SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

                      Annual Report Pursuant to Section 13
                 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended                             Commission File No. 1-9727
                                                                          ------
December 31, 1998

                          Franklin Capital Corporation
                          ----------------------------

               (Exact name of registrant specified in its charter)

         Delaware                                             13-3419202       .
--------------------------------           ------------------------------------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
  incorporation or organization)

450 Park Avenue, 10th Floor, New York, New York               10022        . 
-----------------------------------------------          -------------------
(Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code      (212) 486-2323         .
                                                    ----------------------------

           Securities registered pursuant to Section 12(b) of the Act:
                                      None
           Securities registered pursuant to Section 12(g) of the Act:
                                         Common Stock, $1.00 par value

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  Corporation  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. [ X ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant as of March 16, 1999 was  $2,842,325  based on the last sale price as
quoted by The American Stock Exchange on such date  (officers,  directors and 5%
stockholders are considered affiliates for the purposes of this calculation).

The  number  of  shares of common  stock  outstanding  as of March 16,  1999 was
759,632.



                                       1
<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Prospectus of the Registrant dated July 31, 1992 (the  
"Prospectus")  are incorporated by reference in Part I, Part II and Part III 
hereof.


<TABLE>
<CAPTION>

                                TABLE OF CONTENTS
<S>        <C>      <C>    
PART I
           Item 1.  Business
           Item 2.  Properties
           Item 3.  Legal Proceedings
           Item 4.  Submission of Matters to a Vote of Security Holders

PART II
           Item 5.  Market for Corporation's Common Equity and Related Stockholder Matters
           Item 6.  Selected Financial Data
           Item 7.  Management's Discussion and Analysis of Financial Condition and Results of
                           Operations
           Item 8.  Financial Statements and Supplementary Data
           Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial
                     Disclosure

PART III
           Item 10. Directors and Executive Officers of the Corporation
           Item 11. Executive Compensation
           Item 12. Security Ownership of Certain Beneficial Owners and Management
           Item 13. Certain Relationships and Related Transactions

PART IV
           Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K

Signatures

Exhibit Index

</TABLE>


                      CAUTIONARY STATEMENT FOR PURPOSES OF
                         THE "SAFE HARBOR" PROVISIONS OF
              THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

WHEN  USED  IN  THIS  ANNUAL  REPORT  ON  FORM  10-K,   THE  WORDS   "BELIEVES,"
"ANTICIPATES,"EXPECTS"   AND  SIMILAR   EXPRESSIONS  ARE  INTENDED  TO  IDENTIFY
FORWARD-LOOKING  STATEMENTS.  STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR"  PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN  RISKS AND  UNCERTAINTIES  WHICH  COULD CAUSE  ACTUAL RESULTS TO DIFFER
MATERIALLY,  INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN THE CORPORATION'S
REGISTRATION  STATEMENT  ON FORM N-2 (FILE NO.  811-5103)  AND IN  "MANAGEMENT'S
DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS."
READERS  ARE  CAUTIONED  NOT TO PLACE  UNDO  RELIANCE  ON THESE  FORWARD-LOOKING
STATEMENTS,  WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE CORPORATION  UNDERTAKES
NO OBLIGATION  TO PUBLICLY  REVISE THESE  FORWARD-LOOKING  STATEMENTS TO REFLECT
EVENTS OR  CIRCUMSTANCES  OCCURRING  AFTER THE DATE  HEREOF  OR TO  REFLECT  THE
OCCURRENCE OF UNANTICIPATED EVENTS.


                                       2
<PAGE>


                                     PART I

Item 1.    Business

Formation

           The Franklin Capital  Corporation1 (the "Registrant",  "Franklin," or
the  "Corporation")  filed on April 7, 1987,  with the  Securities  and Exchange
Commission (the "SEC" or the "Commission") a notification of registration  under
Section  8(a) of the  Investment  Corporation  Act of 1940 (the "1940  Act") and
registered as a closed-end,  non-diversified  management  investment company. On
July 10, 1987, the Corporation  commenced  operations as an investment  company.
The  Corporation's  common stock,  par value $1.00 per share, has been listed on
The American Stock Exchange since October 1, 1987. The  Corporation  operates as
an internally  managed  investment  company  whereby its officers and employees,
under the general supervision of its Board of Directors, conduct its operations.

           From 1987  through  1991,  the  Corporation  operated  primarily as a
passive investor, both at the holding company level and through its wholly owned
subsidiary, Franklin SBIC.

           In 1992,  Franklin  SBIC was  dissolved  and the  Corporation  formed
Excelsior  Communications  Corporation  ("Excelsior").   Excelsior,   through  a
partnership,  acquired a number of radio stations, and Franklin's management was
active in the operations of both Excelsior and its operating  assets. At the end
of 1995, Excelsior sold the last of its radio properties. Excelsior continued to
operate through the first half of 1997.

           The  operating  strategy  of  providing   managerial   assistance  to
companies in which the Corporation invests has been pursued by Franklin since at
least 1992. This strategy is consistent  with the legislative  intent behind the
statutory framework governing business development companies under the 1940 Act.
The Business  Development  Corporation  ("BDC") is available for companies which
are engaged in the business of furnishing  capital and  managerial  expertise to
other  companies that might not otherwise have access to such capital.  In light
of  this  operating  strategy  and  the  Corporation's   long-term   objectives,
management  and the  Board  of  Directors  determined  that  it was in the  best
interests of the  shareholders  to explore the feasibility of moving on election
to be regulated as a BDC.

           On August 5, 1997, the Board of Directors determined that it would be
in the best interests of the Corporation and its stockholders to elect to become
a BDC under the 1940 Act.  On  September  9,  1997,  at the  Annual  Meeting  of
Stockholders,  the  stockholders  of Franklin  approved  the  proposal  that the
Corporation be regulated as a BDC. On November 18, 1997, the Corporation filed a
notification  of  election  to become a BDC with the  Commission.  The  election
became effective upon the receipt of the filing by the Commission.





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

           1. On July 14, 1998, the Corporation filed a Certificate of Amendment
with the Secretary of State of the State of Delaware, changing its name from The
Franklin  Holding  Corporation  (Delaware) to The Franklin  Capital  Corporation
(Delaware). The Corporation's shareholders had approved a proposal to change the
Corporation's  name at the Annual Meeting of Stockholders held on June 16, 1998.
The  Corporation  had filed its  original  Articles  of  Incorporation  with the
Secretary of State of the State of Delaware as The Franklin Holding  Corporation
(Delaware) on March 31, 1987.



                                       3
<PAGE>




           As  a  BDC,  the  Corporation's   objective  is  to  achieve  capital
appreciation  through  long-term  investments  in  businesses  believed  to have
favorable growth potential. The Corporation participates,  or would participate,
in start-up and early stage financing,  expansion or growth financing, leveraged
buy-out financing and restructurings. The Corporation has also invested and will
consider investing in a broad range of industry segments.

Portfolio of Investments

           As of December 31, 1998, the  Corporation's  portfolio of investments
is a composite  of  investments  in  developing  companies,  investment  limited
partnerships and one marketable security.

Illiquidity of Investments

           Many of the Corporation'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 does not  anticipate
that  there  will  be  any  established  trading  market  for  such  securities.
Additionally, many of the securities that the Corporation may invest in will not
be eligible for sale to the public without registration under the Securities Act
of 1933, as amended, which could prevent or delay any sale by the Corporation 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  corporation  or  investee  registers  its  securities  and  becomes a
reporting  corporation  under  the  Securities  and  Exchange  Act of 1934,  the
corporation  may be considered an insider by virtue of its board  representation
and would be restricted in sales of such corporation's securities.

Managerial Assistance

           The Corporation believes that providing managerial  assistance to its
investees is critical to its business development activities.  "Making available
significant  managerial assistance" as defined in the 1940 Act with respect to a
BDC such as  Franklin  means  (a) any  arrangement  whereby a BDC,  through  its
directors,  officers,  employees or general partners,  offers to provide, and if
accepted,  does so provide  significant  guidance  and  counsel  concerning  the
management,  operations  or  business  objectives  and  policies  of a portfolio
company;  or (b) the exercise of a controlling  influence over the management or
policies of a portfolio  company by a BDC acting  individually or as a part of a
group  acting   together  which  controls  such   portfolio   Corporation.   The
Corporation,  as a  BDC,  is  required  by the  1940  Act  to  make  significant
managerial assistance available at least with respect to investee companies that
the Corporation  treats as qualifying assets for purposes of the 70 percent test
(see  "Regulation").  The  nature,  timing and amount of  managerial  assistance
provided by the Corporation  vary depending upon the particular  requirements of
each investee Corporation.

           In  connection  with  its  managerial  assistance,  Franklin  may  be
represented  by one or  more  of its  officers  or  directors  on the  board  of
directors  of an investee.  The  Corporation's  goal is to assist each  investee
company in establishing its own independent and effective board of directors and
management.


                                       4
<PAGE>


Need for Follow-on Investments

           Following its initial  investments in investees,  the Corporation has
made and  anticipates  that it will continue to make  additional  investments in
such investees as "follow-on"  investments,  in order to increase its investment
in an investee,  and may exercise  warrants,  options or convertible  securities
that were acquired in the original financing.  Such follow-on investments may be
made for a variety  of  reasons  including:  1) to  increase  the  Corporation's
exposure  to an  investee,  2) to  acquire  securities  issued  as a  result  of
exercising convertible securities that were purchased in the original financing,
3) to preserve Franklin's  proportionate ownership in a subsequent financing, or
4) in an  attempt  to  preserve  or  enhance  the  value  of  the  Corporation's
investment.  There can be no assurance that the Corporation  will make follow-on
investments or have sufficient funds to make such  investments;  the Corporation
will have the  discretion to make any follow-on  investments  as it  determines,
subject to the  availability  of  capital  resources.  The  failure to make such
follow-on  investments may, in certain  circumstances,  jeopardize the continued
validity of an investee and the Corporation's initial investment,  or may result
in a missed  opportunity for the Corporation to increase its  participation in a
successful operation.

Competition

           The Corporation competes for attractive investment opportunities with
venture capital  partnerships and corporations,  merchant banks, venture capital
affiliates of industrial and financial companies,  SBICs, other BDCs and private
individual investors.

Employees

           At December 31, 1998, the Corporation had six employees.

Regulation

           The Small  Business  Investment  Incentive  Act of 1980  modified the
provisions of the 1940 Act that are applicable to a closed-end  investment  BDC.
After filing its election to be treated as a BDC, a corporation may not withdraw
its election  without  first  obtaining the approval of holders of a majority of
its outstanding voting  securities.  The following is a brief description of the
1940 Act, as modified by the Small  Business  Investment  Incentive Act of 1980,
and is qualified  in its entirety by the  reference to the full text of the 1940
Act and the rules thereunder by the SEC.

