Document:

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                                                                    EXHIBIT 10.6

                     SETTLEMENT AGREEMENT AND MUTUAL RELEASE

           THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE (this "Agreement") is
entered into as of the Effective Date (as defined below) by and among Telenetics
Corporation, a California corporation ("Telenetics"), on the one hand, and Peter
C. Rosen ("Rosen"), William A. Shea, Jr. ("Shea," and together with Rosen,
"Rosen/Shea"), and Larry Kars ("Kars") on the other. This Agreement is entered
into with reference to the following facts:

                                    RECITALS

           A. On or about April 1, 1996, Rosen/Shea and Telenetics executed the
Telenetics and Rosen/Shea Agreement (the "Consulting Agreement") in connection
with consulting services that were to be provided by Rosen/Shea to Telenetics.

           B. A dispute (the "Dispute") has arisen between Telenetics and
Rosen/Shea regarding the validity of the Consulting Agreement and the amount and
nature of any services performed by Rosen/Shea and the amount and nature of any
compensation paid or payable by Telenetics pursuant to the Consulting Agreement.

           C. Rosen/Shea and Telenetics wish to settle all differences between
them that arise out of or that in any way are connected with or related to any
of the claims, allegations, causes of action and/or contentions involved in the
Dispute or with any past relationships between the parties.

           D. Kars has acted as legal counsel to Rosen/Shea in connection with
the Dispute, and Rosen/Shea desire to split with Kars the consideration to be
paid to Rosen/Shea by Telenetics pursuant to the terms of this Agreement.

           E. Without acknowledging the validity of any other party's rights,
claims or defenses in connection with the subject matter of the Dispute, and in
order for the parties to this Agreement to settle all differences between them,
and in consideration of the mutual covenants, agreements and promises set forth
in this Agreement, and other good and valuable consideration, each party to this
Agreement agrees as follows:

                                SETTLEMENT TERMS

           1. The foregoing Recitals shall be part of this Agreement.

           2. The Consulting Agreement is hereby canceled and terminated
(including any post termination covenants contained therein) and any and all
obligations of Telenetics to Rosen/Shea for payment thereunder, if any, shall
also be canceled, extinguished and forgiven by Rosen/Shea. All amounts, if any,
previously paid by Telenetics to Rosen/Shea pursuant to the terms of the
Consulting Agreement are deemed validly paid and not subject to any adjustment
or forfeiture.

           3. Within ten business days following the execution of this
Agreement, Telenetics shall deliver or cause to be delivered to Kars the
following:

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                      a. Three certificates representing an aggregate of 175,000
shares of common stock of Telenetics ("Issued Shares"), which certificates shall
be issued to the following persons in the following amounts:

                                 i) Peter C. Rosen - 70,000 shares;
                                 ii) William A. Shea, Jr. - 70,000 shares; and
                                 iii) Larry Kars - 35,000 shares.

                      b. Three five-year warrants to purchase up to an aggregate
of 175,000 shares of Telenetics common stock ("Warrant Shares") in the form
attached as EXHIBIT A to this Agreement ("Warrants"), which warrants shall be
issued to the following persons and shall represent the right to purchase the
following numbers of shares of common stock of Telenetics at an initial exercise
price of $0.45 per share:

                                 i) Peter C. Rosen - 70,000 shares;
                                 ii) William A. Shea, Jr. - 70,000 shares; and
                                 iii) Larry Kars - 35,000 shares.

           4. Rosen/Shea and Kars (individually or collectively, "Recipients")
shall, with respect to the Issued Shares and the Warrant Shares (collectively,
the "Registrable Securities"), have incidental registration rights as follows:

                      a. If Telenetics shall determine to file with the
Securities and Exchange Commission a registration statement relating to an
offering for the account of others under the Securities Act of 1933, as amended
("Securities Act"), of any of its equity securities (other than on Form S-4 or
Form S-8 or their then equivalents relating to equity securities to be issued
solely in connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other employee benefit
plans and other than in connection with an offering for the account of others
pursuant to which Telenetics is prohibited by agreement with those others from
including the Registrable Securities in the registration statement), Telenetics
shall send to Recipients written notice of such determination and, if within
five business days after the effective date of such notice, Recipients shall so
request in writing, Telenetics shall include in such registration statement, if
and when filed, all or any part of the Registrable Securities that Recipients
request to be registered and that are not then included on a registration
statement, except that if, in connection with any underwritten public offering
the managing underwriter(s) thereof shall impose a limitation on the number of
shares of common stock that may be included in the registration statement
because, in such underwriter(s)' judgment, marketing or other factors dictate
such limitation is necessary to facilitate public distribution, then Telenetics
shall be obligated to include in the registration statement only such limited
portion of the Registrable Securities with respect to which Recipients have
requested inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata with holders of other securities
having the right to include such securities in the registration statement other
than holders of securities entitled to inclusion of their securities in the
registration statement by reason of demand registration rights. If an offering
in connection with which Recipients elect to participate in registration under
this Section 4 is an underwritten offering, then Recipients shall, unless
otherwise agreed by Telenetics, offer and sell such Registrable Securities in an
underwritten offering using the same underwriter or underwriters and on the same
terms and conditions as other shares of common stock included in such
underwritten offering.

