets)
                    
                    
                    LLC
                        Interest
                    
                    
                    5.00
                    %
                    
                    50,000
                    
                    
                    50,000
                    
                    
                    50,000(Healthcare
                        Services)Real
                        Estate(7.7%
                        of total investments and 10.2% of net assets)
                    
                    
                    Owned
                    
                    
                    100.00
                    %
                    
                    
                    
                    
                    363,053
                    
                    
                    363,053(Real
                        estate development)Real
                        Estate(7.9%
                        of total investments and 10.5% of net assets)
                    
                    
                    Loan
                    
                    
                    
                    
                    
                    375,465
                    
                    
                    375,465
                    
                    
                    375,465(Real
                        estate development)Investments,
                        at Fair Value(37.8%
                        of total investments and 50.1% of net assets)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    1,788,518
                    
                    $
                    1,788,518
 (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.
  59
 **FRANKLIN
                      CAPITAL CORPORATION AND SUBSIDIARIES****Portfolio
                      of Investments****Marketable
                      Investment Securities****Number
                      of****Shares
                      or**
                  
                  
                  
                  **Market****Principal**
                  
                  
                  
                  **Value****December
                      31, 2003****(2)**
                  
                  **Amount
                      ($)**
                  
                  **Cost****(1)**
                  
                  **(Note
                      2)**Explore
                      Technologies
                  
                  
                  7,500
                  
                  $
                  14,650
                  
                  $
                  7,650Certificate
                      of Deposit - 0.7%, due 02/02/2004
                  
                  
                  
                  
                  
                  26,249
                  
                  
                  26,249Total
                      Marketable Investment Securities(1.2%
                      of total investments and 1.7% of net assets)
                  
                  
                  
                  
                  $
                  40,899
                  
                  $
                  33,899
  **Investments,
                      at Fair Value****Number
                      of****Shares
                      or**
                  
                  
                  
                  **Directors'****Equity**
                  
                  **Principal**
                  
                  
                  
                  **Valuation****December
                      31, 2003****(2)**
                  
                  **Investment**
                  
                  **Interest**
                  
                  **Amount
                      ($)**
                  
                  **Cost****(1)**
                  
                  **(Note
                      2)****Affiliate**Excelsior
                      Radio Networks, Inc.
                  
                  
                  Common
                      stock
                  
                  
                  36.35
                  %
                  
                  908,804
                  
                  $
                  908,804
                  
                  $
                  1,817,608Excelsior
                      Radio Networks, Inc.
                  
                  
                  Warrants
                  
                  
                  -
                  
                  
                  87,111
                  
                  
                  -
                  
                  
                  103,662Total
                      Excelsior Radio Networks, Inc.(65.0%
                      of total investments and 94.9% of net assets)
                  
                  
                  
                  
                  
                  13.82
                  %
                  
                  
                  
                  
                  908,804
                  
                  
                  1,921,270(Radio
                      production and advertising sales)
                  
                  
                  
                  
                  
                  (fully
                      diluted)**Other
                      Investment**Alacra
                      Corporation(33.8%
                      of total investments and 49.4% of net assets)
                  
                  
                  Convertible
                      Preferred Stock
                  
                  
                  1.68
                  %
                  
                  321,543
                  
                  
                  1,000,000
                  
                  
                  1,000,000(Internet-based
                      information provider)Investments,
                      at Fair Value(98.8%
                      of total investments and 144.3% of net assets)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,908,804
                  
                  
                  2,921,270
  (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.
 60
 **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 20 04
          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.
 
 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.
 
 61
 
 **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 **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. To determine fair value an impairment analysis is performed
          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.
          Other
          pertinent factors taken into consideration to determine the fair value
          of an
          investment includes, but are not limited to, assumptions related to future
          results of operations and growth of the portfolio company, the nature and
          value
          of any collateral, the portfolio company’s ability to make payments, 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. 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.
 
 Investments
          identified as having an indicator of impairment are subject to further
          analysis
          to determine if the investment is other than temporarily impaired, in which
          case
          we write the investment down to its impaired value. When a portfolio company
          is
          not considered viable from a financial or technological point of view,
          we write
          down the entire investment since we consider the estimated fair market
          value to
          be nominal. If a portfolio company obtains additional funding at a valuation
          lower than our carrying amount or requires a new round of equity funding
          to stay
          in operation and the new funding does not appear imminent, we presume that
          the
          investment is other than temporarily impaired, unless specific facts and
          circumstances indicate otherwise. We did not recognize any impairments
          for years
          ended December 31, 2004 and 2003.
 