           Generally,  to be eligible to elect BDC status,  a  corporation  must
primarily engage in the business of furnishing capital and managerial  expertise
to  companies  which do not have ready  access to capital  through  conventional
financial  channels.  Such portfolio  companies are termed  "eligible  portfolio
companies." More specifically,  in order to qualify as a BDC, a corporation must
(i) be a domestic corporation; (ii) have registered a class of its securities or
have filed a  registration  statement with the SEC pursuant to Section 12 of the
Exchange  Act of  1934;  (iii)  operate  for the  purpose  of  investing  in the
securities of certain types of portfolio companies, namely, immature or emerging
companies and businesses  suffering or just recovering  from financial  distress
(see following paragraph); (iv) extend significant managerial assistance to such
portfolio  companies;  (v) have a  majority  of  "disinterested"  directors  (as
defined in the 1940 Act) and (vi) file (or, under certain circumstances,  intend
to file) a proper notice of election with the SEC.


                                       5
<PAGE>


           An eligible  portfolio  company  generally is a domestic  corporation
that is not an  investment  company  and  that  (i)  does  not  have a class  of
securities  registered on an exchange or included in the Federal Reserve Board's
over-the-counter  margin list;  (ii) is actively  controlled by a BDC and has an
affiliate of a BDC on its board of directors or (iii) meets such other  criteria
as may be  established  by the SEC.  Control  under the 1940 Act is  presumed to
exist where a BDC owns 25 percent of the outstanding securities of the investee.

           The 1940 Act prohibits or restricts companies subject to the 1940 Act
from investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms and investment companies. Moreover, the 1940
Act limits the type of certain  assets  necessary  for its  operations  (such as
office furniture, equipment and facilities) if, at the time of acquisition, less
than 70 percent of the value of the  Corporation's  assets consist of qualifying
assets.  Qualifying  assets  include:  (i)  securities  of  companies  that were
eligible portfolio companies at the time such company acquired their securities;
(ii)  securities  of bankrupt or insolvent  companies  that were eligible at the
time of such company's initial  investment in those companies;  (iii) securities
received  in  exchange  for or  distributed  in or  with  respect  to any of the
foregoing and (iv) cash items, government securities and high quality short-term
debt. The 1940 Act also places restrictions on the nature of the transactions in
which,  and the persons for whom,  securities  can be purchased in order for the
securities  to  be  considered  qualifying  assets.  Such  restrictions  include
limiting purchases to transactions not involving a public offering and acquiring
securities  from either the portfolio  company or their  officers,  directors or
affiliates.

           The  Corporation  is  permitted  by the  1940  Act,  under  specified
conditions,  to issue  multiple  classes  of senior  debt and a single  class of
preferred stock if its asset  coverage,  as defined in the 1940 Act, is at least
200 percent  after the issuance of the debt or the preferred  stock (i.e.,  such
senior securities may not be in excess of 50 percent of its net assets).  If the
value of the  Corporation's  assets,  as defined,  were to increase  through the
issuance of  additional  capital stock or otherwise,  the  Corporation  would be
permitted under the 1940 Act to issue senior securities.

           The  Corporation may sell its securities at a price that is below the
prevailing net asset value per share only after a majority of its  disinterested
directors  has  determined  that such sale would be in the best  interest of the
Corporation  and its  stockholders  and upon the  approval  by the  holders of a
majority  of its  outstanding  voting  securities,  including  a majority of the
voting  securities  held  by  non-affiliated  persons.  If the  offering  of the
securities  is  underwritten,  a majority of the  disinterested  directors  must
determine in good faith that the price of the securities  being sold is not less
than a price which closely approximates market value of the securities, less any
distribution  discount  or  commission.  As  defined  by the 1940 Act,  the term
"majority of the Corporation's  outstanding voting securities" means the vote of
(i) 67 percent or more of the Corporation's Common Stock present at the meeting,
if the  holders  of more than 50  percent of the  outstanding  Common  Stock are
present  or   represented  by  proxy  or  (ii)  more  than  50  percent  of  the
Corporation's outstanding Common Stock, whichever is less.

           Most of the transactions involving the Corporation and its affiliates
(as well as affiliates of those  affiliates)  which were prohibited  without the
prior  approval of the  Commission  under the 1940 Act prior to its amendment by
the Small Business  Investment  Incentive Act are now permissible upon the prior
approval of a majority of the Corporation's independent directors and a majority
of the  directors  having no financial  interest in the  transactions.  However,
certain  transactions  involving  certain  closely  affiliated  persons  of  the
Corporation, including its directors, officers, and employees, may still require
the prior  approval  of the  Commission.  In  general,  (i) any person who owns,
controls  or holds  power  to vote  more  than 5  percent  of the  Corporation's


                                       6
<PAGE>




outstanding  Common  Stock;  (ii) any  director,  executive  officer  or general
partner of that person and (iii) any person who directly controls, is controlled
by, or is under common control with that person,  must obtain the prior approval
of  a  majority  of  the  Corporation's   independent  directors  and,  in  some
situations,  the prior approval of the  Commission,  before  engaging in certain
transactions  involving  the  Corporation  or  any  company  controlled  by  the
Corporation.  The 1940 Act generally does not restrict  transactions between the
Corporation  and its portfolio  companies.  While a BDC may change the nature of
its business so as to cease being a BDC (and in connection  therewith  withdraws
its election to be treated as a BDC) only if  authorized  to do so by a majority
vote  (as  defined  in the  1940  Act)  of its  outstanding  voting  securities,
stockholder  approval of changes in other fundamental  investment  policies of a
BDC is not  required (in  contrast to the general  1940 Act  requirement,  which
requires  stockholder  approval  for a  change  in  any  fundamental  investment
policy).  The  Corporation  is  entitled  to change its  diversification  status
without stockholder approval.

Item 2.    Properties

           Franklin  maintains its offices at 450 Park Avenue,  10th Floor,  New
York, New York 10022, where it leases  approximately 3,600 square feet of office
space pursuant to a lease  agreement  expiring in 2003. As of December 31, 1998,
Franklin had sublet arrangements with two subtenants for a portion of Franklin's
office space.

Item 3.    Legal Proceedings

           The Corporation is a plaintiff in an action brought against  National
Union Fire Insurance  Corporation of  Pittsburgh,  PA ("National  Union") in the
Supreme  Court of the State of New York ("The  Supreme  Court").  The action was
filed on November  13, 1997 and seeks  reimbursement  of $1 million for fees and
expenses  incurred in connection  with certain  shareholder  litigation  brought
against Franklin and its directors. National Union filed a motion to dismiss the
complaint which was granted by The Supreme Court on November 24, 1998.  Franklin
has filed an appeal  of the  dismissal  with the New York  State  Supreme  Court
Appellate Division. Both sides have submitted briefs to the Appellate Court. The
Corporation is unaware of any other material legal proceedings  pending to which
it is a party or to which any of its property is subject.

Item 4.    Submission of Matters to a Vote of Security Holders

           The  Corporation  did  not  submit  any  matters  to a  vote  of  its
stockholders during the fourth quarter of the 1998 fiscal year.




                                       7
<PAGE>


                                     PART II

Item 5.  Market for Corporation's Common Equity and Related Stockholder Matters

Stock Transfer Agent

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

Market Prices

           The  Corporation'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  Corporation's  shares during each quarter of
the last two years, as reported by the American Stock Exchange.

           1998 Quarter Ending       Low                  High

           March 31                  $  5.750             $  7.000
           June 30                   $  6.875             $  8.250
           September 30              $  5.875             $  8.250
           December 31               $  4.750             $  5.750

           1997 Quarter Ending       Low                  High

           March 31                  $  9.375             $ 10.125
           June 30                   $  8.875             $   9.750
           September 30*             $  7.000             $ 11.750
           December 31               $  6.250             $   7.750


     * A special distribution of $3.25 per share was declared in July 1997.

Stockholders

           As of March  16,  1999,  there  were 665  holders  of  record  of the
Corporation's common stock. The Corporation has 2,000,000 shares authorized,  of
which 1,003,986 are issued and 759,632 are outstanding at March 16, 1999.



                                       8
<PAGE>



Item 6.              Selected Financial Data

           The following tables should be read in conjunction with the Financial
Statements included in Item 8 of this form 10-K.

<TABLE>
<CAPTION>


              BALANCE SHEET DATA 
               Financial Position as of December 31:


                                                1998              1997*              1996              1995                  1994

<S>                                       <C>                <C>              <C>               <C>                   <C>        
Total Assets                              $6,548,696         $7,718,458       $11,798,044       $12,658,556           $14,155,454

Liabilities                                 $233,143          $ 375,326        $1,921,475         $ 538,427             $ 810,849

Net asset value                           $6,315,553         $7,343,132        $9,876,569       $12,120,129           $13,344,605

Net asset value per share                      $8.41            $  9.17          $  12.33          $  14.67              $  15.40

Shares outstanding                           750,686            801,198           801,198           826,198               866,598



Operating Data for the year 
ended December 31:

                                                1998               1997              1996              1995                  1994

Investment Income                           $263,323       $ 497,021            $ 852,211         $ 948,436             $ 709,068

Net investment loss from operations     $(1,357,085)       $(1,903,829)      $(1,553,891)      $(1,209,464)          $(1,441,669)

Net realized gain on investments,
       net of income taxes                $1,628,004    $  3,313,498      $      95,085     $    999,029           $ 1,800,301

Net (decrease) increase in
       unrealized appreciation
       of investments, net of
       deferred income taxes            $(1,015,091)       $(1,339,212)  $     266,694      $    233,878           $    (58,124)

Net increase (decrease) in net
       assets from operations             $(744,172)     $      70,457       $(1,192,112)           $23,443             $ 300,508

Net increase (decrease) in net
       assets from operations
       per weighted average number
       of shares outstanding                 $(0.94)            $  0.09        $   (1.48)          $   0.03              $   0.35


     * A special distribution of $3.25 per share was declared in July 1997.

</TABLE>



                                       9
<PAGE>



Item. 7    Management's Discussion and Analysis of Financial Condition and
Results of Operations

Statement of Operations

           The Corporation  accounts for its operations under Generally Accepted
Accounting  Principles for investment  companies.  On this basis,  the principal
measure of its financial  performance is captioned  "Net increase  (decrease) in
net assets from operations", which is composed of the following: "Net investment
loss from operations," which is the difference between the Corporation'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 increase  (decrease) in
unrealized  appreciation  of  investments,"  which is the net change in the fair
value of the Corporation'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.