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                      b. Recipients shall have two opportunities to have the
Registrable Securities registered under this Paragraph 4. The Issued Shares and
the Warrant Shares shall cease to be Registrable Securities when (i) such shares
shall have been registered under the Securities Act, the registration statement
with respect to the sale of such shares shall have become effective under the
Securities Act and such shares shall have been disposed of pursuant to such
effective registration statement, (ii) such shares shall have been sold or shall
have become eligible for resale pursuant to Rule 144 (or any similar provision
relating to the disposition of securities then in force) under the Securities
Act, (iii) such shares shall have been otherwise transferred, new certificates
or other evidences of ownership for them not bearing a legend restricting
further transfer and not subject to any stop-transfer order or other
restrictions on transfer shall have been delivered by Telenetics and subsequent
disposition of such shares shall not require registration or qualification of
such shares under the Securities Act or any state securities laws then in force,
(iv) such shares shall cease to be outstanding or (v) Recipients shall have
twice declined the opportunity to include such shares in a registration
statement.

                      c. Recipients promptly shall furnish in writing to
Telenetics or its counsel such information as Telenetics or its counsel shall
reasonable require in connection with a registration statement.

                      d. Indemnification.

                                 i) Telenetics shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless Recipients, and the
agents, brokers and investment advisors of Recipients, to the fullest extent
permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees) and expenses (collectively, "Losses") (as determined by a
court of competent jurisdiction in a final judgment not subject to appeal or
review), as incurred, arising solely out of or based solely upon any untrue or
alleged untrue statement of a material fact contained in the registration
statement, any prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising solely out of or
based solely upon any omission or alleged omission of a material fact required
to be stated therein or necessary to make the statements therein (in the case of
any prospectus or form of prospectus or supplement thereto, in the light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that such untrue statements or omissions or alleged
untrue statements or omissions are based upon information regarding Recipients
or such other Indemnified Party (as defined below) furnished in writing to
Telenetics by Recipients or such other Indemnified Party for use therein, or to
the extent that such information relates to Recipients or Recipients' proposed
method of distribution of Registrable Securities and was reviewed and approved
in writing by Recipients for use in the registration statement, such prospectus
or such form of prospectus or in any amendment or supplement thereto.

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                                 ii) Recipients shall, severally and not
jointly, indemnify and hold harmless Telenetics, the directors, officers, agents
and employees, each person who controls Telenetics (within the meaning of
Section 15 of the Securities Act and Section 20 of the Securities Exchange Act
of 1934, as amended ("Exchange Act")), and the directors, officers, agents or
employees of such controlling persons, to the fullest extent permitted by
applicable law, from and against all Losses (as determined by a court of
competent jurisdiction in a final judgment not subject to appeal or review), as
incurred, arising solely out of or based solely upon any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement, any prospectus, or any form of prospectus or form of prospectus or in
any amendment or supplement thereto or in any preliminary prospectus, or arising
solely out of or based solely upon any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein (in the case of any prospectus or supplement thereto, in the light of
the circumstances under which they were made) not misleading, to the extent, but
only to the extent, that such untrue statement or omission or alleged untrue
statement or omission is contained in any information so furnished in writing by
Recipients or other Indemnified Party to Telenetics for inclusion in the
registration statement or such prospectus or to the extent that such information
relates to Recipients or Recipients' proposed method of distribution of
Registrable Securities and was reviewed and approved in writing by Recipients
for use in the registration statement, such prospectus or such form of
prospectus or in any amendment or supplement thereto.

                                 iii) If any proceeding shall be brought or
asserted against any person entitled to indemnity hereunder (an "Indemnified
Party"), such Indemnified Party promptly shall notify the person from whom
indemnity is sought (the "Indemnifying Party") in writing, and the Indemnifying
Party shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to the Indemnified Party and the payment of all fees and
expenses incurred in connection with defense thereof; provided, that the failure
of any Indemnified Party to give such notice shall not relieve the Indemnifying
Party of its obligations or liabilities pursuant to this Agreement, except (and
only) to the extent that it shall be finally determined by a court of competent
jurisdiction (which determination is not subject to appeal or further review)
that such failure shall have proximately and materially adversely prejudiced the
Indemnifying Party.

