**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K/A**


**Amendment
      No. 2**




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 oNo o .




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
            
            37Item
                3.
            
            Legal
                Proceedings
            
            38Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            38PART
                IIItem
                5.
            
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            
            41Item
                6.
            
            SelectedFinancial
                  Data
            
            42Item
                7.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            43Item 7A.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            52Item
                8.
            
            Financial
                Statements and Supplementary Data
            
            53Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            76Item
                9A.
            
            Controls
                and Procedures
            
            76PART
                IIIItem
                10.
            
            Directors
                and Executive Officers of the Registrant
            
            76Item 11.
            
            Executive
                Compensation
            
            81Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and Management and RelatedStockholder
                Matters
            
            87Item 13.
            
            Certain
                Relationships and Related Transactions
            
            90Item
                14.
            
            Principal
                Accountant Fees and Services
            
            91PART
                IVItem
                15.
            
            Exhibits,
                Financial Statement and Schedules
            
            92Signatures
            
            95








**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”).




Our
      corporate structure at December 31, 2004, including our subsidiaries and our
      interests in public and private companies that we have purchased, is set forth
      depicted in the following diagram:


Real
                    estate holdings
                Alacra
                    Corporation
                China
                    Nurse LLC(i.e.,
                    undeveloped land
                (1.6%
                    equity interest)
                (5%
                    equity interest)and
                    loans)
                Digicorp(26.9%
                    equity interest)Excelsior
                    Radio Networks, Inc.(stock
                    appreciation rights)
  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 outstanding at 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 shares outstanding
                    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 treasury at cost, at December
                    31,
                    2004 and 2003, respectively
              
              
              (2,616,832
              )
              
              (2,616,832
              )Total
                  stockholders' equity
              
              
              3,566,269
              
              
              2,024,138**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              6,934,243
              
              $
              3,258,032
 
 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.
 
 ***Termination
        Agreement and Release***
  7
  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 by the Company’s management 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. Such estimate assumes approximately
        61
        million surgeries performed annually in the United States and Europe, and
        an
        average cost of surgical sponges of $10.60 per sponge. 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. The estimated
        size of the surgical sponge market and actual savings derived from utilization
        of the Safety-Sponge(TM) System from retained sponge litigation is based
        on
        management’s estimates and assumptions made by management. Although management
        took into consideration statistics from research and published articles by
        the
        American Hospital Association and New England Journal of Medicine, as well
        as
        various articles located through a search of retained sponge verdicts the
        specific assumptions is management’s interpretation of those multiple sources.
        Further, management believes that a large amount of the litigation relating
        to
        medical malpractice claims are settled under the terms of confidentially
        agreements, thus the actual amount of many settlements are never disclosed
        and
        therefore subject to speculation.
  8
  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.
 
 ***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 in 2003 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.
  9
  The
        tests
        were completed prior to the Company’s acquisition of SurgiCount, which occurred
        in February 2005. At the time the acquisition of the SurgiCount assets was
        completed the Company focused on developing the product for commercialization.
        Although passing the three biocompatibility tests was necessary to satisfy
        any
        questions as to whether or not the product was safe for use in the body it
        was
        only a part of the process required to commercialize the product. In order
        to
        utilize the product as designed investment in specialized software, hardware
        as
        well as modification of current operating room procedures was needed.
 
 Software
        development, which was initially expected to take a few months, required
        approximately nine months for completion. Initially the Company expected
        that
        basic modification to existing software would be sufficient, however, based
        upon
        feedback from third party users and consultants the Company elected to abandon
        its plan to modify existing software currently in use and develop its own
        proprietary software for the system.
 
 Finally,
        due to the nature of the medical products business any changes in the procedures
        requires rigorous rounds of testing and review in every
        adopter. Demonstrations are given to relevant parties and small
“in-service” (an in-hospital teaching of how to use the system to the relevant
        staff members) sessions are performed with the results evaluated. Where the
        results are viewed in a positive fashion a second larger in-service session
        is
        usually performed, which results are again reviewed. Assuming a positive
        outcome of the in-service sessions, the entire staff must then be trained
        to use
        the system prior to the placement of any order. In the event the Company
        is
        successful during the in-service sessions the Company would expect to begin
        receiving orders for the Safety-Sponge TM System
        sometime in the first half of 2005.
 
 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 (“USCF”). These 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 as well as University-developed
        patient safety products such as guides, specially designed notepads and bedside
        tools.
  In
        the
        past the Company has relied on the professional advice of Dr. Jeffrey Pearl
        relating to operating room procedures and how to best adapt the
        Safety-Sponge TM for use
        in an operating room. Dr. Pearl is the Vice-chair of the Department of Surgery
        at UCSF, as well as the vice dean of the medical school and a highly respected
        medical researcher. In August of 2005, Dr. Pearl accepted a one-year consulting
        contract for continued services relating to operating room procedures and
        integration of the Safety-Sponge TM System.
        Integration of the Safety-Sponge TM System
        covers areas such as teaching nurses to use the system, optimum locations
        in the
        operating room, and optimum procedures for how to perform the count. The
        contract provides for a monthly cash payment of $2,000 and warrants to purchase
        12,500 shares of the Company’s common stock.
 
 The
        Company is currently finalizing the terms of a clinical trial agreement with
        Brigham and Women's Hospital, the teaching affiliate of Harvard Medical School,
        relating to SurgiCount's Safety-Sponge TM System.
        The clinical trial is the result of an on-going collaboration between Harvard
        and SurgiCount to refine the Safety-Sponge TM System
        in a clinical optimization study. Under terms of the proposed agreement,
        Brigham
        and Women's Hospital will collect data on how the Safety-Sponge System saves
        time, reduces costs and increases patient safety in the operating room. The
        study will also continue to refine the system's technical processes in the
        operating room to provide clear guidance and instruction to hospitals, easily
        integrating the Safety-Sponge TM System
        into operating rooms. Brigham and Women's Hospital will receive a non-exclusive
        license to use the Safety-Sponge TM System,
        while the company will own all technical innovations and other intellectual
        properties derived from the study. The Company will provide a research grant
        to
        Brigham and Women’s Hospital over the course of the clinical trial in the
        aggregate amount of $430,513.
  10
  ***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.
 
