TO OUR SHAREHOLDERS:

In these difficult economic times, I am particularly pleased that our Company had a profitable year. We significantly reduced our debt, strengthened our balance sheet, and reported a modest profit.

I reported in our earnings releases throughout the year, our domestic consumer sales business was running ahead of the prior year through the beginning of the critical holiday season, but as consumer confidence continued to erode in our third fiscal quarter and with all retail sectors being off, the severe weather, and the Iraqi war, our second half sales were not what we originally anticipated. As such, we were unable to increase our revenues year over year.

Some of our key overseas markets suffered from weakening economies and, in the case of Germany, a major retailer scaling back in our category of goods. Despite these negative factors, our ongoing expense controls, including an effort to turn fixed costs into variable costs, contributed to our profitability.

The technology world has changed. The days of promise and hype are over. It's now back to basics, delivering the bottom line and continuing to build the confidence of you, our shareholders.

Over the last fiscal year we've continued to make material advances that will help position us for future growth. Two key executive officer positions were filled in worldwide sales and marketing and engineering. On the business front, we closed a multi-year renewal of a major Adobe license, secured the 3200 store Rite-Aid chain as a new customer (which began to ship in the current fiscal year), brought Seiko products into our distribution network, and closed on a key strategic investment in MobiPocket, a European-based software company. As I mentioned last year, we are now well into the convergence of our technologies ,as most devices that we are now shipping at a $49.95 retail price point and up are not only dedicated reference works but are dynamic devices as well. We introduced a PageMark Dictionary which has had terrific acceptance and has opened up an all new category of companion products for us. We have licensed a new speech technology which continues to be a key distinguishing feature in Franklin's handheld products

Last year I spoke of the importance of partners, licensing and alliances that would enable us to work with complementary partners to both enhance and leverage our core technologies. We licensed our technology to a division of Honeywell and just recently announced a license of one of our proprietary microprocessor based VLSI's to Seiko Instruments Inc. of Tokyo Japan. While these licenses are not material in relation to our total sales, they are an important and growing part of our long term profitability.

I also spoke of our relationship with MobiPocket and the significance of memory cards and a single file structure which would enable us to leverage our development over a broader base. We recently increased our investment in MobiPocket as we continue to believe the technology stemming from this alliance will be an important element in the overall architecture of Franklin's future technology. As a result of this partnership, we just announced that the Franklin solution has been selected by Mobile Digital Media (known as MDM, a Palm spin-off) as its reader of choice. This reader solution was chosen over a Palm in-house alternative as it became evident to MDM that we have by far the best solution for the publisher, retailer and especially the consumer. We have expanded our licensing business with MDM in both the number of titles and reach. Not only are there many more card-based Palm OS handhelds and smartphones deployed today versus one year ago, but with Franklin's solution MDM will now be supporting Pocket PC and Symbian-based devices as well as Palm devices: a single card that can "play" on virtually any MMC and/or SD (Multimedia and/or Secure Digital) card-enabled device. These same cards and underlying data files will also run on Franklin's next generation devices.

Our internet sales of both devices and downloads, while still a small part of our business, were up 30% year-over-year.

As we moved into FY 2004, we clearly established our corporate vision:

In FY2004 we will continue to invest in our future. While FY 2004 is expected to be a profitable one, and we have no high risk project investments, we are continuing to invest in both marketing and R & D. On the marketing side, we have segmented our core device business into: Language, Language Learning, Test Taking, Travel, Spiritual, Children, Leisure and Organization, with each sector well focused on lines of solutions around particular categories and market channels.

We are well underway in an investment in a new unified architecture -development system which has at its core a much more powerful microprocessor and a software development environment that will allow us to better leverage each component of our product development. This architecture should enable us to greatly reduce product lead time, and ultimately cost, while increasing performance and functionality in this rapidly changing technological world. We are expecting to introduce the first of these exciting new unfied architecture based products at the January 2004 Consumer Electronics Show in Las Vegas.

Just this month Franklin released the electronic handheld version of Merriam-Webster's Eleventh Collegiate Dictionary in a sleek new platform design. The Collegiate is by far America's best selling dictionary and for the first time in publishing history a print version and its electronic counterpart were launched simultaneously. The initial reaction to this premier product has been tremendous. We've also just concluded licensing some other preeminent names in the reference field, with the addition of Encyclopaedia Britannica and the World Almanac to our list of prestigious publishers.

Franklin has continued to produce Scrabble® products for the European markets and this past March Mattel, the European license holder, presented Franklin with its "International Retailing Award", recognizing the sales success and unique perspective we brought to the Mattel and Scrabble brands. While we had been investigating re-launching our Scrabble product for our domestic markets, we received a petition from the National Scrabble Association that just reinforced our own research to bring back our Scrabble Dictionary. The look and form factor of our newest Scrabble Dictionary is turning heads. Even the keys look like Scrabble tiles, with the point value on each key. Although quite early, this new platform is capturing universal acceptance.

In the current year our goal is to continue to strengthen our balance sheet while providing the groundwork for future growth. It's clear that with the lean infrastructure we now have, we can significantly increase profitability, through products, markets and alliances that grow our top line. Morale is high and everyone in the company is now focused on how they can personally contribute to building the company and playing a part in the process of a three year plan with the objective of increasing sales to $100 million and beyond.

It's exciting times at Franklin again and I look forward to seeing you at the upcoming Shareholders' meeting.

On Behalf of our Directors, Officers and Employees,

Barry J. Lipsky

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