TO OUR SHAREHOLDERS,

Our first quarter was a rewarding one for Franklin which demonstrates that the efforts of our dedicated employees are making a difference. Although the June quarter has historically been seasonally weak, your Company was able to show a profit in this quarter for the first time in four years.

While eBookman has generated the most excitement at Franklin lately, our focus remains on maintaining the profitability of our core business while bringing this exciting new product to retail shelves. Going forward, the new technology developed for eBookman will be leveraged throughout our product lines.

In our first quarter, we successfully implemented third party fulfillment of our web-based and direct marketing orders. We can now economically ship same day orders, dramatically increasing our level of customer service. For our European operations, we began implementation of centralized warehousing which will enable us to better service the Pan-European market more economically.

A critical goal of your Company has been to leverage our development resources through more outsourcing. Franklin has been known as a virtual manufacturer. To operate in today's world more effectively, we also need to become a virtual developer so we can bring better and more quality products to the market more quickly and more economically and minimize the impact of our internal resource limitations. As our development team here in New Jersey focuses on eBookman and other value-added innovation, the parts of our business that today have become commodity product based will benefit the most from these efforts. Our team has produced software development tools that now allow third parties to develop to Franklin's high quality standards while still maintaining the integrity of our intellectual property. In the first quarter we have already begun software development efforts in Hong Kong, China and India and in our second quarter now have development efforts starting in Russia as well, all at a fraction of our in-house costs. The Company is quite unique in this area in that we design our own microprocessors, being specific to Franklin products, our own operating system, and our own development tools. This results in not just more efficient designs, but more economic ones.

During our first quarter we began to broaden the availability of download titles from our website, not just in number but to a greater extent in variety of titles. The Bookman Writer System allows our already installed base of over 4 million users to instantly purchase Bookman titles. For the Palm OS and Windows CE (Pocket PC) operating systems, we have augmented the flagship Physicians' Desk Reference (PDR) offering with other quality medical titles. We've added Franklin's traditional reference titles such as the King James Bible, as well as daily crossword puzzles and a Flight Finder which provides a worldwide dynamic database of virtually every flight, airport connection, and timetable. Later this month, we will further be increasing our offerings by adding approximately 20 different bilingual translators ranging from those as common as English-Spanish to those as unique as English-Serbo-Croatian. While our revenues from these downloads have not been significant to date, we firmly believe this to be critical to our future as more and more consumers use both Franklin and non-Franklin handheld devices in their everyday lives.

As the web continues to become an increasingly important part of our business, we've begun to find better ways to bring users to our website. During the first quarter we began an affiliate program, so that partners such as Merriam-Webster using Franklin's spell correction on its website links back to our website giving the consumer the opportunity to purchase Franklin devices directly.

Our core business lines remain profitable as our margins continue to be healthy at approximately 43%. The electronics industry as a whole is faced with unprecedented parts shortages and price increases this year. This will result in Franklin showing only a small profit from our core businesses in the September quarter as some of the component shortages will shift product sales from the September to the December quarter. We also expect an increase in our cost of sales as we air ship more product to meet critical customer deliveries.

Our European operations as a whole remain strong, however, sale and profit contributions will be somewhat impacted by an approximate 10% unfavorable currency variance. We are currently taking steps to recover margin declines due to this currency variance.

Our medical division, which has traditionally been very strong and profitable, has been impacted by some weakening in the traditional Franklin product lines as more and more medical professionals move to the open architecture handheld devices and more medical content becomes available on the web. We have strived to stay ahead of the curve by making titles such as the PDR and a growing list of other medical titles available on our website for both Franklin and non-Franklin platforms. Our eBookman product is ideally suited for future growth in this key area. We will shortly be announcing major OEM arrangements to deliver customized branded eBookman devices and content to prominent medical publishers. This is not only significant as to the revenue it brings, but we are enthused by early adoption by third parties. We believe this will lead to more OEM business as others see the value in eBookman.

We have begun to implement focused marketing in key areas of our core businesses. Our bilinguals, especially the Spanish-English products, continue to be a growing segment of our business as our distribution widens. We have most recently retained an advertising agency with primary focus in the Hispanic markets to support and continue this trend. We are aggressively re-launching a second half Bible campaign with targeted TV, radio and print advertising combined with new retail price points that will also help broaden the distribution of this key product line as well.

We will begin beta testing of the eBookman in this quarter with shipments commencing early in the third quarter. We expect that the product will be production limited for Christmas.

This is a most exciting time for your Company as eBooks, which we pioneered in the eighties, are creating a buzz in the media. Franklin was the forerunner and remains the leader in this business.

I look forward to my next letter when we will have commenced shipments of eBookman and I can share with you the market reaction to this exciting new product.

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