           "Net  realized  gain (loss) on  portfolio  of  investments"  and "Net
increases  (decrease) 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

           The  Corporation's  total assets and net assets  were,  respectively,
$6,548,696 and $6,315,553 at December  31,1998 versus  $7,718,458 and $7,343,132
at December  31,1997.  Net asset value per share was $8.41 at December  31, 1998
versus $9.17 at December 31, 1997.

           Franklin  paid a $3.25 per share  special  distribution  on August 4,
1997 to its  stockholders  of record as of July 28,  1997  totaling  $2,603,894.
Based on the  calculation  of current  and  cumulative  earnings  and profits at
December 31, 1997, it was determined that this entire  distribution was a return
of  capital to the  stockholders.  The  Corporation  also paid a $1.00 per share
special  distribution  on December 4, 1996 to its  stockholders  of record as of
November  25,1996  totaling  $801,198,   which  entire   distribution  was  also
determined to be a return of capital to the stockholders.

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

                                      December 31, 1998     December 31, 1997
                                      -----------------     -----------------

Investments, at cost                     $ 3,475,229           $  4,209,672
Unrealized appreciation, net of          
           deferred taxes                  1,650,077              2,665,168
                                         ------------         --------------
Investments, at fair value               $ 5,125,306           $  6,874,840
                                         ===========           ============
                                      

                                       10
<PAGE>



Investments

           The Corporation has an investment in Avery Communication  Corporation
("Avery")  valued at $3,380,013 at December 31, 1998,  which represents 51.6% of
the  Corporation's  total assets and 53.5% of its net assets. Avery is a holding
corporation operating in the  telecommunications  industry.  Its common stock is
quoted on the OTC Electronic Bulletin Board under the symbol "ATEX". At December
31, 1998,  Hold Billing  Services  ("HBS"),  was Avery's sole current  operating
subsidiary.  HBS provides  billing and  collection  services for  inter-exchange
carriers and long-distance resellers. HBS's other principal operating subsidiary
was sold in early 1998.

           Franklin's  original  investment  in  Avery of  $350,000  was made in
August 1995, and an additional  investment of $2.5 million was made in May 1997.
On July 6, 1998,  Franklin sold certain  securities to the Thurston Group,  Inc.
for $2.5  million.  On a primary  share basis,  Franklin owns more than 17.5% of
Avery's outstanding voting stock.  Additionally,  two officers of Franklin serve
on Avery's eight member Board of Directors.

           At  December  31,  1998,  the   Corporation   had  an  investment  in
Communications  Intelligence Corporation ("CIC") common stock valued at $656,250
and an investment  in CIC Standby  Ventures,  L.P.  ("CIC  Ventures")  valued at
$107,847.  In 1995, the Corporation made an original  investment in CIC Ventures
of $67,000. The managing partner of CIC Ventures is the Chairman of the Board of
CIC.  In  November  1998,  the  Corporation  added to its  existing  holdings by
investing $375,000 in CIC. CIC develops, markets, and licenses software products
based  on  proprietary   handwriting   recognition   technologies.   CIC's  core
technologies include multilingual  handwriting recognition and dynamic signature
verification software.  CIC's products are designed to increase the ease of use,
functionality, and security of electronic devices ranging from PC peripherals to
smart cellular phones. At December 31, 1998, the total investment in CIC and CIC
Ventures represents 11.7% of the Corporation's total assets and 12.1% of its net
assets.

           At December 31, 1998, the Corporation had an investment in the Seneca
Capital,  L.P.  ("Seneca"),  an investment  partnership whose primary investment
objective is to invest in securities  which value will be meaningfully  affected
by an  anticipated  event.  Seneca invests  primarily in publicly  traded equity
securities  of U.S.  companies  and, to control  market  risks,  utilizes  short
positions,  index  options  and other  hedging  techniques.  Franklin is a 0.90%
limited partner. The Corporation's original investment of $500,000 made in April
1996 is valued at $530,019 at December 31, 1998.  The year-end value is net of a
profit  distribution  of $350,000  received  by  Franklin  during the year ended
December  31,  1998.  At  December  31,  1998,  Seneca  represents  8.1%  of the
Corporation's total assets and 8.4% of its net assets.

           During 1997, the Corporation  dissolved its wholly-owned  subsidiary,
Excelsior.  Excelsior was formed in 1992 to invest in  broadcasting  properties,
primarily radio stations.  Excelsior's last broadcast assets were sold effective
December 31, 1995, at which point, and through the time of its dissolution,  its
assets  consisted  principally of cash,  receivables from customers of the radio
station and  marketable  securities.  All  remaining  assets of  Excelsior  were
distributed  to Franklin  during 1997.  The  Corporation  realized a net gain of
$3,166,842 in 1997 from this dissolution.



                                       11
<PAGE>



Results of Operations

Investment Income and Expenses:

           The   Corporation's   principal   objective  is  to  achieve  capital
appreciation  through  long-term  investments  in  businesses  believed  to have
favorable growth potential.  Therefore,  a significant portion of the investment
portfolio is structured to maximize the potential for capital  appreciation  and
provides  little or no current  yield in the form of dividends or interest.  The
Corporation 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  Corporation's  fixed income  portfolio and the
average yield on this portfolio.

           The Corporation  had interest income of $34,128 in 1998,  $225,840 in
1997,  and $96,918 in 1996.  The  decrease in 1998 from 1997 was the result of a
decrease  in the  amount of  investments  in high  yield  bonds in early 1997 as
compared to 1998.  Income  from  controlled  affiliates  of $229,195 in 1998 and
$257,258 in 1997  represents  dividend and interest  income from preferred stock
and a note received in connection  with the  Corporation's  investment in Avery.
The $750,000 income from controlled affiliates in 1996 represents management fee
income from Excelsior.

           Operating  expenses were $1,620,408 in 1998,  $2,400,850 in 1997, and
$2,406,102  in  1996.   Operating   expenses  included  net  professional  fees,
settlement  costs and other expenses  related to litigation of $535,017 in 1997,
$754,631 in 1996. Most of the Corporation's other operating expenses are related
to employee and director compensation, office and rent expenses and professional
fees (primarily general legal and audit fees).

           Net  investment  losses  from  operations  were  $1,357,085  in 1998,
$1,903,829 in 1997, and $1,553,891 in 1996.

           The  Corporation  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 Corporation attempts to maintain adequate working
capital to provide for fiscal periods when there are no such sales.

Net Realized Gains and Losses on Portfolio of Investments:

           During the three years ended  December 31, 1998,  1997 and 1996,  the
Corporation  realized  net gains  before taxes of  $1,628,004,  $3,105,165,  and
$246,518, respectively, from the disposition of various investments.

           During 1998,  Franklin realized a net gain from the sale of a portion
of its investment in and subsequent exercise of warrants in Avery of $1,308,208,
as well as  $350,000  in gains  from  Seneca,  and  $96,370  in gains from other
investment  partnerships,  the sale of various marketable  securities and loans.
These gains were offset by a loss of $126,574 on the sales of various marketable
securities, loans, and investment partnerships.

           During 1997, Franklin realized a net gain from the dissolution of its
wholly-owned  subsidiary,  Excelsior,  of  $3,166,842,  as well as net  gains of
$81,597 on the sales of various marketable securities, including stocks and high
yield bonds,  and realized  capital  gains of $137,313 from the  liquidation  of
holdings in investment  partnerships.  These were offset by a loss of $59,733 on
the sale of a loan which had been originated  when Franklin  operated as a SBIC,
as 


                                       12
<PAGE>


well as the write-off of $220,854 of investments in limited  partnerships and
securities in which there is no anticipated current or future value.

           During 1996 the  Corporation  realized net gains of $246,518 on sales
of marketable  securities,  primarily Market Analysis and Information  Database,
Inc. ("M.A.I.D.") common stock.

Unrealized Appreciation of Investments:

           Unrealized  appreciation  of  investments,  net  of  deferred  taxes,
decreased by $1,015,091 during the year ended December 31, 1998,  primarily from
realized  gains due to the sale of a portion of Franklin's  investment in Avery.
This was offset by increased values for CIC and CIC Ventures.

           Unrealized  appreciation  of  investments,  net  of  deferred  taxes,
decreased by $1,339,212  during the year ended December 31, 1997,  primarily due
to the  realization of the gain from the  dissolution of Excelsior and decreased
values for CIC Standby Ventures,  L.P., Codman Research,  Inc., Pixel Multimedia
Ltd. and Hefty Profits Ltd. These were partially  offset by increased values for
Avery and Seneca.

           Unrealized  appreciation  of  investments,  net  of  deferred  taxes,
increased by $266,694 during the year ended December 31, 1996,  primarily due to
increased  values for Avery,  FMA High Yield Capital  Appreciation  L.P. and CIC
Standby Ventures, L.P., offset by a decreased value for Excelsior.

Liquidity and Capital Resources:

           The Corporation's  reported total cash and cash equivalents,  accrued
interest and accounts  receivable  and  marketable  investment  securities  (the
primary  measure of liquidity) at December 31, 1998 was  $1,979,256  compared to
$720,470 at December  31, 1997 and  $442,805 at December  31,  1996.  Management
believes that these assets,  together with its investment in Seneca, provide the
Corporation with sufficient liquidity for its operations.  Funds from Seneca may
be withdrawn upon 30 days written notice to the general partner.

Risks

           Pursuant to Section 64(b) (1) of the  Investment  Corporation  Act of
1940, a BDC is required to describe the risk factors  involved in an  investment
in its  securities  inherent  in the  nature  of  the  Corporation's  investment
portfolio.  There are significant  risks inherent in the  Corporation's  venture
capital  business.  The  Corporation  has invested a substantial  portion of its
assets  in small  private  companies  and a  non-reporting  public  corporation.
Because of the speculative nature of these  investments,  there is significantly
greater risk of loss than is the case with  traditional  investment  securities.
The Corporation  expects that from time to time its venture capital  investments
may result in a complete loss of the  Corporation's  invested  capital or may be
unprofitable.  Other investments may appear likely to become successful, but may
never realize their  potential.  Neither the  Corporation's  investments  nor an
investment in the  Corporation  is intended to constitute a balanced  investment
program. The Corporation 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.


                                       13
<PAGE>


Risks Relating to the Year 2000 Issue

           The  Corporation's   internal  computer   information  is  Year  2000
compliant.  The  Corporation  uses  individual  PC's  that  rely on third  party
software.  All such  software has been  upgraded to versions  that are Year 2000
compliant.

