TO OUR SHAREHOLDERS:

I am sure you share my pleasure that our company has had another profitable year with an increase in pre-tax income of 25% over the prior year. We were able to accomplish this despite a smaller revenue base.

While our sales for the first six months were disappointing, sales for the second half increased over the prior year period. I expect this favorable trend to continue in the current year. Our balance sheet has been strengthened with our outstanding debt as of March 31, ‘04 reduced to $2.375 million from $6.134 million in the prior year.

The major decline on a year-to-year basis was in our US consumer business which was caused primarily by the loss of a major retailer in the first half of fiscal 2004 when a new lower cost competitor came into our market. The superior performance of our products was able to displace them in the second half and regain our position. Our ROLODEX® Electronics brand of organizers and databanks remains weak as the worldwide demand for these basic function devices continues to be impacted by cell phone and PDA usage.

In October of 2003 we restructured our US consumer business units to establish a North American Operations division to provide more focus on profitability, instead of each domestic revenue entity having sales and margin responsibility only. Our overseas subsidiaries are already managed in this fashion. Michael Crincoli, who was promoted to Vice President, North American Operations, is responsible for managing this P&L initiative in our new structure. Mike had previously been our Vice President of North American Sales. This new structure provided much better P & L focus which was evidenced in our performance in the second half of the year when we were able to achieve revenue and operating profit growth as compared to the prior year period and which continues into the first quarter of our current fiscal year.

During fiscal '04 we continued to launch new products highlighted by our flagship Speaking Merriam-Webster Collegiate® Dictionary, Eleventh Edition which is a handheld version of Merriam Webster's best selling and most prestigious title. The sales of this product, and distribution thereof, continued to broaden as the year progressed and into the current year. In the 4th quarter we began a limited test in selected Borders Bookstores with a range of our reference devices including the 11th Collegiate. We still suffer from an awareness problem. Consumers buy Franklin products because they have heard about them, seen an ad, stumbled across them and think, "Gee, maybe that would be nice for Billy. " But when someone is thinking about reference material, where do they go? A bookstore. Borders has been so pleased with the results that for the first time ever a major book seller will be rolling out Franklin products chain wide. Look for select Franklin reference titles at your local Borders this Back-to-School season. It's just a natural.

We began distributing Seiko Instruments Inc. products to major customers like Wal-Mart and Radio Shack in FY 2004. We expanded our spiritual product line to include a Bible commentary, a Bible dictionary and an ultra thin, clip-on PageMark Edition of a Bible Concordance. In fact, our PageMark series won a Design award at January's Consumer Electronics Show in Las Vegas. Our electronic version of The Official SCRABBLE® Players Dictionary was developed in response to a petition from the National Scrabble Association and just one look at the product instinctively says Scrabble. During the year we launched a "Better Grades" guarantee for many of our educational products. That's how confident we are in the educational value of our products.

On our licensing front, Ademco, a Division of Honeywell, has now started to manufacture their products using the VLSI chip which we had licensed to them several years ago. MDM, a spin-off of Palm, expanded its licensing arrangements for us to provide the industry's first cross-platform reference solution. We launched the world's first cross-platform speaking title together with MDM which is on a postage stamp sized memory card that provides audible translation in 5 European languages for all Palm, Pocket PC, and Nokia Series 60 devices. MobiPocket, a French software company in which we own a 25% interest, continues to be an important asset to Franklin. Our collaborative "reader" initiative with MobiPocket will launch with a line of new Franklin reference products due out later this year. Not only did Mobi's value increase over the prior year but together we launched eBookBase which now has over 17,000 titles from 200 prestigious world publishers offered for sale on our respective websites and a host of other websites.

Our domestic internet sales increased as we continuously improve our search engine optimization to bring more and more relevant customers to our website.

During the past year, our senior management team and I devoted a great deal of time to develop a long-term strategic plan which will focus our efforts on the several areas which offer the best growth opportunities for our company.