 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.
  11
  ***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.
 
 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.
  12
  **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. Further, the Company has not yet defined a rental
        strategy for its existing properties. In the event that Franklin Properties
        elects to liquidate some or all of its real estate holdings the Company expects
        that any gain or loss recognized on the liquidation would be insignificant
        to
        the Company primarily due to the short period of time that the properties
        were
        owned combined with the absence of any significant changes in property values
        in
        the real estate markets where the Company’s real estate holdings are located.
 
 **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.
  13
  **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.
  14
  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.
 
 **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. The
        primary
        purpose for the strategic investment was in anticipation of leveraging the
        relationships that China Nurse developed during the ordinary course of its
        business for the Company’s other patient safety products. This investment was a
        seed investment in a concept that may ultimately be completely impaired within
        a
        one year time frame if China Nurse is unable to secure additional interest
        both
        in the form of additional investment and interest from hospitals and health
        care
        facilities in the United States.
  15
  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.
 
 The
        information services industry is intensely competitive and we expect it to
        remain so. Although Alacra has been in operation since 1996 they are
        significantly smaller in terms of revenue than a large number of companies
        offering similar services. Companies such as ChoicePoint, Inc. (NYSE: CPS),
        LexisNexis Group, and Dow Jones Reuters Business Interactive, LLC report
        revenues that range anywhere from $100 million to several billion dollars,
        as
        reported by Hoovers, Inc. As such, Alacra’s competitors can offer 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 Alacra has. 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.
  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 of approximately $11.4 million, were in excess of the prior
        years
        revenues by approximately 38%. At December 31, 2004, Alacra had total assets
        of
        approximately $4.4 million with total liabilities of approximately $7.2 million.
        Deferred revenue, which represents subscription revenues are amortized over
        the
        term of the contract, which is generally one year, and represented approximately
        $3.3 million of the total liabilities.
  16
  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, nor does it expect to generate any recurring revenue during 2005,
        from
        rental activities on any of its real estate investments. Further, the Company
        has not defined a rental strategy for its existing properties. In the event
        that
        Franklin Properties elects to liquidate some or all of its real estate holdings
        the Company expects that any gain or loss recognized on the liquidation would
        be
        insignificant to the Company primarily due to the short period of time that
        the
        properties were owned combined with the absence of any significant changes
        in
        property values in the real estate markets where the Company’s real estate
        holdings are located.
  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.”*
 
 ***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.
  17
  On
        June
        30, 2004, Franklin sold 200,000 common shares of Excelsior to Quince Associates,
        LP ***(“Quince”)*** for an
        aggregate purchase price of $500,000, $2.50 per common share. On July 5,
        2004,
        Franklin entered into an agreement with Quince to sell Franklin's remaining
        interest in Excelsior. The transactions contemplated by this agreement were
        subject to shareholder approval. On October 22, 2004, Franklin’s shareholders
        approved the sale and Franklin agreed to sell its remaining 550,000 shares
        of
        Excelsior common stock at $2.50 per share and warrants exercisable for 74,232
        shares of Excelsior common stock at an exercise price of $1.20 per share
        at
        $1.30 per warrant and warrants exercisable for 12,879 shares of Excelsior
        common
        stock at an exercise price of $1.125 per share at $1.375 per warrant. On
        September 24, 2004, 100,000 shares of common stock of Excelsior were sold
        for an
        aggregate purchase price of $250,000 as an advance to the final sale. On
        October
        22, 2004, Franklin sold its remaining interest in Excelsior to Quince for
        an
        aggregate purchase price of $1,489,210. Cumulative realized gains on the
        sale of
        Excelsior common stock and warrants to purchase Excelsior common stock to
        Quince
        amounted to $1,389,210.
 
 The
        purchase price in connection with the June 30, 2004, September 24, 2004 and
        October 22, 2004 sales of our equity interests in Excelsior to Quince is
        subject
        to a potential adjustment whereby, in the event that the per share net proceeds
        from any liquidation of Excelsior exceeds $3.00 (or an amount equal to $3.00
        plus $.050 multiplied by the number of years, up to five, elapsed since the
        closing date of the sale), Franklin will be entitled to receive 80% of the
        value
        greater than $3.00 (or such other applicable amount) per share. The purchase
        price adjustment for the sale will expire as of a date 5 years following
        the
        closing of each sale transaction.
 
 Other
        Investments
 
 In
        2001,
        Franklin maintained group life and dental insurance with Principal Financial
        Group ( ***"PFG"*** ).
        Upon
        the demutualization of PFG in October 2001, Franklin received 4,338 common
        shares of PFG. However, Franklin did not receive notification for the receipt
        of
        such shares. In 2004, Franklin became aware of its ownership of PFG common
        shares, and recorded the fair value of such shares within marketable
        investments. On April 23, 2004, Franklin sold the common shares of PFG for
        $151,400, which was recorded as other realized gains in the accompanying
        statement of operations.
 
 **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.
  18
  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.
 
 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.
  19
  In
        addition, sales and marketing practices in the health care industry have
        come
        under increased scrutiny by government agencies and state attorney generals
        and
        resulting investigations and prosecutions carry the risk of significant civil
        and criminal penalties.
 
 Changes
        in regulations and healthcare policy occur frequently and may impact our
        results, growth potential and the profitability of products we sell. There
        can
        be no assurance that changes to governmental reimbursement programs will
        not
        have a material adverse effect on the Company.
 
 **REGULATION
        AS A BUSINESS DEVELOPMENT COMPANY**
 
 ***General***
 
 A
        BDC is
        regulated by the 1940 Act. A BDC must be organized in the United States for
        the
        purpose of investing in or lending to primarily private companies and making
        managerial assistance available to them. A BDC may use capital provided by
        public stockholders and from other sources to invest in long-term, private
        investments in businesses.
 