                                 iv) An Indemnified Party shall have the right
to employ separate counsel in any such proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party
has agreed in writing to pay such fees and expenses; or (2) the Indemnifying
Party shall have failed promptly to assume the defense of such proceeding and to
employ counsel reasonably satisfactory to such Indemnified Party in any such
proceeding; or (3) the named parties to any such proceeding (including any
impleaded parties) include both such Indemnified Party and the Indemnifying
Party, and such Indemnified Party shall have been advised by counsel (which
shall be reasonably acceptable to the Indemnifying Party) that a conflict of
interest is likely to exist if the same counsel were to represent such
Indemnified Party and the Indemnifying Party (in which case, if such Indemnified
Party notifies the Indemnifying Party in writing that it elects to employ
separate counsel at the expense of the Indemnifying Party, the Indemnifying
Party shall not have the right to assume the defense thereof and such counsel
shall be at the expense of the Indemnifying Party). The Indemnifying Party shall

                                       4

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not be liable for any settlement of any such proceeding effected without its
written consent, which consent shall not be unreasonably withheld or delayed. No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending proceeding in respect of which any
Indemnified Party is a party, unless such settlement includes an unconditional
release of such Indemnified Party from all liability on claims that are the
subject matter of such Proceeding.

                                 v) All fees and expenses of the Indemnified
Party (including reasonable fees and expenses to the extent incurred in
connection with investigating or preparing to defend such proceeding in a manner
not inconsistent with this section) shall be paid to the Indemnified Party, as
incurred, within ten (10) business days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; provided, that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).

                                 vi) If a claim for indemnification under this
section is unavailable to an Indemnified Party because of a failure or refusal
of a governmental authority to enforce such indemnification in accordance with
its terms (by reason of public policy or otherwise), then each Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such Losses, in
such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party and Indemnified Party in connection with the actions,
statements or omissions that resulted in such Losses as well as any other
relevant equitable considerations. The relative fault of such Indemnifying Party
and Indemnified Party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission of a material fact, has been
taken or made by, or relates to information supplied by, such Indemnifying,
Party or Indemnified Party, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such action, statement or
omission. The amount paid or payable by a party as a result of any Losses shall
be deemed to include, subject to the limitations set forth in this section, any
reasonable attorneys' or other reasonable fees or expenses incurred by such
party in connection with any proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this section was available to such party in accordance with its terms.

                                 vii) The parties hereto agree that it would not
be just and equitable if contribution pursuant to this section were determined
by pro rata allocation or by any other method of allocation that does not take
into account the equitable considerations referred to in the immediately
preceding paragraph. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.

                                 viii) The indemnity and contribution agreements
contained in this section are in addition to any liability that the Indemnifying
Parties may have to the Indemnified Parties.

           5. Telenetics and Recipients intend that the Issued Shares, the
Warrants and the Warrant Shares (collectively the "Offered Securities"), are
being issued in a private transaction intended to be exempt from the
registration requirements of the Securities Act. Each Recipient hereby
represents and warrants to Telenetics as follows:

                                       5

<PAGE>

                      a. He is an accredited investor (as defined in Rule 501 of
Regulation D promulgated under the Securities Act) and is acquiring the Offered
Securities for his own account, for investment purposes only and not with a view
to or for distributing or reselling such Offered Securities or any part thereof
or interest therein, without prejudice, however, to his right, subject to the
provisions of this Agreement, at all times to sell or otherwise dispose of all
or any part of such Offered Securities in compliance with applicable federal and
state securities laws.

                      b. He has significant investment experience, including
investment in non-listed and non-registered securities, and he, either alone or
together with his representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Offered Securities,
and has so evaluated the merits and risks of such investment.

                      c. He is able to bear the economic risk of an investment
in the Offered Securities and, at the present time, is able to afford a complete
loss of such investment.

                      d. He is not obtaining the Offered Securities as a result
of or subsequent to any advertisement, article, notice or other communication
regarding the Offered Securities published in any newspaper, magazine or similar
media or broadcast over television or radio or presented at any seminar or any
other general solicitation or general advertisement.

                      e. He understands and acknowledges that (i) the Offered
Securities are being offered and sold to him without registration under the
Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act, and (ii) the availability of such exemption
depends in part on, and Telenetics will rely upon the accuracy and truthfulness
of, the representations contained in this Paragraph 5, and he hereby consents to
such reliance.

                      f. He consents to the placement of a legend on any
certificates or other documents evidencing the Offered Securities stating that
the issuance of the Offered Securities has not been registered under the
Securities Act and under applicable state securities laws and setting forth or
referring to the restrictions on transferability and sale thereof.

                      g. He understands that as a condition to the issuance of
the Offered Securities, Telenetics may require him and any designee who is to
receive Offered Securities to execute an investment representation letter
containing the representations in the preceding subparagraphs of this Paragraph
5.