 **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.
 
 62
 
  **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 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.
 
 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.
 
 December
                    31, 2004
                
                December
                    31, 2003
                
                December
                    31, 2002Net
                    (decrease) increase in net assetsattributable
                    to common stockholders:As
                    reported
                
                $
                (2,480,313
                )
                $
                (1,217,741
                )
                $
                255,110Deduct:Total
                    stock-based employee compensationexpense
                    determined under fair valuebased
                    method for all awards, net of relatedtax
                    effect
                
                
                5,094
                
                
                -
                
                
                4,734Pro
                    forma
                
                $
                (2,485,407
                )
                $
                (1,217,741
                )
                $
                250,376Basic
                    and diluted net (decrease) increasein
                    net assets attributable to commonstockholders:As
                    reported
                
                $
                (2.25
                )
                $
                (1.17
                )
                $
                0.24Pro
                    forma
                
                $
                (2.26
                )
                $
                (1.17
                )
                $
                0.23
 
 63
 
  **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 **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”.
 
 **3.
          INCOME TAXES**
 
 For
          the
          years ended December 31, 2004, 2003 and 2002, Franklin's tax (provision)
          benefit
          was based on the following:
 
 2004
                
                2003
                
                2002Net
                    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
                )
                
                1,663,304Pre-tax
                    book (loss) income
                
                $
                (2,403,663
                )
                $
                (1,141,089
                )
                $
                370,592
 
 2004
                
                2003
                
                2002Federal
                    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$
                -
                
                $
                -
                
                $
                -
 The
          components of the tax benefit are as follows:
 2004
                
                2003
                
                2002Current
                    state and local tax benefit
                
                $
                -
                
                $
                -
                
                $
                -
  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:
 
 Asset
                    (Liability)December
                    31,
                
                December
                    31,2004
                
                2003Deferred
                    Federal and state benefit from net operatingloss
                    carryforward
                
                $
                3,081,000
                
                $
                2,605,000Deferred
                    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
                
                $
                —
                
                $
                —
 
 64
 
  **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 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.
 
 **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").
 
 65
 
  **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 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 Companty 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 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,
          which were co-investors in the acquisition of the plaintiffs’ radio production
          and distribution business, joined the alleged conspiracy in structuring
          a
          transaction in which the plaintiffs’ business was transferred to a venture
          primarily composed of and operated by Franklin Capital and Sunshine Wireless
          and
          where the proceeds were retained by non-bankrupt affiliates of Winstar
          Communications. 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.
 
 66
 
  **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 Accounts
          payable and accrued liabilities at December 31, 2004 and 2003 is comprised
          of
          the following:
 
 December
                    31,
                
                December
                    31,2004
                
                2003Professional
                    Fees - legal
                
                $
                351,867
                
                $
                92,470Accrued
                    purchase price on investment
                
                
                165,240
                
                
                —Officer’s
                    severance
                
                
                160,142
                
                
                —Accrued
                    interest
                
                
                112,432
                
                
                82,650Professional
                    fees - other
                
                
                52,950
                
                
                102,000Accrued
                    - other
                
                
                96,937
                
                
                41,020$
                939,568
                
                $
                318,140
 
 **7.
          INVESTMENTS**
 
 Franklin’s
          significant investments, determined based upon both the amount of the investment
          as well as the number of shares held by Franklin in the company, include
          the
          following companies:
 
 *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. As of December 31, 2004, the Company incurred $107,470 in legal
          fees
          attributed to its defense of the
          lawsuit filed by Jeffrey A. Leve and Jeffrey Leve Family Partnership,
          L.P. and the
          representations and warranties made by Winstar Radio Networks, Inc. Accordingly,
          these fees have been set-off against the note with the remaining principal
          balance of $892,530 reflected as a note payable on the balance
          sheet.
 