 We
        may
        not change the nature of our business so as to cease to be, or withdraw our
        election as, a BDC unless authorized by vote of a majority of the outstanding
        voting securities, as required by the 1940 Act. A majority of the outstanding
        voting securities of a company is defined under the 1940 Act as the lesser
        of:
        (i) 67% or more of such company’s voting securities present at a meeting if more
        than 50% of the outstanding voting securities of such company are present
        or
        represented by proxy, or (ii) more than 50% of the outstanding voting securities
        of such company. We do not anticipate any substantial change in the nature
        of
        our business.
 
 As
        with
        other companies regulated by the 1940 Act, a BDC must adhere to certain
        substantive regulatory requirements. A majority of our directors must be
        persons
        who are not interested persons, as that term is defined in the 1940 Act.
        Additionally, we are required to provide and maintain a bond issued by a
        reputable fidelity insurance company to protect the BDC. Furthermore, as
        a BDC,
        we are prohibited from protecting any director or officer against any liability
        to the company or our stockholders arising from willful misfeasance, bad
        faith,
        gross negligence or reckless disregard of the duties involved in the conduct
        of
        such person’s office.
 
 As
        a BDC,
        we are required to meet a coverage ratio of the value of total assets to
        total
        senior securities, which include all of our borrowings and any preferred
        stock
        we may issue in the future, of at least 200%. We may also be prohibited under
        the 1940 Act from knowingly participating in certain transactions with our
        affiliates without the prior approval of our directors who are not interested
        persons and, in some cases, prior approval by the SEC.
 
 We
        are
        not generally able to issue and sell our common stock at a price below net
        asset
        value per share. See *“Risk
        factors—Risks relating to our business and structure—Regulations governing our
        operation as a BDC affect our ability to, and the way in which we raise
        additional capital.”* We may,
        however, sell our common stock, or warrants, options or rights to acquire
        our
        common stock, at a price below the then-current net asset value of our common
        stock if our Board of Directors determines that such sale is in our best
        interests and the best interests of our stockholders, and our stockholders
        approve such sale. In addition, we may generally issue new shares of our
        common
        stock at a price below net asset value in rights offerings to existing
        stockholders, in payment of dividends and in certain other limited
        circumstances.
 
 We
        will
        be periodically examined by the SEC for compliance with the 1940 Act.
 
 As
        a BDC,
        we are subject to certain risks and uncertainties. See *“Risk
        factors—Risks relating to our business and structure.”*
 
 In
        addition, the Company currently has plans, subject to shareholder approval
        at
        the Annual Meeting, to withdraw the Company’s election to be treated as a BDC
        regulated under the 1940 Act. See *"Withdrawal
        of the Company’s Election to be treated as a BDC may increase the risks to our
        shareholders since the Company would not be subject to many of the regulatory
        restrictions imposed by, or receive the financial reporting benefits, of
        the
        1940 Act”* below.
  20
  **Regulation
        of the Financial Services Industry**
 
 **Financial
        Services Industry Regulation**
 
 The
        growth and earnings performance of a financial institution are affected not
        only
        by management decisions (such as the development of a business plan and lending
        decisions) and general economic conditions (such as interest rates, housing
        demand and business cycles), but also by the various governmental regulations
        and authorities, including, but not limited to, regulation by the Board of
        Governors of the Federal Reserve System ( ***"FRB"*** ),
        the
        Federal Deposit Insurance Corporation ( ***"FDIC"*** ),
        the
        Office of the Comptroller of the Currency ( ***"OCC"*** ),
        the
        Office of Thrift Supervision ( ***"OTS"*** ),
        the
        Internal Revenue Service ( ***"IRS"*** ),
        and
        other federal and state authorities.
 
 In
        addition, the Company will also be subject to extensive regulation by
        self-regulatory bodies, including the New York Stock Exchange (NYSE) and
        various
        other stock exchanges, the Securities and Exchange Commission (SEC), the
        National Association of Securities Dealers Regulation, Inc. (NASDR) and foreign
        regulatory bodies.
 
 Federal
        and state laws and regulations generally applicable to financial institutions
        regulate, among other things, the scope of business, investment activities,
        capital levels, reserves against deposits, collateral requirements, transactions
        with insiders and certain affiliates, the establishment of branches, mergers,
        acquisitions, consolidations, the issuance of equity and debt, and the payment
        of dividends.
 
 Broker-dealers
        and investment advisers are subject to regulation covering virtually all
        aspects
        of their businesses. These regulatory authorities have adopted rules that
        govern
        the securities industry and, as a normal part of their procedures, conduct
        periodic examinations of the Company's securities brokerage and asset management
        operations. Additional legislation, changes in rules promulgated by the SEC,
        foreign regulatory agencies, or any self-regulatory organization, or changes
        in
        the interpretation or enforcement of existing laws and rules, may directly
        affect the mode of operation and profitability of the Company. In the United
        States, brokerage firms and certain investment advisers also are subject
        to
        regulation by state securities commissions in the states in which they conduct
        business. These regulatory authorities, including state securities commissions,
        may conduct administrative proceedings which can result in censure, fine,
        suspension or expulsion of a broker-dealer or investment adviser, its officers
        or employees.
 
 **Regulation
        of the Real Estate Industry**
 
 The
        real
        estate development industry is subject to substantial environmental, building,
        construction, zoning and real estate regulations that are imposed by various
        federal, state and local authorities. In order to develop its properties,
        the
        Company must obtain the approval of numerous 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:
  21
  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.
 
 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.”*
  22
  ***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.
 
 ***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.
  23
  **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.*
 
 **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.
  24
  **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.
 
 **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.
  25
  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.
 
 **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**
  26
  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.
 
 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.
  27
  **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:
 
 ***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.
  28
  ***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.
 
 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.
  29
  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.
 
 **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;
  30
  ·
              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.
 