           6. Except for any obligations imposed by this Agreement, Telenetics,
on the one hand, and Recipients, and each of them, on the other, and, as
applicable, each of their respective agents, successors, predecessors, parent
companies, affiliated companies, related companies, partners, officers,
directors, shareholders, representatives, employees, attorneys, insurance
companies, assigns and heirs, and each of them, past and present, hereby release
and forever discharge each other party and each of his or its respective agents,
successors, predecessors, parent companies, affiliated companies, related
companies, partners, officers, directors, shareholders, representatives,
employees, attorneys, insurance companies, assigns and heirs, and each of them,
past and present, with respect to any and all claims, demands, liabilities,

                                       6

<PAGE>

obligations, debts, attorneys' fees, costs, accounts, actions, or causes of
action which any of the parties have or claim to have as of the date of this
Agreement, in law or equity, whether known or unknown, which pertain to or which
arise out of the facts, circumstances, and/or events which are asserted, in the
Dispute and/or which pertain to, arise out of, or are in any way connected with
the past relationships between the parties.

           7. As a condition of this Agreement and in furtherance of the release
provisions set forth in this Agreement, the parties expressly waive any and all
rights and benefits conferred upon them by the provisions of section 1542 of the
Civil Code of the State of California with respect to any of the matters
described or set forth in this Agreement. Section 1542 of the Civil Code of the
State of California states:

                     A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
                     CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
                     THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
                     MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
                     DEBTOR.

                     The parties acknowledge that except for matters expressly
represented or recited in this Agreement, the facts
and law in relation to this matter and the claims released by the terms of this
Agreement may turn out to be different from the facts or law as now known to
each party and/or his or its agents and/or representatives, including his or its
counsel. Each party expressly assumes the risk of the existence of different or
presently unknown facts or law and agrees that this Agreement shall in all
respects be effective and binding as to each party despite the possibility of
the existence of different or new facts or law.

           8. Each of the parties represents and warrants that he or it has not
heretofore assigned, transferred or subrogated, or purported to assign, transfer
or subrogate, to any person or entity, any of the claims released in this
Agreement. Each of the parties agrees that he or it shall indemnify each of the
other parties, including with respect to any attorneys' fees and costs, and hold
each of the other parties harmless from and against any claims based on or
arising from any such assignment, transfer or subrogation, or any attempted
assignment, transfer or subrogation, of any of the claims released in this
Agreement.

           9. Each of the parties agrees to execute and deliver to each other
party all necessary documents and to take such additional action as may be
necessary or reasonably required to effectuate the terms, conditions,
provisions, and intent of this Agreement.

           10. Each party executing this Agreement and/or any other documents
related to the settlement between the parties represents and warrants that he or
it has the legal capacity and/or has been duly authorized to execute this
Agreement and any such other related documents.

           11. Each of the parties acknowledges that he or it has carefully read
this Agreement and knows and understands the contents and effect of this
Agreement, and each of the parties further acknowledges that he or it is signing
this Agreement based on his or its own free act.

           12. Each of the parties acknowledges that he or it has been advised
to seek legal counsel in connection with this matter and the provisions and
execution of this Agreement, and each of the parties acknowledges that he or it
either has consulted with his or its own legal counsel or has had a full
opportunity to consult with his or its own legal counsel in connection with the
settlement between the parties, the terms, conditions, and provisions of this
Agreement, and the execution of this Agreement.

                                       7

<PAGE>

           13. All of the terms, conditions and provisions of this Agreement
shall be governed by and construed and enforced in accordance with the laws of
the State of California, without regard to choice of law principles. Any
disputes arising under this Agreement shall be resolved in the federal or state
courts located in the County of Orange, State of California.

           14. If any term, condition or provision of this Agreement is held to
be invalid, void or unenforceable, the remaining terms, conditions and
provisions of this Agreement nevertheless shall remain in full force and effect
and shall in no way be affected, impaired or invalidated.

           15. This Agreement and all of its terms, conditions and provisions
shall be binding upon and shall inure to the benefit of each of the parties and
each of the parties' respective heirs, successors and assigns.