           The  Corporation's  Year  2000  issues  and  any  potential  business
interruptions, costs, damages, or losses related thereto are primarily dependent
upon the Year 2000 compliance of third parties. The Corporation's suppliers that
provide mission-critical  services are primarily large companies,  such as local
and long distance telephone service providers, banks, and utility companies. The
Corporation  has no reason to believe that these suppliers will not be Year 2000
compliant.  However,  the  Corporation  is in the process of reviewing its third
party relationships in order to assess and address Year 2000 issues with respect
to these third parties.

           The Corporation believes that the "Year 2000" problem may be material
to its investments.  The Corporation has received  assurances from the companies
that it  invests  in that they are  addressing  the Year  2000  issue and do not
expect any material events to affect their business operations.

           There  can be no  assurance  that the  "Year  2000"  problem  will be
properly or timely  resolved,  which could have a material adverse effect on the
Corporation's  results  of  operations.  The  Corporation  intends  to develop a
contingency  plan to be able to react  to any Year  2000  problems  should  they
arise.

           The costs  associated with Year 2000 compliance have been nominal and
the  Corporation  believes that the remaining costs will be minimal and will not
have a  material  adverse  effect  on its  financial  condition  or  results  of
operations.

Item 7a.   Quantitative and Qualitative Disclosures about Market Risk

           A  portion  of  the  Corporation's  portfolio  of  investments  is in
marketable securities traded on the over-the-counter market. In order to realize
the full market value of a security the market must trade in an orderly fashion.
Should an  economic  event occur that would not allow the markets to trade in an
orderly fashion, the Corporation may not be able to receive fair value for those
investments.

           All investments  owned by the Corporation are marked at fair value at
December 31, 1998. For those  investments  that do not have a ready market,  the
Corporation has received valuation  information from either an independent third
party or the investee  corporation  itself.  The  Corporation has no off-balance
sheet investments or hedging instruments.

Item 8.              Financial Statements and Supplementary Data

           See  Index  to  Financial  Statements  for a list  of  the  Financial
Statements and Supplementary Data included in this Form 10-K.



                                       14
<PAGE>



Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure

           The  Corporation  terminated  its auditing  relationship  with Arthur
Andersen & Co. and began a relationship with Ernst & Young LLP on June 16, 1998,
to provide auditing, accounting and managerial services. The change was approved
by the Board of Directors of the Corporation and  subsequently  the shareholders
at a shareholder meeting held on June 16, 1998. There were no disagreements with
Arthur  Andersen  & Co. or with  Ernst & Young LLP on  accounting  or  financial
disclosure.



                                       15
<PAGE>




                                    PART III

Item 10.   Directors and Executive Officers of the Corporation

Officers
--------

           Stephen  L.  Brown,   Chairman  and  Chief  Executive  Officer.   For
additional  information about Mr. Brown, please see the Directors'  biographical
information section below.

           Spencer L.  Brown,  age 33, has been  Senior  Vice  President  of the
Corporation since November 1995, Secretary of the Corporation since October 1994
and was Vice President from August 1994 to November 1995. From September 1993 to
July 1994, Mr. Brown was an attorney with the firm of Wilson, Elser,  Moskowitz,
Edelman & Dicker,  and from September 1991 to September 1993, he was an attorney
with the firm of Weil,  Gotshal & Manges  LLP.  Mr.  Brown is also a director of
Avery.  Mr.  Brown is the son of  Stephen  L.  Brown,  the  Chairman  and  Chief
Executive of the Corporation.

           Hiram M. Lazar,  age 34, joined the  Corporation  as Chief  Financial
Officer  in January  1999.  From June 1992 to January  1999,  Mr.  Lazar was the
Vice-President of Finance and Corporate  Controller for Lebenthal & Co., Inc., a
regional  full-service  broker/dealer.  From July 1985 to June 1992,  Mr.  Lazar
worked as a Certified  Public  Accountant  with  various  regional  and national
Certified Public Accounting firms.

           John Greenbaum, age 48 had been Chief Financial Officer and Treasurer
of the  Corporation  since 1996.  Mr.  Greenbaum  resigned from the  Corporation
effective December 31, 1998.

           Stephen J. Mayer,  age 46, had been Vice  President and Controller of
the Corporation  since 1994. Mr. Mayer's  employment ceased with the Corporation
effective December 31, 1998.

Directors
---------


           Stephen L. Brown, age 60, was elected to the  Corporation's  Board of
Directors and  appointed  Chairman of its Board of Directors in October 1986. He
has been Chief Executive Officer since October 1986. From June 1984 through June
1997, Mr. Brown was Chairman of S.L. Brown & Company,  Inc. ("SLB & Co., Inc."),
a private  investment firm. Mr. Brown is a director of Copley Financial Services
Corporation (advisor to Copley Fund, Inc., a mutual fund) and Avery.

           Miles L. Berger,  age 68, joined the Board as a director in 1996. Mr.
Berger has been Vice Chairman of Heitman  Financial  Ltd., a real estate service
Corporation,  for more than the past six years.  Mr.  Berger is also Chairman of
the  Board of Mid Town  Bank,  Chicago,  and  Berger  Management  Services  LLC.
Additionally  Mr. Berger serves as a board member of Innkeepers  USA Trust,  and
Universal Health Realty Income Trust.

           Irving Levine,  age 77, became a director of the Corporation in 1990.
He has been Chairman of the Board and  President of Copley Fund,  Inc., a mutual
fund, since 1978, and Chairman and Treasurer of Stuffco  International,  Inc., a
ladies handbag  processor and  chain-store  operator,  since 1978. Mr. Levine is
also President and a director of Copley Financial Services  Corporation (advisor
to Copley Fund, Inc.). 


                                       16
<PAGE>


           Jonathan A.  Marshall,  age 60, has been a director  since 1987.  Mr.
Marshall is a Senior Partner in the law firm of Pennie & Edmonds, and has been a
member of that firm  since  1974.  He is a member of the Bar of the State of New
York and is admitted to practice  before the United States Supreme Court and the
United States Patent and Trademark Office.

           Michael P.  Rolnick,  age 33, is  currently  Vice  President  for New
Ventures at E*Trade  Group,  Inc. In this  capacity  he is  responsible  for the
company's corporate  development  activities including mergers and acquisitions,
private equity investments, and Corporate Strategy. Prior to working at E*Trade,
Mr. Rolnick was an Associate at Montgomery Securities.

           Carl Glickman, age 72, resigned from the Board on July 29, 1998.

           Jeffrey  Steiner,  age 61, did not submit his name for  reelection to
the Board at the Annual Meeting of Stockholders held on June 16, 1998.

Item 11.   Executive Compensation

Summary Compensation Table

           The  following  table sets forth a summary for each of the last three
years of the cash and non-cash  compensation  awarded to,  earned by, or paid to
the Chief Executive Officer of the Corporation and the other executive  officers
of the Corporation, whose individual remuneration exceeded $100,000 for the year
ended December 31, 1998.

<TABLE>

<CAPTION>
                    Name &                                                    Additional           Other Annual           401K
              Principal Position           Year            Salary            Compensation          Compensation     Contribution
                                                             ($)                 ($)                   ($)                 ($)
<S>     <C>                               <C>            <C>                  <C>                     <C>                <C>      
        Stephen L. Brown                   1998           350,000              32,500                   -                   -
        Chairman & President               1997           390,000                 -                     -                 9,500
                                   (1)     1996           390,000              32,500                   -                 9,500


        Spencer L. Brown                   1998           126,250              12,500                   -                   -
        Senior Vice President              1997           120,000                 -                     -                 8,050
             & Secretary                   1996           120,000              10,000                   -                 7,200


        John Greenbaum                     1998           102,500                 -                     -                   -
        Chief Financial Officer            1997           120,000                 -                     -                 6,900
         & Treasurer         (2)           1996             92,308             10,000                 4,500               1,000

</TABLE>


(1)     Mr. Brown is employed under a contract with the Corporation at a base
        salary of $390,000 per annum. The initial term of such employment
        contract expired on December 31, 1995, and is automatically extended
        from year to year thereafter unless the Corporation elects not to extend
        the term. In compliance with the terms of the Settlement described in
        Footnote 5 to the financial statements, Mr. Brown's base salary was
        reduced to $350,000. 

(2)     Mr.  Greenbaum  joined  the  Corporation  as Chief  Financial  Officer &
        Treasurer  in March 1996 at an annual base salary of  $120,000.  Through
        March  1996,  Mr.  Greenbaum  served  as  an  outside  director  of  the
        Corporation for which he received  compensation of $4,500. Mr. Greenbaum
        resigned from Franklin effective December 31, 1998.


                                       17
<PAGE>



Item 12.   Security Ownership of Certain Beneficial Owners and Management

           The following  table sets forth certain  information  with respect to
beneficial  ownership (as that term is defined in the rules and  regulations  of
the  Commission)  of the  Corporation's  common stock as of March 16, 1999 by 1)
each person who is known by the  Corporation to be the beneficial  owner of more
than five  percent of the  outstanding  common  stock,  2) each  director of the
Corporation,   3)  each  current   executive   officer  listed  in  the  Summary
Compensation   Table  and  4)  all  directors  and  executive  officers  of  the
Corporation  as a group.  Except as otherwise  indicated,  to the  Corporation's
knowledge,  all shares are beneficially owned and investment and voting power is
held as stated by the persons named as owners.  The  Corporation is not aware of
any arrangement  which may, at a subsequent date,  result in a change of control
of the  Corporation.  The  address  for all  beneficial  owners,  unless  stated
otherwise below is c/o The Franklin Capital  Corporation 450 Park Avenue,  Suite
1000, New York, NY 10022.

                                                Amount and
                                                  Nature of
                        Name and Address        Beneficial            Percent
                       of Beneficial Owner      Ownership             of Class
                       -------------------      ------------          ---------

        Stephen L. Brown                         110,960           (1)   14.4%
                                                                   
        Kuby Gottlieb Special Value Fund          60,350                  7.9%
        500 West Madison Ave, 27th Floor
        Chicago, IL 60661
        Spencer L. Brown                          15,975           (2)    2.1%
        Miles L. Berger                           10,000                  1.3%
        John Greenbaum                              9,600          (3)    1.3%
        Jonathan A. Marshall                        5,900                  *
        Irving Levine                               3,000                  *
        Hiram M. Lazar                              2,000                  *
        Michael Rolnick                               400                  *
        Stephen J. Mayer                            -                      *
        All officers and directors
             as a group (9 persons)              157,835                 20.2%

        ---------------------------
         * Less than 1.0%

(1)     Does  not  include  4,075  shares  owned  by Mr.  Brown's  children  not
        including Spencer L. Brown, and does not include 15,975 owned by Spencer
        L. Brown,  including options for 10,000 shares. See (2) below. Mr. Brown
        disclaims  beneficial  ownership  of such shares.  Includes  options for
        5,000  shares   exercisable   on  January  27,  1998  and  5,000  shares
        exercisable on January 27, 1999.