 ***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.
  31
  The
        rents
        we expect to receive and the occupancy levels at our properties may not
        materialize as a result of adverse changes in any of these factors.  If our
        rental revenues fail to materialize, we generally would expect to have less
        cash
        available to pay our operating costs. In addition, some expenses, including
        mortgage payments, real estate taxes and maintenance costs, generally do
        not
        decline when the related rents decline.
  ***We
        anticipate on leasing space to tenants on economically favorable terms and
        collecting rent from our tenants, who may not be able to
        pay.***
  Our
        financial results depend on leasing space in our properties to tenants on
        economically favorable terms. If a tenant does not pay its rent, we might
        not be
        able to enforce our rights as landlord without delays and might incur
        substantial legal costs to enforce those rights.
  ***Bankruptcy
        or insolvency of tenants may decrease our expected revenues and available
        cash.***
  A
        number
        of companies have declared bankruptcy in recent years. If a major tenant
        were to
        declare bankruptcy or become insolvent, the rental property where it leases
        space may have lower revenues and operational difficulties. As a result,
        the
        bankruptcy or insolvency of a major tenant could result in a lower level
        of
        funds from operations available to pay our operating cost.
  ***Real
        estate is a competitive business.***
  For
        a
        discussion of risks related to competition in the real estate business, see *“The
        Real Estate Industry - Competition.”*
  **Our
        Real Estate Investments Are Concentrated in Baltimore, Maryland and Heber
        Springs, Arkansas.  Circumstances Affecting These Areas Generally Could
        Adversely Affect Our Business.**
  A
        significant proportion of our real estate investments are in Baltimore, Maryland
        and Heber Springs, Arkansas and are affected by the economic cycles and risks
        inherent to those regions. Like other real estate markets, the real estate
        markets in these areas have experienced economic downturns in the past, and
        we
        cannot predict how the current economic conditions will impact these markets
        in
        both the short and long term.  Further declines in the economy or a decline
        in the real estate markets in these areas could hurt our financial performance
        and the value of our properties.  The factors affecting economic conditions
        in these regions include: business layoffs or downsizing; industry slowdowns;
        relocations of businesses; changing demographics; and any oversupply of or
        reduced demand for real estate.
 
 **As
        a BDC, our ability to invest in private companies may be limited in certain
        circumstances.**
 
 If
        we
        maintain our status as a BDC, we must not acquire any assets other than
“qualifying assets” unless, at the time of and after giving effect to such
        acquisition, at least 70% of our total assets are qualifying assets. If we
        acquire debt or equity securities from an issuer that has outstanding marginable
        securities at the time we make an investment, these acquired assets cannot
        be
        treated as qualifying assets. This result is dictated by the definition of
        “eligible portfolio company” under the 1940 Act, which in part looks to whether
        a company has outstanding marginable securities. For a more detailed discussion
        of the definition of an “eligible portfolio company” and the marginable
        securities requirement, see the section entitled *“Regulation
        as a Business Development Company.”*
 
 Amendments
        promulgated in 1998 by the Federal Reserve expanded the definition of a
        marginable security under the Federal Reserve’s margin rules to include any
        non-equity security. Thus, any debt securities issued by any entity are
        marginable securities under the Federal Reserve’s current margin rules. As a
        result, the staff of the SEC has raised the question to the BDC industry
        as to
        whether a private company that has outstanding debt securities would qualify
        as
        an “eligible portfolio company” under the 1940 Act.
 
 The
        SEC
        has recently issued proposed rules to correct the unintended consequence
        of the
        Federal Reserve’s 1998 margin rule amendments of apparently limiting the
        investment opportunities of business development companies. In general, the
        SEC’s proposed rules would define an eligible portfolio company as any company
        that does not have securities listed on a national securities exchange or
        association. We are currently in the process of reviewing the SEC’s proposed
        rules and assessing their impact, to the extent such proposed rules are
        subsequently approved by the SEC, on our investment activities. We do not
        believe that these proposed rules will have a material adverse effect on
        our
        operations.
  32
  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.
 
 **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).”
  33
  **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.
 
 **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.
  34
  **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.
 
 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.**
  35
  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.
 
 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.
  36
  **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.
 
 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.
  37
  **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:
 
 **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:
  38
 
 **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
 
 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:
  39
 
 **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
 
 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.
  40
  **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**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* .”
  41
  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
                
                2000Total
                    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**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
                
                $
                2,372,797Net
                    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 in unrealized appreciation of
                    investments
                
                $
                (1,054,702
                )
                $
                (475,605
                )
                $
                1,663,304
                
                $
                (1,553,756
                )
                $
                (3,365,513
                )Net
                    (decrease) increase in net assets attributable to common
                    stockholders
                
                $
                (2,480,313
                )
                $
                (1,217,741
                )
                $
                255,110
                
                $
                (2,533,460
                )
                $
                (4,526,053
                )Basic
                    and diluted net (decrease) increase in net assets from operations
                    per
                    weighted average number of shares outstanding
                
                $
                (2.25
                )
                $
                (1.17
                )
                $
                0.24
                
                $
                (2.34
                )
                $
                (4.14
                )
  *
              Expenses
                  in the year ended December 31, 2000 include non-cash compensation
                  of
                  $349,644 due to the exercise of employee incentive stock
                  options.
  42
  **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.
 
 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.
  43
  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.
 
 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**
  44
  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.
 
 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.
  45
  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 that were purchased on margin,
        which includes approximately $2,000,000 of U.S. Treasuries. During the year
        ended December 31, 2004, the Company invested its cash balances in the public
        equity and debt markets in an attempt to maximize the short-term return on
        such
        assets. The amount due to the Company’s broker varied throughout the year
        depending upon the aggregate amount of marketable investment securities held
        by
        the Company. The actual amount of marketable investment securities held was
        influenced by several factors, including but not limited to, the Company’s
        expectations of potential returns available from what it considered to be
        mispriced securities as well as the cash needs of the Company’s operating
        activities. During times when the Company was heavily invested in marketable
        investment securities the Company’s liquidity position was significantly
        reduced. To the extent we have a need for an excess cash balance to meet
        our
        financial obligations the amount of securities purchased on margin will either
        decrease or disappear altogether. However, if the Company is in a position
        where
        it has excess cash with no immediate need for liquidity, and the Company
        believes opportunities exist to maximize the short-term return on such assets
        then we may purchase marketable securities on margin. 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.
 