 67
 
  **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 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 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 is evaluating alternative uses for its real estate holdings,
          which
          range from development and capital investments as a means of generating
          recurring revenue to the liquidation of specific properties.
  68
 
  **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 At
          December 31, 2004, other than its investments in real estate, Franklin
          had a
          minority ownership interest in each of its investments. As such, Franklin
          was
          not deemed to have significant influence over management of any company
          that it
          had an investment nor was it obligated to provide any additional
          financing.
  **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:
 
 December
                    31, 2004
                
                December
                    31, 2003
                
                December
                    31, 2002Shares
                
                Weighted
                    Average
                  Exercise
                    Price
                
                Shares
                
                Weighted
                    Average
                  Exercise
                  Price
                
                Shares
                
                Weighted
                    Average
                  Exercise
                  PriceOutstanding
                    at beginning of year
                
                
                20,625
                
                $
                11.39
                
                
                20,625
                
                $
                11.39
                
                
                39,375
                
                $
                11.27Granted
                
                
                26,250
                
                $
                1.50
                
                
                -
                
                
                -
                
                
                -
                
                
                -Exercised
                
                
                26,250
                
                $
                1.50
                
                
                -
                
                
                -
                
                
                -
                
                
                -Forfeited
                
                
                18,750
                
                $
                11.13
                
                
                -
                
                
                -
                
                
                18,750
                
                $
                11.13Expired
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Outstanding
                    at end of year
                
                
                1,875
                
                $
                14.00
                
                
                20,625
                
                $
                11.39
                
                
                20,625
                
                $
                11.39Exercisable
                    at end of year
                
                
                1,875
                
                $
                14.00
                
                
                20,625
                
                $
                11.39
                
                
                20,625
                
                $
                11.39
 
 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:
 
 December
                    31,2004
                
                2003
                
                2002Numerator:Net
                    (decrease) increase in netassets
                    from operations
                
                $
                (2,403,663
                )
                $
                (1,141,089
                )
                $
                370,262Preferred
                    stock dividends
                
                
                (76,650
                )
                
                (76,652
                )
                
                (115,152
                )Numerator
                    for basic and dilutedearnings
                    per share - net (decrease)increase
                    in net assets attributableto
                    common stockholders
                
                $
                (2,480,313
                )
                $
                (1,217,741
                )
                $
                255,110Denominator:Denominator
                    for basic and diluted(decrease)
                    increase in net assetsfrom
                    operations - weighted -average
                    shares
                
                
                1,100,324
                
                
                1,037,443
                
                
                1,066,195Basic
                    and diluted net (decrease) increase innet
                    assets from operations per share
                
                $
                (2.25
                )
                $
                (1.17
                )
                $
                0.24
 
 69
  **Franklin
            Capital Corporation**
 **Notes
            to Consolidated Financial Statements (continued)**
 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
                
                2002Preferred
                    stock convertible into common stock
                
                
                82,125
                
                
                82,125
                
                
                123,375Stock
                    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:
 
 December
                    31,
                
                December
                    31,2004
                
                2003Numerator:Numerator
                    for net asset value percommon
                    share, as if converted basis
                
                $
                3,566,269
                
                $
                2,024,138Liquidation
                    value of convertible preferredstock
                
                
                (1,095,000
                )
                
                (1,095,000
                )Numerator
                    for net asset value per shareattributable
                    to common stockholders
                
                $
                2,471,269
                
                $
                929,138Denominator:Number
                    of common shares outstanding,denominator
                    for net asset value per shareattributable
                    to common stockholders
                
                
                1,556,901
                
                
                1,020,100Number
                    of shares of common stock to beissued
                    upon conversion of preferred stock
                
                
                82,125
                
                
                82,125Denominator
                    for net asset value per commonshare
                    as if converted basis
                
                
                1,639,026
                
                
                1,102,225Net
                    asset value per share attributable to common stockholders
                
                $
                1.59
                
                $
                0.91Net
                    asset value per common share, as if converted basis
                
                $
                2.18
                
                $
                1.84
 
 **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.
 
 70
 
  **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 **12.
          SELECTED QUARTERLY DATA (UNAUDITED)**
 
 2004Quarter
                      1
                  
                  Quarter
                      2
                  
                  Quarter
                      3
                  
                  Quarter
                      4Total
                      investment income
                  
                  $
                  165
                  
                  $
                  50
                  
                  $
                  155
                  
                  $
                  10,686Net
                      investment loss from operations
                  