           16. The prevailing party in any proceeding to enforce the provisions
of this Agreement shall be entitled to recover all costs, including reasonable
attorneys' fees, from the non-prevailing party.

           17. Each of the parties shall bear and be responsible for his or its
own attorneys' fees and costs incurred in connection with all aspects of the
Dispute.

           18. This Agreement contains the entire agreement and understanding
concerning the settlement between the parties and replaces any prior or
contemporaneous negotiations or agreements between the parties, whether written
and/or oral.

           19. Each of the parties agrees that no particular party or parties to
this Agreement shall be deemed to be the author of this Agreement or any
particular term, provision or condition of this Agreement. Each of the parties
further agrees that any ambiguities in this Agreement shall be resolved, and the
terms, provisions and conditions of this Agreement shall be construed and
interpreted, without regard to which party or parties may have suggested,
drafted, revised, or otherwise authored this Agreement or any of its particular
terms, provisions or conditions. Each of the parties further agrees that this
Agreement shall be construed and interpreted as if drafted jointly by all of the
parties.

           20. It is understood that this Agreement is entered into in
compromise of disputed claims and that neither the settlement between the
parties nor the performance of any of the terms, provisions, or conditions of
this Agreement shall be construed or interpreted as an admission of liability on
the part of any of the parties to this Agreement.

           21. This Agreement may not be changed, altered or modified except in
a writing signed by each of the parties and/or duly authorized representatives
of each of the parties.

                                       8

<PAGE>

           22. This Agreement may be executed in counterparts, including
facsimile counterparts, and all such executed counterparts, including with
facsimile signatures, together shall constitute one original Agreement which
shall be binding on all of the parties to this Agreement notwithstanding that
all of the parties are not signatory to the original or the same counterparts.

           23. If the release granted to any released party by any releasing
party in this Agreement is held by a court of competent jurisdiction to be void
or unenforceable, then the release given by that released party to that
releasing party shall also be deemed void and unenforceable.

           24. Any notice, demand, request, waiver or other communication
required or permitted to be given under this Agreement shall be in writing and
shall be effective (a) upon hand delivery by telecopy or facsimile at the
address or number designated below (if delivered on a business day during normal
business hours where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day during normal
business hours where such notice is to be received) or (b) on the second
business day following the date of mailing by express courier service, fully
prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications shall be:

           If to Telenetics:              Telenetics Corporation
                                          25111 Arctic Ocean
                                          Lake Forest, California 92630
                                          Attention: President
                                          Attention: Chief Financial Officer
                                          Telecopier: (949) 455-9324
                                          Telephone: (949) 455-4000

           with a copy (which copy
           shall not constitute notice
           to Telenetics) to:             Larry A. Cerutti, Esq.
                                          Rutan & Tucker, LLP
                                          611 Anton Boulevard, Suite 1400
                                          Costa Mesa, California 92626
                                          Telecopier: (714) 546-9035
                                          Telephone: (714) 641-5100

                                       9

<PAGE>

           If to Rosen or Shea:           At the address of Rosen or Shea set
                                          forth on the signature page to this
                                          Agreement.

           with a copy (which copy
           shall not constitute notice
           to Rosen/Shea) to:             Larry Kars, Esq.
                                          Law Office of Larry Kars, P.C.
                                          9th Floor
                                          101 East 52nd Street
                                          New York, New York 10022
                                          Telecopier: (212) 980-5192
                                          Telephone: (212) 752-9700

           If to Kars:                    At his address set forth above.

                     Any party hereto may from time to time change its address
for notices by giving at least ten (10) days' written
notice of such changed address to the other parties hereto.

           25. At such time as this Agreement has been signed by all of the
parties to this Agreement and executed copies of this Agreement with all of the
parties' signatures have been delivered to each of the other parties and/or
their counsel, this Agreement shall be deemed to be effective as of August 20,
2002 (the "Effective Date").

Dated:   SEPTEMBER 9, 2002               TELENETICS CORPORATION

                                              By: /S/ DAVID L. STONE
                                                  ----------------------
                                                  David L. Stone, President

Dated:   SEPT 5, 2002                         /S/ PETER C. ROSEN
                                              ----------------------
                                              PETER C. ROSEN

                                              Address For Notices:
                                               C/O LARRY KARS
                                              ----------------------
                                               101 E. 52ND ST., 9TH FL.
                                              ----------------------
                                               NYC 10022
                                              ----------------------

                                       10

<PAGE>

Dated:  AUGUST 22, 2002                       /S/ WILLIAM A. SHEA, JR.
                                              ----------------------
                                              WILLIAM A. SHEA, JR.