 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.
  46
  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,**
                ****
                **December
                    31,**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.
 
 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.
  47
  *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.
 
 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. The
        primary
        purpose for the strategic investment was in anticipation of leveraging the
        relationships that China Nurse developed during the ordinary course of its
        business for the Company’s other patient safety products. This investment was a
        seed investment in a concept that may ultimately be completely impaired within
        a
        one year time frame if China Nurse is unable to secure additional interest
        both
        in the form of additional investment and interest from hospitals and health
        care
        facilities in the United States.
  48
  *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*
 
 Administration
        for International Credit & Investments, Inc.
 
 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. IPEX, Inc. ("IPEX") was incorporated
        in
        the State of Nevada on June 27, 2002. On March 17, 2005 IPEX entered into
        an
        Agreement and Plan of Merger with AICI an Oregon corporation which provides
        telecommunication services. The transaction has been reflected as a reverse
        merger where IPEX was the surviving legal entity after the merger, but AICI
        is
        considered to be the accounting acquirer. The merger has been accounted for
        as a
        recapitalization of AICI. Accordingly, the historical financial statements
        prior
        to March 17, 2005 are those of AICI. Following the merger, IPEX changed its
        fiscal year end from July 31 to December 31.
 
 On
        March
        18, 2005 IPEX completed the private placement that the Company participated
        in
        for an aggregate of 3,500,000 shares of common stock, 1,750,000 Series A
        Warrants and 1,750,000 Series B Warrants for aggregate proceeds of $3,500,000,
        less issuance costs of $259,980, resulting in net realized proceeds of
        $3,240,020. The common stock, Series A and Series B Warrants were sold as
        Units,
        with each Unit consisting of two shares of common stock, one series A Warrant
        and one Series B Warrant. Each Series A Warrant entitles the holder to purchase
        one share of common stock at $1.50 per share, exercisable for a period of
        five
        years. Each Series B Warrant entitles the holder to purchase one share of
        common
        stock at $2.00 per share, exercisable for a period of five years. Subsequent
        to
        the effectiveness of a registration statement covering shares underlying
        the
        warrants, the Series A and Series B Warrants are callable by IPEX, under
        certain
        circumstances, if IPEX's common stock trades at or above $2.00 and $2.50,
        respectively, for ten consecutive trading days.
 
 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.
  49
  Tuxis
        Corporation
 
 On
        March
        16, 2005, Ault Glazer filed a Schedule 13D with the SEC relating to its holdings
        in Tuxis Corporation ("Tuxis"). Tuxis, a Maryland corporation, currently
        is
        registered under the 1940 Act, as a closed-end management investment company.
        Tuxis previously received Board of Directors and shareholder approval to
        change
        the nature of its business so as to cease to be an investment company and
        on May
        3, 2004, filed an application with the SEC to de-register. At March 16, 2005,
        the Company directly held 36,000 shares and indirectly, by virtue of its
        relationship with Ault Glazer, held 98,000 shares of Tuxis common stock,
        which
        represented approximately 3.66% and 9.96%, respectively, of the total
        outstanding shares. At December 31, 2004, Tuxis had reportable net assets
        of
        approximately $9.1 million.
  **Results
        of Operations**
 
 The
        principal measure of our financial performance is the "Net increase (decrease)
        in net assets from operations" which is the sum of three elements. The first
        element is "Net investment income (loss) from operations," which is the
        difference between the Company's income from interest, dividends, fees and
        other
        income (such as management fees), and its operating expenses, net of applicable
        income tax provision. The second element is "Net realized gain (loss) on
        portfolio of investments," which is the difference between the proceeds received
        from dispositions of portfolio securities and their stated cost, net of
        applicable income tax provision. The third element, "Increase (decrease)
        in
        unrealized appreciation on investments," is the net change in the fair value
        of
        the Company's investment portfolio, net of any increase (decrease) in deferred
        income taxes that would become payable if the unrealized appreciation were
        realized through the sale or other disposition of the investment
        portfolio.
 
 The
        Company generally earns interest income from loans, preferred stocks, corporate
        bonds and other fixed income securities. The amount of interest income varies
        based upon the average balance of the Company's fixed income portfolio and
        the
        average yield on this portfolio.
 
 *Investment
        Income*
 
 The
        Company had interest and dividend income of $11,056 in 2004, $3,159 in 2003,
        and
        $5,081 in 2002. The Company earned no management fees in 2004 as opposed
        to
        management fees of $180,000 in 2003, and $450,000 in 2002.
 
 The
        decrease in investment income was primarily the result of no management fees
        being received by us from Excelsior, an affiliate, because our management
        agreement with Excelsior expired on December 31, 2003.
 
 The
        Company has relied and continues to rely to a large extent upon proceeds
        from
        sales of investments rather than investment income to defray a significant
        portion of its operating expenses. 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.
  50
  *Net
        Investment Loss from Operations*
 
 Net
        investment losses from operations were $2,940,117 in 2004, $1,096,367 in
        2003,
        and $1,530,369 in 2002. The change in such amounts reflects the increase
        in
        operating expenses versus the decrease in investment income during such
        periods.
 
 *Net
        Realized Gain on Portfolio of Investments*
 
 During
        the three years ended December 31, 2004, 2003, and 2002, the Company realized
        net gains before taxes of $1,591,156, $430,883, and $237,658, respectively,
        from
        the disposition of various investments.
 
 During
        2004, the Company realized a gain of $1,448,014 from the sale of 908,804
        shares
        and warrants to purchase 87,111 shares of Excelsior common stock. Additionally,
        the Company realized a net gain of $143,142 from the sale of marketable
        securities.
 
 During
        2003, Franklin realized a gain of $432,900 from the sale of 568,000 shares
        of
        Excelsior Radio Networks, Inc. common stock. This gain was offset by a loss
        of
        $2,017 from the sale of marketable securities.
 