                  
                  (292,683
                  )
                  
                  (396,647
                  )
                  
                  (1,296,010
                  )
                  
                  (954,777
                  )Net
                      (decrease) increase in net assetsattributable
                      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
                  )
  2003Quarter
                      1
                  
                  Quarter
                      2
                  
                  Quarter
                      3
                  
                  Quarter
                      4Total
                      investment income
                  
                  $
                  45,678
                  
                  $
                  45,080
                  
                  $
                  45,090
                  
                  $
                  47,311Net
                      investment loss from operations
                  
                  
                  (273,727
                  )
                  
                  (277,926
                  )
                  
                  (271,683
                  )
                  
                  (273,031
                  )Net
                      (decrease) increase in net assetsattributable
                      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
                  )
 
 **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 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.
 
 Franklin
          entered into a services agreement with Excelsior, which terminated at December
          31, 2003, whereby Franklin provided Excelsior with certain services. Franklin
          received a management fee of not less than $15,000 per month as determined
          by
          Excelsior's board. Additionally, Franklin's chief financial officer served
          in
          that capacity for Excelsior and his salary and benefits were allocated
          between
          Excelsior and Franklin on an 80/20 basis. During the years ended December
          31,
          2004, 2003, and 2002, Franklin earned $0, 180,000 and $450,000, respectively,
          in
          management fees and was reimbursed $0, $144,000 and $120,936, respectively,
          for
          salary and benefits for Franklin's chief financial officer, which was recorded
          as a reduction of expenses on Franklin.
 
 Franklin
          is entitled to designate two members to the Board of Directors of Digicorp,
          a
          company in which Franklin has an investment. Franklin’s first designee, Melanie
          Glazer, who is also manager of our subsidiary Franklin Capital Properties,
          LLC,
          was appointed on December 29, 2004
 
 71
 
  **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 **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.
 
 **FRANKLIN
          CAPITAL CORPORATION AND SUBSIDIARIES PRO FORMA**
 **UNAUDITED
          PRO FORMA BALANCE SHEET**
 
 **December
                    31,**
                
                **2004**
                
                **2003****ASSETS**Cash
                    and cash equivalents
                
                $
                846,404
                
                $
                224,225Trading
                    assets
                
                
                4,020,154
                
                
                1,955,169Other
                    current assets
                
                
                255,510
                
                
                58,432**TOTAL
                    CURRENT ASSETS**
                
                
                5,122,068
                
                
                2,237,826Property,
                    plant and equipment, net
                
                
                23,657
                
                
                20,206Other
                    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
                
                $
                915,754Accounts
                    payable and accrued liabilities
                
                
                939,568
                
                
                318,140Trading
                    assets sold short
                
                
                1,075,100Due
                    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 outstandingat
                    December 31, 2004 and 2003(Liquidation
                    preference $1,095,000)
                
                
                10,950
                
                
                10,950Common
                    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
                    sharesoutstanding
                    at December 31, 2004 and 2003, respectively
                
                
                2,042,689
                
                
                1,505,888Paid-in
                    capital
                
                
                13,925,253
                
                
                10,439,610Accumulated
                    deficit
                
                
                (9,795,791
                )
                
                (7,315,478
                )6,183,101
                
                
                4,640,970Deduct:
                    485,788 shares of common stock held in treasuryat
                    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
 
 72
  **Franklin
              Capital Corporation**
 **Notes
              to Consolidated Financial Statements (continued)**
 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.
  73


**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, which Form 10-Q was filed August
      16,
      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 through August 16, 2004, 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
      Company’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 the end of
      the period covered by this annual report. Based on such evaluation, they have
      concluded that, as of the end of the period covered by this annual report,
      the
      Company’s disclosure controls and procedures are effective to ensure that all
      information required to be disclosed by the Company in the reports that it
      files
      or submits under the Exchange Act is: (1) accumulated
      and communicated to the Company’s management, including the Company’s chief
      executive officer and the person performing the functions as chief financial
      officer, as appropriate to allow timely decisions regarding required
      disclosure ;
      and (2)
      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.