                                              Address For Notices:
                                               25 WEST 54TH ST.
                                              ----------------------
                                               NEW YORK, N.Y. 10019
                                              ----------------------

Dated:  9/3, 2002                             /S/ LARRY KARS
                                              ----------------------
                                              LARRY KARS

APPROVED AS TO FORM:

RUTAN & TUCKER, LLP

By:  /S/ LARRY A. CERUTTI
     --------------------
     Larry A. Cerutti
Attorneys for Telenetics Corporation

LAW OFFICE OF LARRY KARS, P.C.

By:  /S/ LARRY KARS
     ---------------------
     Larry Kars
Attorneys for Peter C. Rosen and William A. Shea, Jr.

                                       11<PAGE>

                                                                    Exhibit 10.7

                     SETTLEMENT AGREEMENT AND MUTUAL RELEASE

           THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE (this "Agreement") is
entered into effective as of August 1, 2002 by and among Telenetics Corporation,
a California corporation ("Telenetics"), on the one hand, and John D. McLean, an
individual ("McLean"), William C. Saunders, an individual ("Saunders"), Terry S.
Parker, an individual ("Parker") and Saunders & Parker, Inc., a Texas
corporation ("S&P", and together with McLean, Saunders and Parker, the
"Defendants"), on the other. This Agreement is entered into with reference to
the following facts:

                                 R E C I T A L S
                                 ---------------

           A. On or about October 19, 2001, Telenetics filed a Complaint against
Defendants and Edward L. Didion, an individual ("Didion") in the United States
District Court, Central District of California, Southern Division (Case No.
SA01-987-AHS (ANX)) (the "Action").

           B. Defendants and Telenetics wish to settle all differences between
them which arise out of or which in any way are connected with or related to any
of the claims, allegations, causes of action and/or contentions set forth in the
Action.

           C. In contemplation of entering into this Agreement, in February
2002, Telenetics filed a request for and obtained a dismissal without prejudice
in the Action.

           D. Without acknowledging the validity of any other party's rights,
claims or defenses in connection with the subject matter of the Action, and in
order for the parties to this Agreement to settle all differences between them,
and in consideration of the mutual covenants, agreements and promises set forth
in this Agreement, and other good and valuable consideration, each party to this
Agreement agrees as follows:

                                SETTLEMENT TERMS

           1. The foregoing Recitals shall be part of this Agreement.

           2. The Stock Purchase Agreement dated January 7, 2000, as amended by
that certain First Amendment to Stock Purchase Agreement dated as of May 31,
2000 (collectively, the "Stock Purchase Agreement") by and among Telenetics,
Saunders, Parker and Didion shall be amended as to Telenetics, Saunders and
Parker only (i.e., not as to Didion) pursuant to the terms of the Second
Amendment to Stock Purchase Agreement (the "Second Amendment to Stock Purchase
Agreement"), a copy of which is attached hereto as EXHIBIT A and made a part
hereof.

           3. Defendants acknowledge and agree that any and all actions taken by
Telenetics between the date of the Stock Purchase Agreement and the date of this
Agreement relating to the issuance of any capital stock of Telenetics did not
result in the application of Section 1.3(c) of the Stock Purchase Agreement (as
such was in effect prior to the deletion of such section pursuant to the Second
Amendment to Stock Purchase Agreement) and, as such, Defendants waive any rights
any of them may have with respect to the issuance of any Additional Stock (as
that term is defined in the Stock Purchase Agreement) as a result of any such
issuances of capital stock. For purposes of this Agreement, the phrase "issuance
of any capital stock of Telenetics" means (i) the issuance of any shares of
common stock of Telenetics, (ii) any grant of an option or warrant to purchase
shares of common stock of Telenetics (including any exercise of any such option
or warrant and the subsequent issuance by Telenetics of shares of common stock
underlying such option and/or warrant) and (iii) any issuance of debt
obligations of Telenetics, which debt obligations are convertible into shares of
common stock of Telenetics (including any conversion of such debt obligations
and the subsequent issuance by Telenetics of shares of common stock underlying
such debt obligations).

<PAGE>

           4. The Consulting Agreement dated as of January 7, 2000 by and
between Telenetics and S&P is hereby canceled and terminated (including any post
termination covenants contained therein) as of September 1, 2000 and any and all
obligations of Telenetics to S&P for payment thereunder, if any, shall also be
canceled, extinguished and forgiven by S&P. All amounts previously paid by
Telenetics to S&P pursuant to the terms of the Consulting Agreement are deemed
validly paid and not subject to any adjustment or forfeiture.