 During
        2002, Franklin realized a gain of $726,804 from the sale of 773,196 shares
        of
        Excelsior Radio Networks, Inc. common stock. This gain was offset by a loss
        of
        $300,000 from the sale of 188,425 shares of Structured Web common stock,
        a
        previous portfolio holding of the Company, a loss of $140,000 from the write
        down of Excom Ventures, a previous portfolio holding of the Company which
        was
        determined to be a worthless security, a loss of $32,715 from the sale of
        363,938 shares of Primal common stock a previous portfolio holding of the
        Company as well as a realized net loss of $16,430 from the sale of marketable
        securities.
 
 The
        Company has relied and continues to rely to a large extent upon proceeds
        from
        sales of investments rather than investment income to defray a significant
        portion of its operating expenses. Because such sales cannot be predicted
        with
        certainty, the Company attempts to maintain adequate working capital to provide
        for fiscal periods when there are no such sales.
 
 *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.
  51
  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
  (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."
 
 52
  **Item
        8.**   **Financial
        Statements and Supplementary Data**
  **FRANKLIN
                  CAPITAL CORPORATION**
                
                **INDEX
                  TO FINANCIAL STATEMENTS AND
                  SCHEDULES**
 PageReport
                    of Rothstein, Kass & Company, P.C
                
                54Report
                    of Ernst & Young LLP
                
                55Balance
                    Sheets as of December 31, 2004 and 2003
                
                56Statements
                    of Operations for the years ended December 31, 2004, 2003 and
                    2002
                
                57Statements
                    of Cash Flows for the years ended December 31, 2004, 2003 and
                    2002
                
                58Statements
                    of Changes in Net Assets for the years ended December 31, 2004,
                    2003 and
                    2002
                
                59Financial
                    Highlights for the years ended December 31, 2004, 2003, 2002,
                    2001 and
                    2000
                
                60Portfolio
                    of Investments as of December 31, 2004
                
                61Portfolio
                    of Investments as of December 31, 2003
                
                62Notes
                    to Financial Statements
                
                63-75
 
 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
 
 53
  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
  54
  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
 
 55
 **FRANKLIN
                    CAPITAL CORPORATION AND SUBSIDIARIES**
  **Balance
                    Sheets**
 **December
                    31,**
                
                **2004**
                ****
                **2003**ASSETSMarketable
                    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
                
                
                78,638TOTAL
                    ASSETS
                
                $
                6,934,243
                
                $
                3,258,032LIABILITIES
                    AND STOCKHOLDERS' EQUITYLIABILITIESNotes
                    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
                
                
                460,776TOTAL
                    LIABILITIES
                
                
                3,367,974
                
                
                1,233,894STOCKHOLDERS'
                    EQUITYConvertible
                    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
                
                
                2,024,138TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                6,934,243
                
                $
                3,258,032
 
  The
        accompanying notes are an integral part of these financial statements.
  56
  **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.
 
 57
  **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.
 
 58
 
 **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.
 
 59
  **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.
 
 60
 
 **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.
 
 61
  **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.
 
 62
  **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.
  63
  **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.
  64
 
 **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
  65
 
 **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
              
              $
              —
              
              $
              —
  66
 
 **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").
  67
 
 **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.
  68
 
 **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 offset 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. The Company believes the amount of the offsets exceed the amount
          of
          the note payable. However, since Winstar may not agree with this belief,
          the
          only offsets against the principal balance of the note reflected in the
          accompanying financial statements relate to legal fees attributed to our
          defense
          of the lawsuits filed against us. 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. Legal
          fees
          attributed to our defense of any claim brought against us as a result of
          the
          note are specifically included in the transaction documents as an allowable
          offset. Accordingly, these fees have been offset as a direct reduction
          against
          the note and, for all practical purposes, the payment of legal fees by
          the
          Company are similar to that of the Company making a direct payment against
          the
          outstanding principal balance on the note. The remaining principal balance
          of
          $892,530 is reflected as a note payable on the balance sheet.
  69
 
 **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.
 
 70
 
 **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
  71
 **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.
  72
 
 **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
 
 73
 
 **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
 
 74
 
 **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.
  75
  **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).
  76
  All
        of
        the Company’s directors are independent with the exception of Milton “Todd” Ault
        III and Louis Glazer, M.D., Ph.G.
 
 **Common
        Stock Directors**
 
 ***Milton
        “Todd” Ault III*** ,
        age 35,
        is the Chairman and Chief Executive Officer of the Company and has served
        as a
        director of the Company since June 23, 2004. He is the co-founder, in 1998,
        the
        controlling and managing member and chief investment officer of Ault Glazer,
        a
        private investment management firm headquartered in Santa Monica, California
        that manages approximately **$** 20 million
        in individual client accounts and private investment funds. Mr. Ault also
        serves on the board of directors of Definitely for Kids, a philanthropic
        organization devoted to assisting hearing-impaired children. Prior to founding
        Ault Glazer, Mr. Ault served as a portfolio manager and regional
        institutional financial advisor 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.
  77
  1
        -
        Member of Compensation Committee, 2 - Member of Audit Committee
 
 **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.
  78
  **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.
  NAME
                    AND ADDRESS
                
                AGE
                
                POSITION(S)
                    HELDWITH
                    COMPANY
                
                TERM
                    OF OFFICE AND LENGTH OFTIME
                    SERVED
                
                PRINCIPAL
                    OCCUPATION(S) DURING PAST5
                    YEARS
                
                OTHER
                    DIRECTORSHIPS HELD BY DIRECTOR ORNOMINEE
                    FOR DIRECTORINTERESTED
                    PERSONSMILTON
                    "TODD" AULT III(2)(8)
                  100
                    Wilshire Boulevard
                  Santa
                    Monica, California 90401
                
                35
                
                Chairman
                    and
                  Chief
                    Executive
                  Officer
                    Class III
                  Director
                
                Term
                    of one year; served as Chairman and CEO since October 22, 2004
                    and as
                    director since June 23, 2004
                
                Member
                    and Investment advisor of Ault Glazer (3)
                
                NoneLOUIS
                    GLAZER, M.D., PH.G(1)(8)
                  100
                    Wilshire Boulevard
                  Santa
                    Monica, California 90401
                
                73
                
                Class
                    III Director
                
                Served
                    as director since October 22, 2004 and Chief Health and Science
                    Officer of
                    Franklin Medical Products, LLC Since January 1, 2005
                
                Member
                    of Ault Glazer (3); independent medical and biotechnology
                    consultant
                
                NoneNON-INTERESTED
                    PERSONSBRIGADIER
                    GENERAL (RET.)LYTLE
                    BROWN III(1)(6)
                  1601
                    Ardenwood Court
                  Nashville,
                    Tennessee 37215
                
                72
                
                Class
                    I Director
                
                Served
                    since October 22, 2004
                
                Owner
                    and manager of Marmatic Enterprises (4); senior tax professional
                    for
                    H&R Block, Inc.
                
