TO OUR SHAREHOLDERS:

Fiscal 2007 was a disappointing year. While the year started off with encouragement and excitement, we met with grave disappointments primarily in our domestic market.

With a much brighter outlook ahead it’s important to understand and address what went wrong and what went right, and what we’ve learned in order to build your confidence in our future.

Financial Results and Accomplishments:

Our year-over-year sales and profits declined significantly, with the primary miss being in our North American domestic market. While our North American Direct Marketing efforts ran well ahead of the prior year, it was not enough to offset the downturn we faced with several major retailers. This downturn was underscored by a major customer going through its own internal struggles and as they re-evaluated their own future direction, they ceased ordering any Franklin product during the key June quarter. While they did re-commence ordering in October, we could not recoup the lost sales of the missed back-to-school season. The loss of yearly promotional placement at another major retailer where we were unable to meet their value requirements (although we continued to actively sell them other products) contributed to our disappointing results. In addition, a poor performing new model, despite receiving outstanding press, required significant mark-down allowances due to misses in price point, channel and "go to market" strategy.

Our year over year comparison was also impacted by the inclusion in prior year sales of $3.5 million from two multi-year technology development and licensing agreements.

While it is more difficult for us to address external challenges similar to the ones that our retailers face, we have to continuously develop new, fresh and exciting products to be a key supplier to each and every one of our retailers. We have implemented changes in our product planning process to assure that we have a correct go-to-market strategy and that we maintain channel discipline through an improved understanding of each retailer and their customers. These changes will minimize the downside of new model performance yet still maximize the potential benefit.

This year-over-year loss in the North American sector was not in all channels of distribution. Our sales in the direct marketing channel grew as did sales into the book channel, and this channel will be an important product and market focus in the future.

We continue to show increased revenue in our international operations where we expect to see even stronger growth in the coming year.

Our balance sheet remains strong with over $6.5 million in cash, in addition to our existing credit facility, which together can be used to fuel our internal and external growth initiatives.

New Products:

We launched 16 new products during FY 2007. Our US launch was spearheaded by the TGA-490, a 12 language speaking global translator which was a winner of the Cherry Picks award for new technology at the 2007 CES show. While this product did not commence shipping until the end of February, it has received strong global acceptance and is exceeding our budgeted sales targets. It carries an MSRP of $229 and combines a unique sliding keyboard design, with Romanized translations for the western traveler to be able to phonetically pronounce foreign character sets like Asian languages and real human voice recordings of all words and phrases in each of 12 languages.

During FY 2007 we launched two products into the Japanese market, using our new Unified Architecture, for distribution through our partnership with Seiko Instruments, Inc. (SII). These e-dictionaries were the first products that provide Japanese users’ customizable content, PC connectivity and expandability. While our partnership with SII was initiated for our entry into Japan, the largest e-dictionary market in the world, we have since modified this distribution arrangement and we will continue with additional new products and other distribution partners to penetrate this important market.

Another dozen products were launched in the UK and Continental Europe, both broadening and freshening up our offerings in these competitive markets where we are one of the dominant players.

The Year Ahead:

We are seeing increased success with our efforts of driving products to higher price points such as the new 12 language speaking translator, our Japanese product launches and many of the new products for the greater German market. These new higher price products in markets where the need for language based products continues to grow differ greatly from the lower price products traditionally sold in mass channels in North America. Earlier this year, we saw a rebound in North America through newly launched versions of our Speaking Merriam-Webster’s Collegiate Dictionary, 11th Edition, our Speaking Merriam-Webster’s Spanish-English Dictionary, and for the first time two major retailer customers moved into higher price point products that they resisted in the past. The sell through at these higher price points, albeit it is early in the game, has been quite favorable.

I believe that FY 2008 will mark a turn around for our company. Both our first quarter revenues and our forward placement should assure an increase in our North American sales. We’ve secured promotional placement once again with that “other” retailer I referred to earlier and have forward commitments in our international sector, where we anticipate an increase in our year over year sales of 15% or more.

We have just reached a settlement with SII where they will make a one time payment to us of $3 million to terminate their purchase commitments to us as well as terminating our purchase commitments to them. Our partnership with SII was premised on the opportunity that we saw in Asia. That opportunity continues to exist and we are pursuing it with other distribution partners.

We intend to uniquely position ourselves in key markets such as Asia, especially those where we are a new player in a competitive market. Since Korea has more product convergence than any other market, we are focused on product and market segments in Korea in which the competition is weaker. FY 2008 has already marked the year in which we have successfully launched two new English language learning products into the Korean market for children, and we will continue to expand this product line and introduce additional products for the Korean and other Asian markets.

I’ve mentioned many times before the growth of worldwide language learning and how Franklin intends to transition its products from language learning aids such as dictionaries to language learning solutions. During FY 2007, Franklin entered into an agreement with digital publishing, a preeminent worldwide provider of language learning software and we will be launching a new exciting line of color screen, full English language learning course devices beginning later this year. These products take the user through a course much like one that they would take in an educational institution, immersing the learner with engaging and market proven multimedia content. This will allow the learner to be truly un-tethered from the classroom or PC.

We have also greatly expanded our business development team. In April, Mark Winter joined us to head our Proximity Licensing Division and Thomas Chow joined us to lead our Asian Business Development efforts.

Our confidence in our growth and return to profitability in FY 2008 is not based on any new product(s) launching later this year, although these may be part of the story. Instead it’s based on new product offerings that have already taken place, promotional placement that has already been committed to, and forward orders from major overseas customers. Morale is high and you can feel the impact that knowing that “this is our year” is having on each and every one of our employees.

This is, finally, the year in which we believe it’s our time and all of us at Franklin are committed to the success of this current year and to building the platform of success for the years to come. I once again look forward to seeing you at the upcoming Shareholders’ Meeting where we can make our confidence yours.

On Behalf of our Directors, Officers and Employees,

Barry J. Lipsky
President and Chief Executive Officer

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