74


**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 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





75


**Executive
      Officers as of February 28, 2005**





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





***Name
                and Age***
            
            ***Office***
            
            ***Served as an***
              ***Officer
                Since***Milton
                “Todd” Ault III (35)
            
            Chief
                Executive Officer
            
            2004Lynne
                Silverstein (34)
            
            President
                and Secretary
            
            2004Louis
                Glazer, M.D., Ph.G**.**(73)
            
            Chief
                Health and Science Officer of Franklin Medical Products,
                LLC
            
            2005Melanie
                Glazer (63)
            
            Manager
                of Franklin Capital Properties, LLC
            
            2005





Certain
      family relationships exist among the directors and/or executive officers of
      the
      Company. Specifically, Lynne 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. In addition,
      Louis
      Glazer and Melanie Glazer are husband and wife. Melanie Glazer is the Manager
      of
      our subsidiary Franklin Capital Properties, LLC.





**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 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 Apex
      Financial Management Services L.L.C. for the engagement of 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.





76


**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.





PRINCIPALTERM
                OF OFFICE
            
            OCCUPATION(S)
            
            OTHER
                DIRECTORSHIPSPOSITIONS(S)
                HELD
            
            AND
                LENGTH OF
            
            DURING
                PAST
            
            HELD
                BY DIRECTOR ORNAME
                AND ADDRESS
            
            AGE
            
            WITH
                COMPANY
            
            TIME
                SERVED
            
            5
                YEARS
            
            NOMINEE
                FOR DIRECTORINTERESTED
                PERSONSMILTON
                "TODD" AULT III(2)(8)
            
            35
            
            Chairman
                and
            
            Term
                of one year;
            
            Member
                and
            
            None100
                Wilshire Boulevard
            
            
            
            Chief
                Executive
            
            served
                as Chairman
            
            InvestmentSanta
                Monica, California 90401
            
            
            
            Officer
                Class III
            
            and
                CEO since
            
            advisor
                of AultDirector
            
            October
                22,
            
            Glazer
                (3)2004
                and asdirector
                sinceJune
                23, 2004LOUIS
                GLAZER, M.D., PH.G(1)(8)
            
            73
            
            Class
                III Director
            
            Served
                as director
            
            Member
                of Ault
            
            None100
                Wilshire Boulevard
            
            
            
            
            
            since
                October 22,
            
            Glazer
                (3);Santa
                Monica, California 90401
            
            
            
            
            
            2004
                and Chief
            
            independentHealth
                and Science
            
            medical
                andOfficer
                of
            
            biotechnologyFranklin
                Medical
            
            consultantProducts,
                LLCSince
                January 1,2005NON-INTERESTED
                PERSONSBRIGADIER
                GENERAL (RET.)LYTLE
                BROWN III(1)(6)
            
            72
            
            Class
                I Director
            
            Served
                since
            
            Owner
                and manager
            
            None1601
                Ardenwood Court
            
            
            
            
            
            October
                22, 2004
            
            of
                MarmaticNashville,
                Tennessee 37215
            
            
            
            
            
            
            
            Enterprises
                (4);senior
                taxprofessional
                forH&R
                Block, Inc.HERBERT
                LANGSAM(1)(7)
            
            73
            
            Class
                II Director
            
            Served
                since
            
            President
                of
            
            None5300
                Wisteria Drive
            
            
            
            
            
            October
                22, 2004
            
            MedicareOklahoma
                City, Oklahoma 73142
            
            
            
            
            
            
            
            Recoveries,Inc.
                (5)ALICE
                CAMPBELL(1)(7)
            
            55
            
            Class
                II Director
            
            Served
                since
            
            Independent
                private
            
            None1211
                Ridgeway Road #130
            
            
            
            
            
            October
                22, 2004
            
            investigator/Memphis,
                Tennessee 38119
            
            
            
            
            
            
            
            consultantEXECUTIVE
                OFFICERSLYNNE
                SILVERSTEIN(2)
            
            33
            
            President
                and
            
            Served
                since
            
            CEO,
                Director of
            
            None100
                Wilshire Boulevard
            
            
            
            Secretary
            
            October
                22, 2004
            
            Operations
                andSanta
                Monica, California 90401
            
            
            
            
            
            
            
            Member
                of AultGlazer
                (3)





77


(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 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.