                NoneHERBERT
                    LANGSAM(1)(7)
                  5300
                    Wisteria Drive
                  Oklahoma
                    City, Oklahoma 73142
                
                73
                
                Class
                    II Director
                
                Served
                    since October 22, 2004
                
                President
                    of Medicare Recoveries, Inc. (5)
                
                NoneALICE
                    CAMPBELL(1)(7)
                  1211
                    Ridgeway Road #130
                  Memphis,
                    Tennessee 38119
                
                55
                
                Class
                    II Director
                
                Served
                    since October 22, 2004
                
                Independent
                    private investigator/ consultant
                
                NoneEXECUTIVE
                    OFFICERSLYNNE
                    SILVERSTEIN(2)
                  100
                    Wilshire Boulevard
                  Santa
                    Monica, California 90401
                
                33
                
                President
                    and
                  Secretary
                
                Served
                    since October 22, 2004
                
                CEO,
                    Director of Operations and Member of Ault Glazer (3)
                
                None
  79
  (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.
  80
  **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
              (4)
              
              ---
              
              
              ---
              
              
              ---
              
              $
              250,000
              (5)Chief
                  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
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---
              
              $
              500
              (6)Chief
                  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.
 (4)
                Amount
                    represents long term disability premiums of $646 and Life Insurance
                    premiums of $4,223 paid by the Company on Mr. Brown’s
                    behalf.
 (5)
                Amount
                    represents a severance payment to Mr. Brown upon his
                    resignation.
 (6)
                Amount
                    represents compensation for attendance at a meeting of the Board
                    of
                    Directors.
  **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.
  81
  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.
  82
  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.
  83
  Shares
        subject to options that terminate or expire prior to exercise will be available
        for future grants under the plans. Because the issuance of options to “outside”
directors is not permitted under the Investment Company Act without an exemptive
        order by the Securities and Exchange Commission, the issuance of options
        under
        the SOP was conditioned upon the granting of such order. The order was granted
        by the Commission on January 18, 2000.
 
 On
        December 31, 2004, there were 1,875 options to purchase common stock outstanding
        and 18,750 remain available for future issuance.
 
 The
        following is a description of each of the Stock Option Plans followed by
        a
        description of the provisions applicable to both Stock Option
        Plans.
 
 ***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.
  84
  *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.
 
 *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.
  85
  ***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.
  86
  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.
  87
  **Common
        Stock**
 
 **Name
                  and Address of**
                **Beneficial
                  Owner**
              
              **Amount
                  and Nature of****Beneficial
                  Ownership**
              
              **Percent**
                **of
                  Class**Ault
                  Glazer & Company InvestmentManagement
                  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 CapitalManagement
                  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.
  88
  (2)  Pursuant
        to the Schedule 13D filed by Steven Bodnar on December 17, 2004, Bodnar Capital
        Management LLC ***(“BCM”)*** owns
        187,500 shares of Common Stock and warrants exercisable to purchase 93,750
        shares of Common Stock. Mr. Bodnar has the power to vote and direct the
        disposition of all shares of Common Stock owned by BCM.
 
 (3)  The
        shares listed above are being reported by the Company in connection with
        its
        acquisition of SurgiCount. On February 25, 2005, the Company closed this
        acquisition and issued 200,000 shares of Common Stock, of which 10,000 shares
        of
        Common Stock will be held in escrow until August 2005. In addition, if certain
        milestones are satisfied, the Company will issue up to an additional 33,334
        shares of Common Stock.
 
 (4) Includes
        1,100 shares that Ms. Campbell beneficially owns by virtue of her minority
        ownership interest in Zeal Aggressive Partners, L.P., a private investment
        fund
        managed by Ault Glazer.
 
 **Preferred
        Stock**
  **Name
                  and Address of**
                **Beneficial
                  Owner**
              
              **Amount
                  and Nature of**
                **Beneficial
                  Ownership**
              
              **Percent**
                **of
                  Class**Ault
                  Glazer & Company InvestmentManagement
                  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 directors
                  As
                    a group (6 persons)
              
              
              10,750
              (1)
              
              98.2
              %
 
 *
          Represents less than 1.0%
  (1) Consists
        of: (i) 1,500 shares beneficially owned by Zodiak Investment Partners, L.P.;
        (ii) 2,600 shares beneficially owned by Zealous Partners, L.L.C.; and (iii)
        an
        aggregate of 6,650 shares beneficially owned by six separate trust accounts
        for
        which Melanie Glazer acts as trustee. Pursuant to the Ault Glazer 13D, Ault
        Glazer, Ault, Silverstein, and the Glazers have reported beneficial ownership
        of
        these shares of Preferred Stock because, as a result of certain relationships
        they may be deemed to be members, of a group that beneficially owns such
        shares
        of Preferred Stock.
 
 The
        following table sets forth the dollar range of Common Stock beneficially
        owned
        by each of our current directors and nominees as of December 31,
        2004:
 
 **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
  89
 __________
 (1)   Pursuant
        to Instruction 2 of Item 22(b)(5) of Schedule 14A, beneficial ownership has
        been
        determined in accordance with Rule 16a-1(a)(2) of the Exchange Act.
 
 (2)   The
        Company has not provided information with respect to the aggregate dollar
        range
        of equity securities in all funds overseen by each director or nominee for
        director named above because the Company is not part of any family of investment
        companies.
 
