TO OUR SHAREHOLDERS:

Fiscal `05 marked a year of accomplishment for our Company. We increased our net income nearly 50% and our pre-tax income just over 25%, resulting in our fourth consecutive year of increased pre-tax income.

Our cash flow continues to improve as we were able to eliminate all year end debt for the first time in ten years. We retired 47% of our outstanding preferred stock and paid the dividends on the preferred in cash rather than in kind.

Much of the groundwork, including strengthening our team, for execution of our long-term strategic plan was accomplished during fiscal `05. We added two seasoned executives; first, Matthew Baile, VP of Product Development, who brings over twenty years experience in development of consumer electronic products to Franklin. Second, with the emphasis on Asian market opportunities and our relationship with our Japanese partner Seiko Instruments, we recruited Kevin Port to be our VP of International Operations. Kevin joined us late in the year bringing over fifteen years of experience in sales and marketing, having managed international operations for American companies, predominantly in the Japanese market.

During the year just ended, we established an Hispanic business unit specifically to execute on our opportunities in the growing Hispanic market in the United States. We sold our 25% equity interest in MobiPocket.com, our French software partner, to Amazon.com as part of its acquisition of MobiPocket and realized a gain of $1,781,000 on this sale. I believe that Amazon has a vision of the changing content world similar to the one we shared with MobiPocket over the past several years, and Franklin and Amazon have entered into a going forward Framework for Technology Collaboration Agreement.

Our Proximity Technology Division provided a great boost to the Company by entering into a new $1,700,000 licensing agreement with Adobe Systems as well as renewing two licensing agreements with Adobe and Apple Computer that will provide revenue in excess of $2,000,000 to our Company primarily in fiscal `06.

In fiscal 2004, we identified four major areas for strategic growth for Franklin: the Asian marketplace; standardized test preparation products; the US Hispanic market; and licensing of Franklin technology. We have to execute effectively, but the opportunities in these areas are undeniable.

The market for handheld reference products has been viewed as stable or flat by some or even eroding by others, yet it is bigger today than ever. What many focus on is only the US market, but the worldwide handheld electronic reference market, or, as it is called outside of the States, the “e-dictionary market,” approximates in wholesale US dollar terms one billion annually. In actuality, the US market represents less than 5% of the world market. While niche successes exist, the world market is really all about learning, and learning one thing: English. The obvious can also be the profound: Americans as a whole do not need to learn English! We believe that Franklin has the technology to teach English to the world better than anyone else. By the time you read this letter we will have shipped our first product into the Japanese market and in the next six to nine months we will be shipping major products into both the Japanese and Korean markets, followed later by shipments into China. Japan currently accounts for over 50% of the worldwide market for “e-dictionaries.” Over the coming years, you’ll see our products transition from the supplemental learning role they play today to providing complete language learning solutions.

Embarking on selling products for preparation for standardized testing, we launched our new SAT-2400 product with content provided by The Princeton Review this past April. Our launch was spearheaded by Borders and, as the back-to-school and holiday seasons begin, you will see our SAT-2400 at Office Max, Office Depot and Staples, plus Circuit City, J & R and a host of online retailers like Amazon.com. Standardized testing has a global reach and we’ll be launching test preparation products in major markets outside the United States, initially focusing on Japan and Korea.

Our Spanish/English products are an example of supplemental tools used both by Americans learning Spanish and by Hispanics learning English. But we recognize that the markets, needs, and demographics of these two users differ. This winter will mark the launch of our first products specifically designed with the Hispanic English learner in mind and we expect that the new emphasis on those users will strengthen our already growing penetration in that marketplace.

Products targeted for the Asian, standardized testing, and English learning for Hispanics markets have something in common - higher unit prices. Focusing on higher end products is a key to growing our revenues and profits.

Our licensing activities, led by our Proximity Technology Division, have continued to bolster the Company, both at the top and bottom lines. Over the last year, the Proximity Division has added sales, market research, and development staff and increased the number of languages supported for spelling correction and hyphenation software from 20 to 36. Just as we entered into this new fiscal year, the Proximity Division closed a multi-year licensing agreement with Sun Microsystems that will have added $800,000 to our revenues in the first quarter of fiscal ’06. Proximity’s linguistic solutions provide the technological hub of Franklin’s future. We’re now positioned to provide linguistic solutions, not only for Franklin’s own handhelds, but for third party mobile devices and software applications, learning solutions, and on-line applications. It proves a linguistic solution that has an architecture designed to provide maximum leveragability and flexibility across platforms and languages.

We expect continued growth in the 2006 fiscal year and, while many of the new initiatives will only have a partial impact on fiscal `06, we expect that we will see more significant growth in fiscal ’07 when these initiatives will have a full year impact.

I look forward to seeing you at the upcoming shareholders’ meeting at which time I can, once again, speak to and demonstrate some of the exciting innovations we have underway that I believe will benefit our Company.

     On behalf of our Directors, Officers and Employees,

     
     Barry J. Lipsky
     President and Chief Executive Officer