TO OUR SHAREHOLDERS,

The 2002 fiscal year was a much tougher one than I anticipated a year ago. Sales of our eBookMan line did not meet even our revised expectations, in part because of the continuing dot-com bust. As we closed the year, we wrote down all remaining eBookMan assets to their estimated recoverable value and reduced the carrying value of our ROLODEX® Electronics trademark to its estimated fair value.

While certainly the past fiscal year was disappointing, it taught us how to better position ourselves for the future. Our core business remains strong and was profitable for the year. We have taken steps to improve that profitability in the current fiscal year.

Once again I had the difficult task of implementing staff reductions in our domestic workforce and further consolidating our European operations. While both of these measures had negative short-term cost impacts, future periods will benefit from over a $1 million a year in overhead cost reductions.

As I reflect on Franklin's successes and misses, a number of things are evident. Market conditions change quite swiftly and price points drop dramatically. Time-to-market misses are unforgiving and Franklin cannot launch a new category such as e-books alone, especially in these difficult economic times which adversely impacted the e-book industry as a whole. Franklin has traditionally been a consumer electronics company whose products last for years, while products such as eBookMan are much closer to computer products where product life cycles are measured in months.

As I mentioned a year ago, our technologies of reference works, dynamic content and personal organization have been converging. In June we began to ship our popularly priced $49.95 core reference products that are now both dedicated and dynamic. They are solution-based machines as always, but can now connect to a PC, support basic organizer functionality, and are capable of downloading other reference content, topical information, or even a best-selling novel. You can expect to see further enhancements to this technology as the current fiscal year draws to a close.

As I have also said in the past, Franklin will need to continually partner, as we revise our product development to leverage all content for cross platform solutions. We have further expanded our relationship with MobiPocket; a Paris based Software Company and the developer of the Mobipocket Reader so that even our $49.95 products can utilize a library of thousands of titles. Mobi's newest Reader was a collaborative effort between our two companies utilizing Franklin's years of vast experience in this field.

Our successes, however, stem from knowing our business and knowing our customers. Palm OS devices under the Sony Clie brand just began to bundle the latest MobiPocket Reader including selected Franklin content. Sony Clie users can link to Franklin's website to purchase content. Similarly, the Nokia Communicator includes the same reader and it's users will also have access to Franklin's website to purchase their content. Our development efforts now allow us to leverage our content to more and more devices enabling partnering with brand leaders who have significant marketing muscle. While our download revenues are still small, they did increase by 200% over the prior year and our expectations remain that they will become a more and more important source of revenue as we move forward.

Franklin has long been producing memory card based machines. However, retailer adoption of a wide variety of cards has always required significant device sales. Although Franklin became Handspring's largest springboard module vendor, and licensed some of the best selling titles to Palm as well, retailers did not carry our modules in great numbers. Next year, however, we intend to produce one memory card that will use the same cross-platform software so that a single card can work on a Palm, Handspring, Pocket PC, Symbian (Nokia Communicator) and Franklin's proprietary machines. We are also studying the feasibility of this same content card working on a variety of other popular handheld devices. We are hopeful this will help fuel retailer adoption of our new device agnostic memory card.

The world moves a lot faster and is a lot less forgiving than it has been in the past. We need to also react more quickly. We need to do it right and get it right the first time. Andrew Horsfall, who joined our company as Vice President Worldwide Sales and Marketing as the new fiscal year started, has over 20 years experience as a marketing professional. Our job now is to better understand what our customers want and then to offer more and more value in our solution-based products. The more we understand about who buys our products and how they use them, the better we can design and add functionality and related content for those users. Andrew's background will prove instrumental in this effort.

I am confident fiscal year 2003 will be a profitable one.

We are in the midst of implementing our product plans for beyond this fiscal year, I am very excited about them. As they draw nearer, I will begin to share my excitement with you.

I look forward to seeing you at our upcoming Annual Shareholders Meeting on August 2, in New York.

On Behalf of our Directors, Officers and Employees,

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