 (3)   Ault
        became a director on June 23, 2004. Louis Glazer, Gen. Lytle Brown, Herbert
        Langsam, and Alice Campbell became directors on October 22, 2004.
 
 **Equity
        Compensation Plan Information**
 
 The
        following table summarizes information about the options, warrants and rights
        and other equity compensation under the Company’s equity plans as of December
        31, 2004.
 **Plan
                    Category**
                ****
                **Number
                    of securities to be issued upon exercise of outstanding
                    options**
                
                **Weighted-average
                    exercise price of outstanding options**
                
                **Number
                    of securities remaining available for future issuance under equity
                    compensation plans (excluding securities reflected in column
                    (a))**Equity
                    compensation plans approved 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.
  90
  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.
 
 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.
  91
  *All
        Other Fees* *.* All
        other fees would include fees for products and services other than the services
        reported above. The Company did not incur other fees for 2004.
 
 **Audit
        Committee’s pre-approval policies and procedures**
 
 In
        accordance with its Amended and Restated Charter of the Audit Committee,
        the
        Audit Committee’s policy is to expressly pre-approve all audit and permissible
        non-audit services provided by the Company’s independent public accountants
        before the independent public accountants are engaged by the Company to provide
        any such services. These services may include audit services, audit related
        services, tax services and other related services. Pre-approval is generally
        provided for up to one year and any pre-approval is detailed as to the
        particular service or category of service and is subject to a specific
        budget.
  **PART
        IV**
  **Item
        15.****Exhibits,
        Financial Statements and Schedules**
 
 The
        following financial statements are set forth under Item 8.
 
 (a)
              (1)
                  Financial Statements
 Report
        of
        Rothstein, Kass & Company, P.C
 Report
        of
        Ernst & Young LLP
 Balance
        Sheets as of December 31, 2004 and 2003
 Statements
        of Operations for the years ended December 31, 2004, 2003
 and
        2002
 Statements
        of Cash Flows for the years ended December 31, 2004, 2003
 and
        2002
 Statements
        of Changes in Net Assets for the years ended December 31,
 2004,
        2003 and 2002
 Financial
        Highlights for the years ended December 31, 2004, 2003, 2002,
 2001
        and
        2000
 Portfolio
        of Investments as of December 31, 2004
 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)
 (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)
  92
   (10.5)
              Stock
                  Incentive Plan(11)
 (10.6)
              Stock
                  Option Plan(12)
 (10.7)
              Management
                  Agreement with Excelsior Radio Networks(13)
 (10.8)
              Registration
                  Rights Agreement, dated as of February 3, 2005, by and among Franklin,
                  Brian Stewart and Dr. William Stewart(2)
 (10.9)
              Common
                  Stock Purchase Agreement, dated as of December 29, 2004, between
                  Franklin
                  and certain selling stockholders(14)
 (10.10)
              Subscription
                  Agreement, dated November 3, 2004, by and among Franklin and accredited
                  investors(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
  93
  (7) Incorporated
        by reference to Exhibit 10.1 filed on the Company’s Annual Report filed on Form
        10-K for the year ended December 31, 2000
 (8) Incorporated
        by reference to Exhibit 10.2 filed on the Company’s Annual Report filed on Form
        10-K for the year ended December 31, 2000
 (9) Incorporated
        by reference to Exhibit 10.3 filed on the Company’s Annual Report filed on Form
        10-K for the year ended December 31, 2000
 (10) Incorporated
        by reference to Exhibit 10.4 filed on the Company’s Annual Report filed on Form
        10-K for the year ended December 31, 2000
 (11) Incorporated
        by reference to Exhibit 10.5 filed on the Company’s Annual Report filed on Form
        10-K for the year ended December 31, 2001
 (12) Incorporated
        by reference to Exhibit 10.6 filed on the Company’s Annual Report filed on Form
        10-K for the year ended December 31, 2001
 (13) Incorporated
        by reference to Exhibit 10.7 filed on the Company’s Annual Report filed on Form
        10-K for the year ended December 31, 2001
 (14) Incorporated
        by reference to the Current Report on Form 8-K filed January 4,
        2005
 (15) Incorporated
        by reference to the Current Report on Form 8-K filed June 24, 2004
 (16) Incorporated
        by reference to the Current Report on Form 8-K filed August 27,
        2004
 (17) Incorporated
        by reference to the Current Report on Form 8-K filed September 30,
        2004
 (18) Incorporated
        by reference to 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 on Form 10-K for the year ended
        December 31, 2004, filed with the Securities and Exchange Commission on March
        30, 2005
 
 94
 
 **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.
  PATIENT
                SAFETY TECHNOLOGIES, INC.Date: February
                13, 2006
              By:
              /s/
                  Louis Glazer, M.D., Ph.G.Louis
                  Glazer, M.D., Ph.G.Chief
                Executive Officer and
                Chairman
                  of the Board
  Date: February
                13, 2006
              By:
              /s/
                  William B. HorneWilliam
                  B. HorneChief
                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.
 
 **Signature**
              
              **Title**
              
              **Date**/s/
                    Louis Glazer, M.D.,
                    Ph.G.
                Louis
                  Glazer, M.D., Ph.G.
              
              Chief
                  Executive Officer and Chairman of the Board
              
              February
                  13, 2006/s/
                    William B.
                    Horne
                William
                  B. Horne
              
              Chief
                  Financial Officer and Principal Accounting Officer
              
              February
                  13, 2006/s/
                  Alice M.
                  Campbell
                Alice
                  M. Campbell
              
              Director
              
              February
                  13, 2006/s/
                  Lytle Brown
                  III
                Brigadier
                  General (Ret.) Lytle Brown III
              
              Director
              
              February
                  13, 2006/s/
                    Herbert
                    LangsamHerbert Langsam
              
              Director
              
              February
                  13, 2006/s/
                    Arnold
                    Spangler
                Arnold
                  Spangler
              
              Director
              
              February
                  13, 2006
 
 95