(2)     Includes options for 5,000 shares exercisable on January 27, 1998 and
        5,000 shares exercisable on January 27, 1999.

(3)     Ownership  is  through  Greenbaum  Brothers  Partnership,  in which  Mr.
        Greenbaum has a 33% general Partnership  interest.  Includes options for
        5,000 shares exercisable on January 27, 1998.

Item 13.   Certain Relationships and Related Transactions

           See Items 10 through 12 and Footnote 6 to the Financial Statements.


                                       18
<PAGE>



                                     PART IV

Item 14.   Exhibits, Financial Statements, Schedules and Reports on Form 8-K

   (a)   (1) Financial Statements
                        Information  required by subsection of item is
                        presented  in index to  Financial  Statements  on
                        page 21.
         (2) Exhibits
                        (3)  (i)  Articles  of  Incorporation*  
                        (3)  (ii) By-Laws* 
                        (23)  Financial Data Schedule (for EDGAR purposes only)

   (b)    Reports on Form 8-K.  The  Corporation  did not file any reports on 
          Form 8-K the last quarter of 1998.



--------------------------------------------------------------------------------
*Incorporated by reference to the Corporation's Form N-2, as amended, filed July
31, 1992.



                                       19
<PAGE>



                                   SIGNATURES

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

                                       THE FRANKLIN CAPITAL CORPORATION

Date: March 24, 1999         By:       /s/
                                       ----------------------------------------
                                       Stephen L. Brown
                                       Chairman & Chief Executive Officer  

           Pursuant to the requirements of the Securities  Exchange Act of 1934,
this  report  has  been  signed  by  the  following  persons  on  behalf  of the
Corporation in the capacities and on the dates indicated.

Signatures                     Title                              Date
----------                     -----                              ----

/s/______________________     Chairman &                     March 24, 1999
Stephen L. Brown                  Chief Executive Officer

/s/______________________     Senior Vice President &        March 24, 1999
Spencer L. Brown                  Secretary

/s/______________________     Chief  Financial Officer       March 24, 1999
Hiram M. Lazar

/s/______________________     Director                       March 24, 1999
Miles L. Berger

/s/______________________     Director                       March 24, 1999
Irving Levine

/s/______________________     Director                       March 24, 1999
Jonathan A. Marshall

/s/______________________     Director                       March 24, 1999
Michael P. Rolnick




                                       20
<PAGE>



                        THE FRANKLIN CAPITAL CORPORATION

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES



The following financial statements of The Franklin Capital Corporation are filed
herewith and included in response to Item 8.

                                                                           Page
                                                                           ----

   Report of Ernst & Young, LLP..........................................    22
   Report of Arthur Andersen, LLP........................................    23

   Balance Sheets as of
             December 31, 1998 and 1997..................................    24

   Statements of Operations for the years
             ended December 31, 1998, 1997 and 1996......................    25

   Statements of Cash Flows for the years
             ended December 31, 1998, 1997 and 1996......................    26

   Statements of Changes in Net Assets for the years
             ended December 31, 1998, 1997 and 1996......................    27

   Financial Highlights for the years ended December 31,
             1998, 1997, 1996, 1995 and 1994.............................    28

   Portfolio of Investments as of
             December 31, 1998...........................................    29

   Notes to Financial Statements......................................... 30-37



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.


                                       21
<PAGE>
To the Stockholders and Board of Directors of
Franklin Capital Corporation


We have audited the accompanying  balance sheet of Franklin Capital  Corporation
as of December 31, 1998,  including the portfolio of  investments as of December
31, 1998, and the related  statements of  operations,  cash flows and changes in
net assets and the financial highlights for the year then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance  about whether the financial  statements and financial  highlights are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence supporting the amounts and disclosures in the financial  statements and
financial  highlights.  Our  procedures  included  the  physical  inspection  of
securities  on hand at December  31,  1998 and the  confirmation  of  marketable
investment  securities owned as of December 31, 1998, by correspondence with the
custodian.  An audit also includes assessing the accounting  principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements and financial  highlights referred to
above  present  fairly,  in all material  respects,  the  financial  position of
Franklin  Capital   Corporation  at  December  31,  1998,  the  results  of  its
operations,  cash flows and changes in net assets and the  financial  highlights
for the year  then  ended  in  conformity  with  generally  accepted  accounting
principles.


                                                          ERNST & YOUNG LLP


New York, New York
February 24, 1999

<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Stockholders and Board of Directors of
The Franklin Capital Corporation:

We  have  audited  the  accompanying  balance  sheet  of  The  Franklin  Capital
Corporation (formerly,  The Franklin Holding Corporation [Delaware]) (a Delaware
corporation) as of December 31, 1997, and the related  statements of operations,
cash flows and changes in net assets for the two years ended  December 31, 1997,
and the financial  highlights for the four years ended December 31, 1997.  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  generally   accepted  auditing
standards.  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.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  Our  procedures  included the physical  inspection of securities on
hand at  December  31,  1997,  and the  confirmation  of  marketable  investment
securities  owned as of December 31, 1997, by  correspondence  with brokers.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

As explained in Note 2, the financial  statements include  investments valued at
$6,833,318  (93% of net assets) as of  December  31, 1997 whose fair values have
been estimated by the Board of Directors in the absence of readily ascertainable
market values. Because of the inherent uncertainty of valuation, those estimated
values may differ  significantly from the values that would have been used had a
ready market for the securities existed, and the differences could be material.

In our opinion,  the financial  statements and financial  highlights referred to
above present fairly, in all material  respects,  the financial  position of The
Franklin Holding Corporation  (Delaware) as of December 31, 1997, the results of
its  operations,  cash flows and  changes in net assets for the two years  ended
December  31,  1997,  and the  financial  highlights  for the four  years  ended
December 31, 1997 in conformity with generally accepted accounting principles.




ARTHUR ANDERSEN LLP



New York, New York
March 24, 1998


<PAGE>

<TABLE>
<CAPTION>

                                              THE FRANKLIN CAPITAL CORPORATION
====================================================================================================================


Balance Sheets

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


December 31,                                                                     1998                  1997
--------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                      <C>    

ASSETS

Marketable investment securities, at market value (cost: December 31,
    1998 - $412,048; December 31, 1997 - $41,522)  (Note 2)                   $   699,704          $    41,522
Investments, at fair value (cost: December 31,1998 - $3,063,181;                                  
    December 31, 1997 - $4,168,150)  (Note 2)                                                     
         Avery Communications Inc.  (Note 6)                                    3,380,013            5,511,000
         Other investments                                                      1,045,589            1,322,318
                                                                                ---------            ---------
                                                                                4,425,602            6,833,318
                                                                                ---------            ---------
                                                                                                  
Cash and cash equivalents (Note 2)                                              1,100,373              348,900
Accrued interest and accounts receivable  (Note 6)                                179,179              330,048
Other assets                                                                      143,838              164,670
                                                                                  -------              -------
                                                                                                  
                                                                              $ 6,548,696          $ 7,718,458
                                                                              ===========          ===========
TOTAL ASSETS                                                                                      
                                                                                                  
                                                                                                  
--------------------------------------------------------------------------------------------------------------
                                                                                                  
LIABILITIES AND STOCKHOLDERS' EQUITY                                                              
                                                                                                  
LIABILITIES                                                                                       
                                                                                                  
Accounts payable and accrued liabilities                                      $   233,143          $   375,326
                                                                                                  
TOTAL LIABILITIES                                                                 233,143              375,326
                                                                                                  
Commitments and contingencies  (Note 5)                                                           
                                                                                                  
STOCKHOLDERS' EQUITY                                                                              
                                                                                                  
Common stock, $1 par value: 2,000,000 shares authorized;                                          
    1,003,986 shares issued:750,686 and 801,198 shares outstanding                                
    at December 31,1998 and 1997, respectively  (Note 7)                        1,003,986            1,003,986
Paid-in capital                                                                 8,997,877            8,997,877
Unrealized appreciation of investments,                                                           
    net of deferred income taxes  (Notes 2 and 3)                               1,650,077            2,665,168
Accumulated deficit                                                            (3,169,229)          (3,440,148)
                                                                               ----------           ---------- 
                                                                                                  
                                                                                8,482,711            9,226,883
Deduct:253,300 and 202,788 shares of common stock held in treasury,                               
    at cost, at December 31, 1998 and 1997, respectively  (Note 4)             (2,167,158)          (1,883,751)
                                                                                                  
Net assets, equivalent to $8.41 per share at December 31, 1998                                    
      and $9.17 per share at December 31, 1997                                  6,315,553            7,343,132
                                                                                                  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $ 6,548,696          $ 7,718,458
                                                                              ===========          ===========
                                                                                                  
--------------------------------------------------------------------------------------------------------------
                                                                                              
                         The accompanying notes are an integral part of these financial statements.
</TABLE>

  
                                     24
<PAGE>

<TABLE>
                                                       THE FRANKLIN CAPITAL CORPORATION
==================================================================================================================================

 Statements of Operations

----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>


For the Year Ended December 31,                                                          1998           1997             1996
                                                                         --------------------------------------------------------

INVESTMENT INCOME
<S>                                                                               <C>              <C>              <C>        
    Income from controlled affiliates  (Note 6)                                   $   229,195      $   257,258      $   750,000
    Interest on loans and debt securities                                                   -          176,728           78,978
    Interest on short term investments and money market accounts                       34,128           49,112           17,940
    Dividend income                                                                         -            1,996            5,293
    Other Income                                                                            -           11,927                -
                                                                                  -----------         --------         --------
                                                                                      263,323          497,021          852,211
                                                                                  -----------         --------         --------

EXPENSES
    Salaries and employee benefits  (Note 7)                                          882,168          923,080          941,164
    Professional fees                                                                 223,106          169,928          117,994
    Appraisal fees                                                                      3,087           25,000
    Investment banking fee                                                                  -           13,997                -
    Rent  (Note 5)                                                                     99,912           97,607          108,857
    Insurance                                                                          43,201           43,748           48,462
    Directors' fees                                                                    54,539          121,809          131,906
    Taxes other than income taxes                                                      49,919           43,259           51,212
    Newswire and promotion                                                             12,774            7,826            9,116
    Depreciation and amortization                                                      28,428           38,301           36,660
    General and administrative                                                        223,274          266,287          206,100
    Professional fees related to conversion to
          Business Development Corporation                                                  -          114,991                -
    Professional fees related to Stearns & Foster litigation  (Note 5)                      -           35,380          122,000
    Expenses related to Stockholders' litigation & proxy contest  (Note 5)                  -          499,637          257,631
    Net settlement of Stearns & Foster litigation  ( Note 5)                                -                -          375,000
                                                                                  -----------         --------         --------

