TO OUR SHAREHOLDERS:

These are exciting times at our Company. Just a few weeks ago we began to ship our long awaited dictionary line into the burgeoning Japanese market. While the results of these efforts will be realized in the current fiscal year and beyond, it is the culmination of our development teams' efforts which commenced in FY 2006.

Financial Results and Accomplishments:

While our year over year sales and profits declined marginally, we were able to maintain our profitability while continuing to build for future growth. As I'll discuss later in this letter, we did achieve growth in the areas we previously targeted; however, to a large extent they were offset by a decline in our traditional US retail market which was much greater than we had anticipated. We have and are continuing to take the necessary steps to try to assure sales growth to offset these declines.

FY 2006 also marked a year of financial accomplishments for our Company. In January, 2006 we sold our 90,000 square foot headquarters building and adjacent land for $10.3 million and realized a pre-tax gain of $4,920,000 on the sale. With these funds we were able to retire all of the company's outstanding Preferred Shares and remained debt free at year end. We closed the year with over $10 million cash to be used to fuel our future growth initiatives.

New Products:

We launched a dozen new domestic products in FY 2006 and another dozen for our international markets.

Our US launch was spearheaded by the SAT-2400 Pocket Prep for the New SAT, an interactive handheld version of "The Princeton Review's Cracking the New SAT". We launched our first 'unified architecture' platform product, the BSI-1900 "Ingl?s en su Bolsillo" (English in Your Pocket)", the SCD-787 a speaking desktop version of Merriam-Webster's Collegiate Dictionary 11th Edition and five other new models designed for the English or Spanish learner. The majority of these introductions carry retail prices of $150 or more.

On the international side, we introduced our first Seiko branded products into the already existing high end German market; the GR-M6000, a multi title European Dictionary retailing at $320 and the GR-T7000, a multi title Business Dictionary retailing at $380. We launched the PM-350 and the PMK-540, PageMark series bi-lingual dictionaries in both Japan and Korea, six additional products for the French market and the SDU-310 and 320, two Sudoku models for the US, UK, Australia and other international markets.

Strategy and Execution:

Growth is essential to our company and to achieve that we have identified and targeted both products and markets where we can drive products to higher price points which we began to successfully demonstrate during FY 2006.

As I shared with you previously, our Company identified four major areas for strategic growth: language learning and the Asian marketplace, standardized test prep products, the US Hispanic market and the licensing of our Proximity Division's technologies. We have been able to demonstrate growth in each of these areas. As I have also shared with you previously, the handheld reference market beyond the US market is growing.

Language Learning:

There are two types of English Language learners. The first is EFL, or English as a foreign language, which is what we see in the Asian and European markets. These markets are driven by adults with the objective of using English in the workplace. English is undeniably the bridge for communication between nations where English is not the primary language. The second is ESL, or English as a second language, for learners such as US Hispanics living in an English speaking society where they need to communicate with native English speakers.

The other key difference between EFL and ESL learners are the price points. Generally in markets such as Germany, Japan and Korea e-dictionaries are selling at retail prices of $300 or more with features and functionality far above those in the US domestic market. While Franklin is addressing both of these market opportunities, the markets that command higher price points are a key driving factor for our company. These are not markets where we need to convince the consumer of the need to buy - we only have to convince them to buy a Franklin.

In China alone there are more than 300,000,000 people studying English today. That's larger than the entire US population! Globally, there are approximately twice the number of EFL learners as ESL learners and there are tens of billions of US dollars being spent annually on English language learning. This is the market we are entering.

While I have also talked before about transitioning our products from supplemental learning to actually "teaching", this is a major undertaking for Franklin and an immense opportunity that requires our focus and effort. The first products will combine proven language learning techniques with the power of a personal computer in a handheld that un-tethers the user by providing a 'take it with you' solution. Language learning is much like exercising; it's about repetitive frequent practice drills immersing the user in situational roles and cannot be successfully achieved by occasional intensified sessions. Our research shows that in markets like Japan, the norm is to commute 1? hours each way to work on public transportation, making a portable solution a natural fit. We expect these initial products to retail at around $400 in the Asian and European markets during FY 2008.

The English Language Learning market is a global market, growing annually.

Standardized Testing:

Our first standardized test product, the SAT-2400, has continued to do well in bookstores such as Borders and other retailers. This spring the product was updated to include the ACT test preparation. The products just shipped into Japan include "The Princeton Review's Cracking the TOEIC" examination taken annually by nearly four million business professionals worldwide of which nearly 65% are in Japan. (This compares to only 1.4 million unique SAT test takers annually in the US.)

US Hispanic Market:

While we have seen growth in our initiatives into the domestic Hispanic market, (an ESL market) it has been more challenging than we initially expected to target and reach the consumer. The traditional retailers for Franklin's class of products do not have a "Goya" aisle like the one you would see in a supermarket. We have had to find other creative ways to reach this market since it has been difficult for the national chains to support Hispanic-centric efforts. For example, while our BSI-1900, "Ingl?s en su Bolsillo" is being marketed domestically, primarily through ethnic retailers and websites, the same product is sold in Mexico at major chains like Sears, Liverpool and Sanborns. In order to enhance our domestic efforts in this market, we've just inked an agreement to deliver our first co-branded product this fall to Lexicon Marketing. Lexicon is a preeminent marketer catering directly to the Hispanic community by selling products and services that contribute to the advancement and achievement of Hispanics in the United States and abroad.

Proximity Division:

In FY 2006, our Proximity Division secured a multi year licensing deal with Sun Microsystems for over $1 million and a $240,000 contract renewal from HCA (Hospital Corporation of America).

Proximity's technologies continue to be a key asset of our Company. We have just retained an investment banking firm to aid in our search for partners and/or acquisitions that will help us broaden our Proximity technology and feature set and, therefore, grow our revenues and profits. We continue to believe that, with globalization, there are and will continue to be growing opportunities for Proximity.

We expect moderate growth for FY 2007. As we kick off some of the initiatives we have been working on, we maintain conservative yet realistic expectations until we start to see the results and further fine tune our go-to-market efforts.

I look forward to seeing you once again at the upcoming Shareholders Meeting where I can talk to you and show you more of what we have underway and discuss our "main thing"…. "Helping the World Communicate through Language Learning Solutions".

On Behalf of our Directors, Officers and Employees,

Barry J. Lipsky
President and Chief Executive Officer

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