           5. Concurrent with the execution of this Agreement, Telenetics shall
pay to Kutak Rock, LLP, counsel for Defendants in connection with that certain
action filed in United States District Court for the Middle District of Florida,
Tampa Division (Case No. 8:00-CV-2283-T-27B), the sum of $10,000.00.

           6. Concurrent with the execution of this Agreement, Telenetics shall
execute and deliver to S&P a promissory note in the principal amount of
$24,723.42, a copy of which is attached hereto as EXHIBIT B and made a part
hereof (the "Promissory Note").

           7. Concurrent with the execution of this Agreement, Telenetics shall
pay to each of Saunders and Parker the sum of $5,000.00.

           8. Concurrent with the execution of this Agreement, S&P shall deliver
to Telenetics for cancellation all outstanding options to purchase shares of
common stock of Telenetics held by S&P.

           9. Except for any obligations imposed by this Agreement, the
Promissory Note and the Stock Purchase Agreement as amended by the Second
Amendment to Stock Purchase Agreement, Telenetics, on the one hand, and
Defendants, and each of them, on the other, and, as applicable, each of their
respective agents, successors, predecessors, parent companies, affiliated
companies, related companies, partners, officers, directors, shareholders,
representatives, employees, attorneys, insurance companies, assigns and heirs,
and each of them, past and present, hereby release and forever discharge each
other party and each of his or its respective agents, successors, predecessors,
parent companies, affiliated companies, related companies, partners, officers,
directors, shareholders, representatives, employees, attorneys, insurance
companies, assigns and heirs, and each of them, past and present, with respect
to any and all claims, demands, liabilities, obligations, debts, attorneys'
fees, costs, accounts, actions, or causes of action which any of the parties
have or claim to have as of the date of this Agreement, in law or equity,
whether known or unknown, which pertain to or which arise out of the facts,
circumstances, and/or events which are asserted, in the Action and/or which
pertain to, arise out of, or are in any connected with the past relationships
between the Parties; PROVIDED, HOWEVER, that the provisions of this Section 7
shall not apply to any claims related to or arising out of (i) McLean's
employment relationship with Telenetics and (ii) the right of the Defendants to
receive additional shares of Telenetics common stock pursuant to the terms of
the Stock Purchase Agreement as amended by the Second Amendment to Stock
Purchase Agreement.

                                       2

<PAGE>

           10. As a condition of this Agreement and in furtherance of the
release provisions set forth in this Agreement, the parties expressly waive any
and all rights and benefits conferred upon them by the provisions of section
1542 of the Civil Code of the State of California with respect to any of the
matters described or set forth in this Agreement. Section 1542 of the Civil Code
of the State of California states:

                     A general release does not extend to claims which the
                     creditor does not know or suspect to exist in his favor at
                     the time of executing the release, which if known by him
                     must have materially affected his settlement with the
                     debtor.

           The parties acknowledge that except for matters expressly represented
or recited in this Agreement, the facts and law in relation to this matter and
the claims released by the terms of this Agreement may turn out to be different
from the facts or law as now known to each party and/or his or its agents and/or
representatives, including his or its counsel. Each party expressly assumes the
risk of the existence of different or presently unknown facts or law and agrees
that this Agreement shall in all respects be effective and binding as to each
party despite the possibility of the existence of different or new facts or law.

           11. Telenetics intends to pursue its claims against Didion as set
forth in the Action. If Didion, or any assignee of Didion, asserts claims for
contribution or indemnity against Defendants in connection with Telenetics'
claims against Didion as set forth in the Action or any other litigation arising
from the facts alleged in the Action, Telenetics agrees to indemnify, defend,
and hold harmless Defendants as to such contribution or indemnity claims or any
judgment or award rendered thereon. The intent of this provision is to ensure
that Defendants will not be subject to any further liability in connection with
Telenetics' continued pursuit of claims against Didion arising from facts
alleged in the Action.

           12. Each of the parties represents and warrants that he or it has not
heretofore assigned, transferred or subrogated, or purported to assign, transfer
or subrogate, to any person or entity, any of the claims released in this
Agreement. Each of the parties agrees that he or it shall indemnify each of the
other parties, including with respect to any attorneys' fees and costs, and hold
each of the other parties harmless from and against any claims based on or
arising from any such assignment, transfer or subrogation, or any attempted
assignment, transfer or subrogation, of any of the claims released in this
Agreement.

           13. Each of the parties agrees to execute and deliver to each other
party all necessary documents and to take such additional action as may be
necessary or reasonably required to effectuate the terms, conditions,
provisions, and intent of this Agreement.

           14. Each party executing this Agreement and/or any other documents
related to the settlement between the parties represents and warrants that he or
it has been duly authorized to execute this Agreement and any such other related
documents.