                                                                                    1,620,408        2,400,850        2,406,102
                                                                                  -----------         --------         --------

Net investment loss from operations                                                (1,357,085)      (1,903,829)      (1,553,891)

Net realized gain on portfolio of investments                                       1,628,004        3,105,165          246,518

Benefit (provision) for income taxes  (Note 3)                                              -          208,333         (151,433)
                                                                                  -----------         --------         --------

Net realized income (loss)                                                            270,919        1,409,669       (1,458,806)

(Decrease) increase in unrealized appreciation of investments,
    net of deferred income tax benefit of $0; $0; and $100,636,
    respectively  (Note 3)                                                         (1,015,091)      (1,339,212)         266,694
                                                                                  -----------         --------         --------

Net (decrease) increase in net assets  from operations                            ($  744,172)     $    70,457      ($1,192,112)
                                                                                  ===========      ===========      =========== 

Net (decrease) increase in net assets from operations per common share            ($     0.94)     $      0.09      ($     1.48)
                                                                                  ===========      ===========      =========== 

Weighted average number of common shares outstanding                                  792,572          801,198          803,097
                                                                                  ===========      ===========      =========== 

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

                                  The accompanying notes are an integral part of these financial statements.
</TABLE>

                                       25
<PAGE>
<TABLE>

THE FRANKLIN CAPITAL CORPORATION
===================================================================================================================================


Statements of Cash Flows
                                                                                                                                   
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   
<CAPTION>
For the Year Ended December 31,                                                     1998                 1997           1996       
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   
Cash flows from operating activities:                                                                                              
<S>                                                                                  <C>                    <C>        <C>         
  Net (decrease) increase in net assets from operations                              ($744,172)             $70,457    ($1,192,112)
  Adjustments to reconcile net (decrease) increase in net assets to net cash
    used in operating activities:
      Depreciation and amortization                                                     28,428               38,301         36,660 
      (Increase) decrease in unrealized appreciation of investments                  1,015,091            1,339,212       (166,058)
      Deferred income tax benefit                                                            -                    -       (100,636)
      Amortization of discount on note receivable from Avery                          (101,176)            (127,760)             - 
      Net realized gain on portfolio of investments                                 (1,628,004)          (3,105,165)      (246,518)

      Changes in operating assets and liabilities:
        (Increase) decrease in accrued interest and accounts receivable                150,869             (161,101)       315,312 
        (Increase) decrease in other assets                                             (7,596)           1,173,580     (1,126,211)
        Increase (decrease) in accounts payable and accrued liabilities               (142,183)          (1,592,196)    1,483,684  

          Total adjustments                                                           (684,571)          (2,435,129)      196,233  

          Net cash used in operating activities                                     (1,428,743)          (2,364,672)      (995,879)

Cash flows from investing activities:
  Proceeds from sale of controlled affiliate                                         2,500,000                    -              - 
  Proceeds from sale of other investments, net of expenses                           1,432,717              309,000        300,001 
  Proceeds from sale of marketable investment securities, net of expenses              217,481            7,296,186      2,099,051 
  Cash consolidated from Excelsior Communications Corporation                                -            1,710,702              -
  Return of capital from investments                                                         -              887,313        677,716
  Purchases of investments                                                          (1,025,000)          (2,448,963)      (887,521)
  Purchases of marketable investment securities                                       (661,575)          (2,749,730)        (1,694)
  Purchases of fixed assets                                                                 -                (5,890)       (21,791)

          Net cash provided by investing activities                                 2,463,623            4,998,618      2,165,762  

Cash flows from financing activities:
  Distribution to stockholders charged to accumulated deficit                                -           (2,603,894)      (801,198)
  Purchase of treasury stock                                                          (283,407)                  -        (250,250)

          Net cash used in financing activities                                       (283,407)          (2,603,894)    (1,051,448)

Net increase in cash and cash equivalents                                              751,473               30,052        118,435 

Cash and cash equivalents at beginning of year                                        348,900              318,848        200,413

Cash and cash equivalents at end of year                                           $1,100,373             $348,900       $318,848  


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

   The accompanying notes are an integral part of these financial statements.
</TABLE>







                                       26
<PAGE>

<TABLE>
<CAPTION>
                        THE FRANKLIN CAPITAL CORPORATION
=================================================================================================================================


Statements of Changes in Net Assets

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


<S>                                                                        <C>                   <C>                  <C>

For the Year Ended December 31,                                            1998                  1997                 1996
---------------------------------------------------------------------------------------------------------------------------------

Decrease in net assets from operations:
   Net investment loss                                                    ($1,357,085)          ($1,903,829)         ($1,553,891)
   Net realized gain on portfolio of investments,
       net of current income taxes                                          1,628,004             3,313,498               95,085
   (Decrease) increase in unrealized appreciation of investments,
       net of deferred income taxes                                        (1,015,091)           (1,339,212)             266,694
                                                                         ------------            ----------           ----------

       Net (decrease) increase in net assets from operations                 (744,172)               70,457           (1,192,112)

Distributions to stockholders charged to
       accumulated deficit and earnings                                             -            (2,603,894)            (801,198)

Capital stock transactions:
   Purchase of treasury stock                                                (283,407)                   -              (250,250)
                                                                         ------------            ----------           ----------

       Total decrease in net assets                                        (1,027,579)           (2,533,437)          (2,243,560)
                                                                         ------------            ----------           ----------


Net assets at beginning of year                                            7,343,132             9,876,569           12,120,129
                                                                         ------------            ----------          ----------


Net assets at end of year                                                 $6,315,553            $7,343,132           $9,876,569
                                                                         ============           ==========           ==========

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

   The accompanying notes are an integral part of these financial statements.
</TABLE>







                                       27

<PAGE>

<TABLE>
<CAPTION>
                        THE FRANKLIN CAPITAL CORPORATION
=================================================================================================================================


Financial Highlights

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

<S>                                                         <C>            <C>            <C>            <C>            <C>    

For the Year Ended December 31,                              1998           1997           1996           1995            1994
-----------------------------------------------------------------------------------------------------------------------------------

PER SHARE OPERATING PERFORMANCE (1):
Net asset value, beginning of period                            $9.17         $12.33         $14.67          $15.40         $14.96
                                                                -----         ------         ------          ------         ------

      Net investment loss                                       (1.71)         (2.37)         (1.93)          (1.43)         (1.66)
      Net gain on portfolio of
        investments (realized and unrealized) after taxes        0.77           2.46           0.45            1.46           2.01
                                                                -----         ------         ------          ------         ------

Total from investment operations                                (0.94)         0.09           (1.48)          0.03           0.35
                                                                -----         ------         ------          ------         ------

Less dividends and distributions:
      Distributions from accumulated
         deficit and earnings                                    0.00           (3.25)         (1.00)          (1.00)         0.00
                                                                -----         ------         ------          ------         ------

Total dividends and distributions                                0.00           (3.25)         (1.00)          (1.00)         0.00
                                                                -----         ------         ------          ------         ------

Treasury stock transactions                                      0.18           0.00           0.14            0.24           0.09
                                                                -----         ------         ------          ------         ------

Net asset value, end of period                                  $8.41          $9.17         $12.33          $14.67         $15.40
                                                                -----         ------         ------          ------         ------

Market value per share, end of period                           $5.25          $6.50         $10.13          $10.13          $8.13
                                                                -----         ------         ------          ------         ------

TOTAL INVESTMENT RETURN:
Based on market value per share (%)                            (19.23)        (16.62)          9.64           35.45          (8.45)

RATIOS TO AVERAGE NET ASSETS:
Expenses (%)                                                    23.73          28.97          20.58           16.59          16.04
Net investment loss (%)                                        (19.88)        (22.97)        (13.29)         (11.17)        (10.76)

RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (000 omitted)                      $6,316         $7,343         $9,877         $12,120        $13,345
Portfolio turnover rate (%)                                        39             77              8              32             63

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

(1) Calculated based on weighted average number of shares outstanding during the period.
    The accompanying notes are an integral part of these financial highlights.

</TABLE>


                                       28


<PAGE>
<TABLE>



THE FRANKLIN CAPITAL CORPORATION
===================================================================================================================================

Portfolio of Investments

--------------------------------------------------------------------------------------------------------------------------------
<CAPTION>

Marketable Investment Securities                                                   Number of
---------------------------------------------------------------------------------               --------------------------------
                                                                                   Shares or                           Market
                                                                                   Principal                           Value
December 31, 1998                                                                  Amount ($)         Cost(1)         (Note 2)
--------------------------------------------------------------------------------------------------------------------------------

<S>                                                                               <C>                 <C>             <C>     
Common Stock - Communication Intelligence Corp..........................           875,000            $368,594        $656,250
Certificate of Deposit - 3.90%, due 05/04/99............................            43,454              43,454          43,454

     Total Marketable Investment Securities (13.7% of total investments 
          and 11.1% of net assets)......................................                              $412,048        $699,704
</TABLE>

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------
Investments, at Fair Value
----------------------------------------------------------------------------------------------------------------------------------

                                                                                                                    Directors'
                                                                                         Equity                     Valuation
December 31, 1998                                                   Investment          Interest     Cost(1)         (Note 2)
------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                    <C>             <C>             <C>

  Avery Communications Inc.......................................Common stock                         $1,481,482
   (Telecommunications)

  Avery Communications Inc..................................Convertible preferred
   (Telecommunications)                                       stock - Series E;                          350,000
                                                             12.0% dividend rate

Total Avery Communications (65.9% of total investments 
     and 53.5% of net assets)                                                            12.90%       $1,831,482     $3,380,013
                                                                              
(fully diluted basis)

Other Investments

  Seneca Limited Partnership.................................Limited partnership          0.80%          500,000        530,019
   (Investment limited partnership)                                interest

  Codman Research Inc............................................Common stock             2.75%          400,031        254,488
    (Healthcare information systems)

  CIC Standby Ventures, L.P. ................................Limited partnership          1.80%           66,987        107,847
   (Computer handwriting systems)                                  interest

  FMA High Yield Income Limited Partnership .....................Limited partnership      2.69%                -         36,568
   (Schroders high yield bond                                      interest
                 limited partnership)

  GoAmerica Corp.................................................Common stock             0.50%           50,000         50,000
   (Internet software)

  Pixel Multimedia Ltd..........................................Convertible Note                          66,667         66,667
   (Multimedia publishing)                                  (Non Interest Bearing)

  Other investments...................................................                                   148,014              -


Total Other Investments (20.4% of total investments 
     and 16.6% of net assets)                                                                          1,231,699      1,045,589

     Total Investments ...............................................................................$3,063,181.....$4,425,602

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

(1) Book cost equals tax cost for all investments.