78


**Item
      11.****Executive
      Compensation**





The
      following table sets forth information concerning the total compensation that
      we
      have paid or that has accrued on behalf of our chief executive officer and
      other
      executive officers with annual compensation exceeding $100,000 during the fiscal
      years ended December 31, 2004, 2003 and 2002.





**SUMMARY
      COMPENSATION TABLE**


**Long-Term**
              **Compensation****Annual
                Compensation**
            
            **Awards**
            
            **Payouts****Name
                and**
              **Principal
                Position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Other**
              **Annual**
              **Compen-**
              **sation
                ($)**
            
            **Restricted
                Stock Award(s) ($)**
            
            **Securities
                Underlying Options/ SARs (#)**
            
            **LTIP**
              **Payouts
                ($)**
            
            **All**
              **Other**
              **Compen-**
              **sation
                ($)**Stephen
                L. Brown (1)
            
            
            2004
            
            $
            350,000
            
            $
            7,500
            
            $
            4,869
            
            
            ---
            
            
            ---
            
            
            ---
            
            $
            250,000Chief
                Executive Officer
            
            
            2003
            
            $
            427,000
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---2002
            
            $
            450,000
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Hiram
                M. Lazar (2)
            
            
            2004
            
            $
            25,000
            
            $
            13,750
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Chief
                Financial Officer
            
            
            2003
            
            $
            163,750
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---2002
            
            $
            133,750
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Milton
                “Todd” Ault III (3)
            
            
            2004
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            $
            500Chief
                Executive Officer
            
            
            2003
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---2002
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---


(1)
              Mr. Brown
                  resigned from his position as 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 hired as Chairman and Chief Executive Officer of the Company
                on
                October 22, 2004.





**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.





79


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.





**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.





80


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.





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 Apex
      Financial Management Services L.L.C. for the engagement of William
      Horne (the ***"H*** ***orne*** ***C*** ***onsulting
      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.





81


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.





***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
      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.





82


*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 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.





83


***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.





*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.





84


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 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**
              **Beneficial
                Owner**
            
            **Amount
                and Nature of****Beneficial
                Ownership**
            
            
            
            **Percent**
              **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)
            
            
            *Lynne
                Silverstein
              100
                Wilshire Boulevard
              Santa
                Monica, CA 90401
            
            
            476,900
            
            
            (1)
            
            
            27.1
            %All
                current officers and directorsas
                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.





85


**Preferred
      Stock**


**Name
                  and Address of**
                **Beneficial
                  Owner**
              
              **Amount
                  and Nature of**
                **Beneficial
                  Ownership**
              
              
              
              
              
              **Percent**
                **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
              %All
                  officers and directorsAs
                  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:





**Name
                of Director or Nominee**
            
            **Dollar
                Range of**
              **Equity
                Securities**
              **of
                the Company(1)(2)****Interested
                Persons**Milton
                “Todd” Ault III(3)
            
            $10,001-$50,000Louis
                Glazer, M.D., Ph.G.(3)
            
            over
                $100,000**Non-Interested
                Persons**Brigadier
                General (Ret.) Lytle Brown III(3)
            
            $10,001-$50,000Herb
                Langsam(3)
            
            $10,001-$50,000Alice
                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.





86


**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.





**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))**Equity
                compensation plansapproved
                by security holders(1)
            1,875
            $14.00
            18,750





(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.





**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.





87


The
      Company was a party to a services agreement with Excelsior, which terminated
      on
      December 31, 2003, whereby the Company provided Excelsior with certain services.
      The Company received a management fee of not less than $15,000 per month as
      determined by Excelsior's board. Additionally, the Company's chief financial
      officer served in that capacity for Excelsior and his salary and benefits were
      allocated between Excelsior and the Company on an 80/20 basis. During the years
      ended December 31, 2004, 2003, and 2002, the Company earned $0, 180,000 and
      $450,000, respectively, in management fees and was reimbursed $0, $144,000
      and
      $120,936, respectively, for salary and benefits for the Company's chief
      financial officer, which was recorded as a reduction of expenses on the
      Company.