We have looked in the mirror at our own strengths and weaknesses and through the window at defining the major opportunities we have. Our growth strategy evolved from weighing the risks versus the opportunities.

In the course of developing this plan, we did a great deal of internal analysis of the company which showed us how to better approach our existing and new markets and improve operations, and more importantly showed us the significant growth opportunities that we have in these markets. Although our sales have suffered in recent years, the global business, specifically of dedicated handheld reference devices is nearing a billion dollars a year at wholesale and growing!

The greatest single, worldwide opportunity that we have is in language learning, specifically learning of the English language. It's evident that in the global economy for people to succeed, they must master English. Over 78% of the world's handheld reference business takes place in Asia. Japan alone accounts for over 50% of this business. We recently announced an alliance with Seiko Instruments Inc. of Tokyo, Japan who is one of the top three players in the Japanese market. We will be working with Seiko in the Japanese, Korean and Chinese markets to bring Franklin reference products to the region. Seiko sees the strengths of Franklin and how together we can grow market share through some unique differentiation between us and our competitors. Franklin will also distribute the Seiko reference products in the North American, European and Australian markets as we increase our relevance in markets we already lead.

While our Spelling Ace spell corrector is on the recommended reading list of some 20,000 schools nationwide, the US educational market is very fragmented as each state and local school district has its own curriculum and criteria. Standardized testing, however, means that we can leverage our development efforts to a much broader audience. We believe that standardized testing can be an explosive category for our company. We recently entered into an alliance to distribute content provided by The Princeton Review, perhaps the most respected and well known name in standardized testing. We will be launching our "Cracking the SAT", early in calendar 2005 and are building a test taking platform to coincide with our roadmap of the most relevant Standardized Testing titles both domestically and abroad.

The Hispanic market continues to be the largest growing demographic in the US. We're establishing an entire business unit under the North American Operations division specifically to enhance our presence and visibility, and hence revenues in this important and growing market. We are underway in developing new products specifically geared to this consumer to not only help them learn English, but as they learn to also provide them valuable feedback as to how well they are learning. The challenge is to get better and better and improve their score. With both our Standardized Testing devices and our Hispanic offerings, "scored" learning provides a user with goals and a means to measure their improvement.

Our Proximity Division recently renewed its three year licensing agreement with Adobe Systems which will generate revenue of $2.7 million in fiscal '06. This renewal, in fact, is a testimonial that we are the best in linguistic solutions. With the globalization of software applications and the rapid growth of web based information and commerce; our "linguistic solutions" have re-emerged as a growth opportunity for our company.

We've secured two new OEM projects in the current year, the first being a line of four custom products exclusively for The Sharper Image. We'll also be producing, on an exclusive basis, a spiritual product for a well known and respected evangelist.

Fiscal '05 also marks the year when retailers, although skittish at first to offer higher priced reference SKU's, are cheerfully ringing up higher dollar sales now that our efforts to "give it a try" have convinced them the market will support these products. Major retailers who once shied away from $100 and up reference products are now surprising themselves by exceeding their own sales expectations.

We must also increase the relevance of what we do in light of new technologies and the new ways people work and learn. We have applied for a patent for "PC View" technology so that on select Franklin devices hosting a suite of reference material, a student can not only access the data on his handheld device anywhere at anytime time but can access that same exact data when connected to his PC. This is a terrific new function that broadens the relevance of our products and, in fact, when combined with a suite of reference titles, is often more functionally cost effective than buying the same suite of titles in its print or CD counterparts.

The opportunities are clearly there. The challenge now is timely, cost effective, quality execution with a realigned, focused organization.

I look forward to seeing you at the upcoming Shareholders' meeting where I can demonstrate for you some of the exciting new concepts underway at our company.

On behalf of our Directors, Officers and Employees,

Barry J. Lipsky
President and Chief Executive Officer