                                       3

<PAGE>

           15. Each of the parties acknowledges that he or it has carefully read
this Agreement and knows and understands the contents and effect of this
Agreement, and each of the parties further acknowledges that he or it is signing
this Agreement based on his or its own free act.

           16. Each of the parties acknowledges that he or it has been advised
to seek legal counsel in connection with this matter and the provisions and
execution of this Agreement, and each of the parties acknowledges that he or it
either has consulted with his or its own legal counsel or has had a full
opportunity to consult with his or its own legal counsel in connection with the
settlement between the parties, the terms, conditions, and provisions of this
Agreement, and the execution of this Agreement.

           17. This Agreement has been entered into in the State of California,
and all of the terms, conditions and provisions of this Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of California.

           18. If any term, condition or provision of this Agreement is held to
be invalid, void or unenforceable, the remaining terms, conditions and
provisions of this Agreement nevertheless shall remain in full force and effect
and shall in no way be affected, impaired or invalidated.

           19. This Agreement and all of its terms, conditions and provisions
shall be binding upon and shall inure to the benefit of each of the parties and
each of the parties' respective heirs, successors and assigns.

           20. The prevailing party in any proceeding to enforce the provisions
of this Agreement shall be entitled to recover all costs, including reasonable
attorneys' fees, from the non-prevailing party.

           21. Each of the parties shall bear and be responsible for his or its
own attorneys' fees and costs incurred in connection with all aspects of the
Action.

           22. This Agreement contains the entire agreement and understanding
concerning the settlement between the parties and replaces any prior
negotiations or agreements between the parties, whether written and/or oral.

           23. Each of the parties agrees that no particular party or parties to
this Agreement shall be deemed to be the author of this Agreement or any
particular term, provision or condition of this Agreement. Each of the parties
further agrees that any ambiguities in this Agreement shall be resolved, and the
terms, provisions and conditions of this Agreement shall be construed and
interpreted, without regard to which party or parties may have suggested,
drafted, revised, or otherwise authored this Agreement or any of its particular
terms, provisions or conditions. Each of the parties further agrees that this
Agreement shall be construed and interpreted as if drafted jointly by all of the
parties.

           24. It is understood that this Agreement is entered into in
compromise of disputed claims and that neither the settlement between the
parties nor the performance of any of the terms, provisions, or conditions of
this Agreement shall be construed or interpreted as an admission of liability on
the part of any of the parties to this Agreement.

                                       4

<PAGE>

           25. Any disputes arising under this Agreement shall be resolved in
accordance with the laws of the State of California in either the County of
Orange or the County of Los Angeles, State of California.

           26. This Agreement may not be changed, altered or modified except in
a writing signed by each of the parties and/or duly authorized representatives
of each of the parties.

           27. This Agreement may be executed in counterparts, including
facsimile counterparts, and all such executed counterparts, including with
facsimile signatures, together shall constitute one original Agreement which
shall be binding on all of the parties to this Agreement notwithstanding that
all of the parties are not signatory to the original or the same counterparts.

           28. If the release granted to any released party by any releasing
party in this Agreement is held by a court of competent jurisdiction to be void
or unenforceable, then the release given by that released party to that
releasing party shall also be deemed void and unenforceable.

Dated:  September 27, 2002                TELENETICS CORPORATION

                                          By: /S/ David Stone
                                              ---------------------------------
                                               David Stone, President and Chief
                                               Financial Officer

                                          /S/ JOHN D. MCLEAN
Dated:  September 27, 2002                --------------------------------------
                                          JOHN D. MCLEAN

                                          /S/ WILLIAM C. SAUNDERS
Dated:  September 27, 2002                --------------------------------------
                                          WILLIAM C. SAUNDERS

                                          /S/ TERRY S. PARKER
Dated:  September 27, 2002                --------------------------------------
                                          TERRY S. PARKER

Dated:  September 27, 2002                SAUNDERS & PARKER, INC.

                                          By:/S/ WILLIAM C. SAUNDERS
                                             -----------------------------------
                                               Its: CO-PRES
                                                   -----------------------------

                                       5

<PAGE>

APPROVED AS TO FORM:

RUTAN & TUCKER, LLP

By:  /S/  Larry A. Cerutti
     ------------------------------------
           Larry A. Cerutti
Attorneys for Telenetics Corporation

MUNSCH HARDT KOPF & HARR, P.C.

By:  /S/ Sally A. Schreiber
     ------------------------------------
           Sally A. Schreiber
Attorneys for Terry S. Parker, William C.
Saunders and Saunders & Parker, Inc.

                                       6

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