At
      December 31, 2004, the Company had an investment in Digicorp valued at $532,435,
      which represents 7.7% of the Company’s total assets. 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, 1,224,000 shares of Digicorp common
      stock
      will be purchased 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,
      the
      Company is entitled to designate two members to the Board of Directors of
      Digicorp. The Company’s first designee, Melanie Glazer, who is also manager of
      our subsidiary Franklin Capital Properties, LLC, was appointed on December
      29,
      2004.





On
      February 25, 2005, the Company acquired all of the outstanding securities of
      SurgiCount in exchange for approximately $340,000 in cash payments and 200,000
      shares of Franklin common stock. The entire 200,000 shares were issuable and,
      with the exception of 10,000 shares of common stock held in escrow to secure
      certain rights to indemnification by the Company, issued to Brian Stewart and
      Dr. William Stewart, the holders of 100% of the outstanding capital stock of
      SurgiCount (the “Shareholders”). As a result of this transaction, both Brian
      Stewart and Dr. William Stewart are each beneficial owners of 5.4% of the
      Company’s outstanding shares of common stock as of February 28,
      2005.





Concurrent
      with the Company’s acquisition of all of the outstanding securities of
      SurgiCount, the Company entered into consulting agreements with Brian Stewart
      and Dr. William Stewart, for a term of 12 months and 18 months, respectively,
      to
      provide services relating to SurgiCount’s business and operations. As
      consideration, Brian Stewart shall be paid $40,000 per year and Dr. William
      Stewart shall be paid $5,000 per month.




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.





88


**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


Portfolio
      of Investments as of December 31, 2003


Notes
      to
      Financial Statements





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(21)
 (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)




89


(10.10)
            Subscription
                Agreement, dated November 3, 2004, by and among Franklin and accredited
                investors(21)


(10.11)
            Amendment
                to Subscription Agreement, dated March 2, 2005, by and among Franklin
                and
                accredited investors(21)


(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)


(10.17)
            Consulting
                Agreement entered into as of December 10, 2004 by and among Franklin
                Capital Corporation (n/k/a Patient Safety Technologies, Inc.) and
                Apex
                Financial Management Services L.L.C.(18)


(10.18)
            Consulting
                Agreement entered into as of February 3, 2005 by and among SurgiCount
                Medical, Inc. and Brian Stewart(2)


(10.19)
              Consulting
                  Agreement entered into as of February 3, 2005 by and among SurgiCount
                  Medical, Inc. and Dr. William Stewart(2)
 (14.1)
              Code of Business Conduct and Ethics(19)
 (16.1)
              Letter from Ernst & Young LLP to the SEC, dated
                August 30, 2005(20)


(21)
            List
                of Subsidiaries(21)


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


(23.2)
            Consent
                of Ernst & Young LLP


(31.1)
            Certification
                of the Chief Executive Officer pursuant to Section 302 of The
                Sarbanes-Oxley Act of 2002


(31.2)
            Certification
                of the Chief Financial Officer pursuant to Section 302 of The
                Sarbanes-Oxley Act of 2002


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


(32.2)
            Certification
                of Chief Financial Officer 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




90


(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 the Company’s registration statement on Form S-8 (File No.
      333-124594) filed on May 3, 2005


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


(20)   Incorporated
      by reference to the Current Report on Form 8-K/A filed August 31,
      2005


(21)   Incorporated
        by reference to the Company's Annual Report filed on Form 10-K for the year
        ended December 31, 2004, filed with the Securities and Exchange Commission
        on
        March 30, 2005





91





**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:
                September 13, 2005
              By:
              /s/
                Milton “Todd” Ault IIIMilton
“Todd”
                Ault III*Chairman
                & Chief Executive Officer*
 Date:
                September 13, 2005
              By:
              /s/
                William B. HorneWilliam
                B. Horne*Chief
                  Financial Officer and*
                *Principal Accounting
                  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
              Milton
                “Todd” Ault III
            Chairman
                & Chief Executive Officer
            September
                13, 2005/s/
                Lytle Brown III
              Brigadier
                General (Ret.)
              Lytle
                Brown III
            Director
            September
                13, 2005/s/
                Alice Campbell
              Alice
                Campbell
            Director
            September
                13, 2005/s/
                Louis Glazer
              Louis
                Glazer, M.D., Ph.G
            Director
            September
                13, 2005/s/
                Herbert Langsam
              Herbert
                Langsam
            Director
            September
                13, 2005




92