          The accompanying notes are an integral part of this Schedule.

                                       29
</TABLE>

<PAGE>

Franklin Capital Corporation
Notes to Financial Statements
December 31, 1998


1. ORGANIZATION

Franklin  Capital   Corporation   (formerly  The  Franklin  Holding  Corporation
(Delaware))  ("Franklin",  or  the  "Corporation")  is  a  Delaware  corporation
registered  as a  Business  Development  Company  ("BDC")  under the  Investment
Company  Act of 1940 (the  "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 managerial  expertise to companies that do not have ready
access to capital through  conventional  financial channels.  Such companies are
termed "eligible portfolio companies". The Corporation,  as a BDC, may invest in
the securities of public companies and other investments that are not qualifying
assets of eligible portfolio companies,  however such investments may not exceed
30% of the Corporation's total asset value at the time of any such investment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

Effective  July  2,  1997,   Franklin's  wholly  owned   subsidiary,   Excelsior
Communications Corporation ("Excelsior"), was dissolved. For financial reporting
purposes,  the assets and  operations of Excelsior have been  consolidated  with
Franklin effective January 1, 1997. The Corporation,  as a closed-end investment
company  registered  under  the Act,  does not  consolidate  its  non-investment
company subsidiaries.

Use of Estimates

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

Statements of Cash Flows

For purposes of the  Statements of Cash Flows,  Franklin  considers  only highly
liquid  investments  with  maturities  of 90 days or less at the  date of  their
acquisition to be cash equivalents.

The Corporation  paid no interest during the years ended December 31, 1998, 1997
and 1996 and paid $0,  $54,265 and  $173,018  for income  taxes during the years
ended December 31, 1998, 1997 and 1996, respectively.

At December 31, 1998 the Corporation held cash and cash equivalents primarily in
money market funds at two commercial banking institutions.

Valuation of Investments

Security  investments which are publicly traded on a national exchange or NASDAQ
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.

<PAGE>

The Franklin Capital Corporation
Notes to Financial Statements (continued)


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 by the Board of
Directors.  The  financial  condition  and  operating  results have been derived
utilizing both audited and unaudited  data. In the absence of a ready market for
an investment,  numerous assumptions are inherent in the valuation process. Some
or all of  these  assumptions  may not  materialize.  Unanticipated  events  and
circumstances  may occur  subsequent to the date of the valuation and values may
change due to future events.  Therefore,  the actual amounts eventually realized
from each investment may vary from the valuations  shown and the differences may
be material.  Franklin  reports the unrealized  gain or loss resulting from such
valuation in the Statements of Operations.

Gains on Portfolio of Investments

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

Income Taxes

Franklin  does not  qualify as a  Regulated  Investment  Company  for income tax
purposes. Therefore, the Corporation is taxed as a regular corporation.

Franklin  has adopted  Statement  of  Financial  Accounting  Standards  No. 109,
"Accounting  for Income  Taxes"  ("SFAS  109").  The  significant  components of
deferred tax assets and liabilities are principally related to the Corporation's
net operating loss carryforward and its unrealized appreciation of investments.

Depreciation and Amortization

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 its useful life or the remaining
life of the lease, whichever is shorter.

Net (Decrease) Increase in Net Assets Per Common Share

Net  (decrease)  increase  in net  assets  per  common  share is based  upon the
weighted  average number of shares of common stock  outstanding.  See Note 7 for
discussion of Stock Option Plans.

3.  INCOME TAXES

At December 31, 1998,  Franklin had a net operating loss carryforward for income
tax purposes of approximately $3,315,000 that will begin to expire in 2011. At a
43%  effective  tax rate the  after-tax  net  benefit  from this  loss  would be
approximately $1,425,000.

For the years ended December 31, 1998, 1997 and 1996, Franklin's tax (provision)
benefit was based on the following:


<PAGE>

The Franklin Capital Corporation
Notes to Financial Statements (continued)


<TABLE>
<CAPTION>
<S>                                                                 <C>                <C>                 <C>           
                                                                         1998             1997                    1996       
                                                                    -------------    ---------------        -----------------


Net investment loss from operations.................................$  (1,357,085)     $  (1,903,829)      $  (1,553,891)
Net realized gain on portfolio of investments.......................    1,628,004           3,105,165            246,518
Decrease in unrealized appreciation.................................   (1,015,091)        (1,339,212)            166,058
                                                                       ----------         ----------             -------

     Pre-tax book loss .............................................$ (   744,172)     $    (137,876)      $  (1,141,315)
                                                                    =============      =============       ============= 



                                                                        1998                  1997                    1996       
                                                                 ----------------        ---------------         ----------------

Tax benefit at 34% on $(744,172), $(137,876) and
  $(1,141,315) respectively.........................................$    253,000      $     46,878             $  388,047
State and local, net of Federal benefit.............................       -               (14,100)               (40,000)
Book losses for which no benefit is provided........................    (253,000)          (46,878)              (361,319)
Adjustment to deferred taxes provided in prior periods..............       -               222,433                (37,525)
                                                                     -----------           -------                ------- 

                                                                    $      -          $    208,333             $  (50,797)
                                                                    =============     ============             ===========

The components of the tax benefit (provision) are as follows:
                                                                      1998                  1997                   1996     
                                                                 -------------        --------------        ----------------

Current Federal tax benefit (provision)                             $    -            $     -                $ (111,433)
Net deferred Federal tax benefit (provision)                             -                  -                    67,339
Current state and local tax
  provision......................................................        -                 (14,100)             (40,000)
Deferred state and local tax benefit.............................        -                  -                    33,297
Adjustment to Federal, state and local taxes
   provided in prior periods.....................................        -                 222,433                    -        
                                                                    -------------        ----------          ---------------  
(Provision) benefit for income taxes.............................   $    -             $   208,333           $  (50,797)
                                                                    =============      ===========           ==========
</TABLE>
--------------------------------------------------------------------------------
Deferred  income tax  benefit  (provision)  reflects  the  impact of  "temporary
differences"  between amounts of assets and liabilities for financial  reporting
purposes and such amounts as measured by tax laws.

At December 31, 1998 and December 31, 1997,  significant deferred tax assets and
liabilities consist of:
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                 Asset (Liability)        
                                                                                 -----------------        
<S>                                                                      <C>                 <C>          
                                                                          December 31,            December 31,
                                                                              1998                    1997       
                                                                        ----------------        -----------------

Deferred Federal and state benefit from net operating
  loss carryforward..................................................... $  1,425,000        $   1,370,552
Deferred Federal and state provision on unrealized
  appreciation of investments...........................................     (710,000)          (1,172,673)
Valuation allowance.....................................................     (715,000)           (  197,879) 
                                                                          ------------       ----------------
  Deferred taxes........................................................ $      -             $      -          
                                                                         =============        ===============
</TABLE>

<PAGE>

The Franklin Capital Corporation
Notes to Financial Statements (continued)


At December 31, 1998,  the  realization of deferred tax assets is dependent upon
future appreciation of the Corporation's investments.

4.  STOCKHOLDERS' EQUITY

The  Accumulated  Deficit at December  31,  1998  consists  of  accumulated  net
realized gains of $2,855,000 and accumulated investment losses of $6,024,000.

Prior to 1998, the Board of Directors had  authorized  Franklin to repurchase up
to an aggregate of 250,000  shares of its common stock in open market  purchases
on the American Stock Exchange when such purchases were deemed to be in the best
interest of the  Corporation and its  stockholders.  As of December 31, 1997 the
Corporation  had purchased  212,788  shares of its common stock of which 202,788
remained in treasury. In December 1998 the Board authorized the repurchase of up
to an additional  100,000 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 Corporation and its stockholders. During the year ended December
31, 1998, the Corporation purchased 50,512 shares of its common stock at a total
cost of $283,407. To date, Franklin has repurchased 263,300 shares of its common
stock of which 253,300 shares remain in treasury at December 31, 1998.

Subsequent  to December  31, 1998,  20,046  shares of stock from  treasury  were
issued  pursuant to an investment made by Franklin in January 1999. (See Note 10
- Subsequent Events)

5.  COMMITMENTS AND CONTINGENCIES

Franklin is obligated under an operating lease which provides for annual minimum
rental payments as follows:

--------------------------------------------------------------------------------
December 31,
1999....................................$   149,600
2000....................................    149,600
2001....................................    149,600
2002....................................    149,600
2003....................................    149,600
                                         ----------
                                         $  748,000
                                         ==========
--------------------------------------------------------------------------------

Rent expense for the twelve  months ended  December 31, 1998,  1997 and 1996 was
$99,912,  $97,607  and  $108,857,  respectively.  For the  twelve  months  ended
December  31,  1998 and 1997,  the  Corporation  collected  rents of $43,542 and
$44,750,  respectively,  from  subtenants  for a portion of its existing  office
space which is reflected as a reduction in rent expense for that period.

In March 1994, Stearns and Foster Bedding Company ("Stearns & Foster") commenced
a private cost recovery and contribution action against Franklin and a number of
other  defendants  in the United States  District  Court for the District of New
Jersey  (Newark).  Stearns & Foster is the  current  owner of a site  located in
South  Brunswick,   New  Jersey  (the  "Site"),  which  is  the  subject  of  an
investigation  and cleanup under the  Industrial  Site Recovery Act ("ISRA").  A
settlement  agreement  concerning  this  matter was  

<PAGE>

The Franklin Capital Corporation
Notes to Financial Statements (continued)


executed  by the  parties  on  February  28,  1997.  Franklin  and  its  insurer
respectively  agreed therein to pay Stearns and Foster  $375,000 and $1,125,000.
In consideration  for these payments,  Stearns and Foster agreed to: (i) dismiss
all claims  against  Franklin  and its related  entities  with  prejudice;  (ii)
release  Franklin  and its  related  entities  from any past,  present or future
claims related to the matters at issue in the  litigation;  and (iii)  indemnify
and hold  Franklin and its related  entities  harmless as to any claims  arising
from or in any way  related  to the  matters  at  issue in the  litigation.  All
payments due under this settlement agreement were made in March 1997.

A settlement  related to a complaint  filed by a former  director of Franklin in
the United  States  District  Court for the  Southern  District  of New York was
approved by the District  Court on September 11, 1997.  Pursuant to terms of the
Settlement,  the Board of  Directors  declared on July 18, 1997 a $3.25  special
distribution to stockholders of record of the  Corporation's  Common Stock as of
July 28, 1997 and the Corporation  paid legal fees of $75,000 to the plaintiff's
counsel.

The Corporation  brought an action against National Union Fire Insurance Company
of  Pittsburgh,  PA ("National  Union") in the Supreme Court of the State of New
York.  The  action  sought  reimbursement  of $1 million  for fees and  expenses
incurred in  connection  with certain  shareholder  litigation  brought  against
Franklin  and its  directors.  National  Union  filed a motion  to  dismiss  the
complaint,  which was granted by the Court on November  24,  1998.  Franklin has
filed an appeal of the dismissal with the New York State Supreme Court Appellate
Division.  Both  sides  have  submitted  briefs  to the  Court,  and the case is
currently pending.

6. TRANSACTIONS WITH CONTROLLED AFFILIATES

In August  1995,  Franklin  made an  initial  investment  of  $350,000  in Avery
Communications  Inc.  ("Avery"),  a holding  company  in the  telecommunications
industry.  This investment  consisted of a one year 12% note with warrants and a
conversion option. On June 30, 1996, Franklin exercised its warrants to purchase
158,333  shares of Avery common stock at $0.10 per share.  In November 1996, the
note was  converted  to 350,000  shares of Series B  preferred  stock which earn
dividends of 12% per annum  payable  quarterly  and are  convertible  to 350,000
shares of common stock.  An additional  28,506 shares of common stock at a price
of $1.00  per share  were  issued to  Franklin  at that time in lieu of  accrued
interest on the note.

On May 30, 1997, Franklin made an additional  investment of $2,500,000 in Avery.
This  investment  partially  consisted of a  $1,000,000  note with a maturity of
three years that earns interest at the rate of 10.0% per annum. The first year's
interest  payment  of  $100,000  was made at the time  the  loan  was  made.  As
additional  consideration  for this note, the Corporation  received  warrants to
purchase 666,667 shares of Avery common stock at $1.50 per share. These warrants
expire in five years from the date of issuance. The remainder of the investment,
$1,500,000,  purchased 7.5 equity units in Avery.  Each unit consists of 133,333
shares of common stock of Avery and 200,000  shares of preferred  Series D stock
which are convertible to 100,000 shares of common stock. The shares of preferred
Series D stock earn a dividend of 10.0% per annum payable quarterly.  The Series
B preferred  shares  previously  owned by Franklin  were  converted  to Series E
preferred stock with the same terms. This  transaction,  in conjunction with the
investment  in common and  preferred  stock of Avery that the  Corporation  held
previously,  resulted in Franklin owning in excess of 25% of Avery's outstanding
voting stock on a primary basis.  Additionally,  three officers of Franklin were
appointed  to  Avery's  six  person  Board of  Directors  and the  Corporation's
Chairman  and Chief  Executive  Officer was  appointed  as the Vice  Chairman of
Avery's Board of Directors.

<PAGE>

The Franklin Capital Corporation
Notes to Financial Statements (continued)


On July 6, 1998,  Franklin sold the 1,500,000 shares of Avery preferred Series D
stock and the  $1,000,000  Avery note along with  280,000  warrants  to purchase
Avery common stock for a total of  $2,500,000  to the Thurston  Group,  Inc. The
president  of the  Thurston  Group is the current  chairman  of Avery.  Franklin
realized a net gain of $935,297 as a result of this sale.  In  conjunction  with
this  transaction,  Franklin's  representation on Avery's Board of Directors was
reduced from three directors to two.

On July 13, 1998,  Franklin  entered into a cashless  exercise of its  remaining
warrants to purchase  386,667  shares of Avery  common  stock at $1.50 per share
realizing a net gain of $372,911 and a decrease in unrealized  appreciation of a
like amount. In return, Franklin received 196,503 shares of Avery common stock.

As a result of the July 6 transaction, Avery is no longer a controlled affiliate
of  Franklin.  At December  31,  1998,  Franklin  owns 12.9% of Avery on a fully
diluted basis.

For the years ended  December  31, 1998 and 1997,  Franklin's  income from Avery
consists of $118,431 and $129,500,  respectively,  in dividends from Avery,  and
$110,764 and  $127,758,  respectively,  of interest on the note. At December 31,
1998 and December 31, 1997, $112,523 and $170,403, respectively, are included in
"Accrued  interest and accounts  receivable" on the accompanying  balance sheets
for amounts due from Avery for dividends and reimbursable expenses.

7. EMPLOYEE BENEFIT PLANS

On September 9, 1997, Franklin's stockholders approved two Stock Option Plans: a
Stock  Incentive  Plan ("SIP") to be offered to the  Corporation's  consultants,
officers and employees (including any officer or employee who is also a director
of the Corporation) and a Non-Statutory  Stock Option Plan ("SOP") to be offered
to the  Corporation's  "outside " directors,  i.e.,  those directors who are not
also officers or employees of Franklin. 75,000 shares of the Corporations Common
Stock have been reserved for issuance under these plans,  of which 45,000 shares
have been reserved for the SIP and 30,000 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.

The SIP is administered by the Corporation's  Board of Directors.  The Board has
the authority, among other rights, to select the participants to whom awards may
be granted,  determine  the types of awards to be  granted,  and  determine  the
vesting terms and other  conditions of an award to an SIP  participant.  The SIP
permits the  Committee to grant  participants  options to purchase  Common Stock
(including  incentive  stock  options  within the  meaning of Section 422 of the
Internal Revenue Code ("ISOs") or "non-statutory  stock options"  ("non-ISOs")),
stock appreciation rights, restricted stock and tax offset bonuses.

The SOP is also  administered  by the Board of  Directors.  Only non-ISOs can be
granted under the SOP. Because the issuance of options to "outside" directors is
not permitted under the Act without an exemptive  order by the  Commission,  the
issuance  of options  under the SOP is  conditioned  upon the  granting  of such
order. The Corporation has applied for such relief and will not issue options to
"outside"  directors  until obtaining such exemptive  relief.  In the event such
relief is not granted, no "outside" directors will be issued options pursuant to
the SOP.

On January 27, 1998,  45,000  options  were  granted in total to three  eligible
officers of the  Corporation  under the SIP. The strike price of the options was
$7.00 per share which  represented the closing price of Franklin's  

<PAGE>

The Franklin Capital Corporation
Notes to Financial Statements (continued)


Common Stock as reported by the American Stock Exchange on that date.  One-third
of the options granted vested immediately;  another one-third vest one year from
the date of issuance;  and the final  one-third vest two years after the date of
issuance. The options expire after ten years.

Franklin  accounts for the options issued to employees under APB Opinion No. 25,
under  which no  compensation  cost has been  recognized.  Proforma  information
determined  consistent with the fair value method required by FASB Statement No.
123 ("FASB 123"), is as follows:

Net realized gain:
As reported                                             $270,919
Pro forma                                               $219,444

Net decrease in net assets per common share:
As reported                                            ($0.94)
Pro forma                                              ($1.00)

Net Asset Value per share:
As reported                                             $8.41
Pro forma                                               $8.34
Pro forma - fully diluted                               $8.34

The fair value of the  options  granted was  estimated  on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:

            Stock volatility                              27.0%
            Risk-free interest rate                        5.5%
            Option term in years                             4
            Stock dividend yield                            -

A summary of the  status of the Stock  Option  Plans at  December  31,  1998 and
changes during the year then ended follows:
<TABLE>
<CAPTION>
<S>                                                              <C>                           <C>  
                                                                                                           
                                                                                           Weighted Average
                                                                  Shares                    Exercise Price
                                                        ----------------------------   -----------------------
Outstanding at beginning of 
   period                                                           -                             -
Granted                                                          45,000                        $7.00
Exercised                                                           -                             -
Forfeited                                                        10,000                        $7.00
Expired                                                             -                             -
Outstanding at end of period                                     35,000                        $7.00
Exercisable at end of period                                     15,000                        $7.00
Weighted average fair value 
   of options granted                                             $2.13
</TABLE>


<PAGE>

The Franklin Capital Corporation
Notes to Financial Statements (continued)

                                                                 
One of the eligible officers of the corporation  resigned on 12/31/98  resulting
in the  forfeiture  of  10,000  options.  The  exercise  price  for all  options
outstanding as of December 31, 1998 is $7.00 with a remaining  contractual  life
of 9.1 years.

Prior to the Stock Option Plans,  Franklin had a  contributory  retirement  plan
(the "Plan") covering all employees.  Contributions to the Plan were invested in
Franklin's  common stock and/or a selected group of mutual funds.  Contributions
for the year  ended  December  31,  1997  and 1996  were  $27,093  and  $21,163,
respectively,  and  are  included  in  salaries  and  employee  benefits  in the
accompanying  Statements of Operations.  The Plan was terminated in January 1998
and all funds were distributed to the participating employees.

8.  PURCHASES AND SALES OF INVESTMENT SECURITIES

The  cost of  purchases  and  proceeds  from  sales  of  investment  securities,
including the cashless  exercise of the Avery  warrants of $580,000 as discussed
in Note 6, and  excluding  short term  investments,  aggregated  $4,730,199  and
$2,365,820  respectively,  for the year ended December 31, 1998;  $5,198,693 and
$8,492,499,  respectively,  for the year ended  December 31, 1997 and $4,837,273
and $3,350,826, respectively for the year ended December 31, 1996.

9. STOCKHOLDERS' DISTRIBUTION

Franklin  paid a $3.25 per share special  distribution  on August 4, 1997 to its
stockholders  of record as of July  28,1997  totaling  $2,603,894.  Based on the
calculation of current and cumulative earnings and profits at December 31, 1997,
it was determined that this entire  distribution  was a return of capital to the
stockholders.  Franklin  also  paid a $1.00 per share  special  distribution  on
December 4, 1996 to its  stockholders of record as of November 25, 1996 totaling
$801,198.  Based on the  calculation  of current  and  cumulative  earnings  and
profits at that time, it was determined that this entire distribution was also a
return of capital to the stockholders.

10. SUBSEQUENT EVENTS

In January 1999,  Franklin formed Ecom Capital  Corporation  ("Ecom"),  a wholly
owned subsidiary of Franklin,  for the purposes of investing in internet related
ventures.  On  January  25,  1999,  Ecom  invested  a  total  of  $387,500  into
E-Mattress.com  Inc.  ("E-Mattress"),  consisting of $175,000  worth of Franklin
common stock (20,046 shares from treasury stock valued at the Net Asset Value on
the  date of the  transaction)  and  $212,500  in cash  for  320,000  shares  of
Preferred  Stock which is convertible  into a 50% equity interest in E-Mattress.
E-Mattress  is a retail  internet  mattress  company  that was  founded in 1998.
E-mattress   can  be  found  on  the  World  Wide  Web  at  the  domain  address
www.emattress.com.  E-Mattress became operational and its website went online in
March 1999.  Two  officers of Franklin  were elected to serve on the five member
E-Mattress Board of Directors.