FRANKLIN ELECTRONIC PUBLISHERS INC - 10-K Annual Report

Back to GetFilings.com

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED
MARCH 31, 1998

COMMISSION FILE NUMBER
0-14841

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)

PENNSYLVANIA 22-2476703
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

ONE FRANKLIN PLAZA, BURLINGTON, NEW JERSEY 08016-4907
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(609) 386-2500
(REGISTRANT'S TELEPHONE NUMBER)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK, NO PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

As of June 1, 1998, approximately 8,093,000 shares of common stock of the
registrant were outstanding and the aggregate market value of the common stock
held by non-affiliates was approximately $70,068,000.

The registrant's Proxy Statement for its 1998 annual meeting of stockholders
is hereby incorporated by reference into Part III of this Form 10-K.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED MARCH 31, 1998

ITEMS IN FORM 10-K

PAGE
----

PART I
Item 1. BUSINESS...................................................... 1
Item 2. PROPERTIES.................................................... 13
Item 3. LEGAL PROCEEDINGS............................................. 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 13
EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 14
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................... 15
Item 6. SELECTED FINANCIAL DATA....................................... 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 36
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 36
Item 11. EXECUTIVE COMPENSATION........................................ 36
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 36
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 36
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K..................................................... 36
Signatures.............................................................. 38

PART I

ITEM 1. BUSINESS

Franklin Electronic Publishers, Incorporated ("Franklin" or the "Company")
designs and develops hand-held electronic information products, such as
electronic reference products, electronic organizers and personal computer
companion products.

The Company believes it is the world's largest designer, developer and
publisher of electronic reference products. The Company's electronic reference
products are hand-held, battery-powered devices that incorporate the text of a
reference work or database and permit the user to read selected portions on a
display screen. The Company owns or has licenses to publish in electronic
hand-held format more than 200 titles, including monolingual and bilingual
dictionaries (such as Merriam-Webster's Tenth Collegiate Dictionary), the
Bible, encyclopedias (such as the Concise Columbia Encyclopedia),
entertainment-oriented publications (such as Parker's Wine Guide), educational
publications and medical publications (such as the Physicians' Desk
Reference). To date, the Company has sold more than eighteen million units.

The Company marketed its first electronic reference product, the Spelling
Ace(R), in 1986. The Company believes that the Spelling Ace was one of the
first electronic reference products marketed in the United States. Beginning
in 1987, Franklin began marketing increasingly sophisticated electronic
versions of thesauruses and dictionaries and, in 1989, the Holy Bible.

In 1995, the Company introduced its BOOKMAN(R) line of electronic reference
products. Each BOOKMAN unit is a platform that contains a built-in database of
one of the Company's more popular titles, such as a general purpose
dictionary, a version of the Bible or an encyclopedia, and permits
simultaneous access from the platform to a maximum of two additional reference
works contained in razor-blade sized cartridges inserted into slots on the
back of the unit. The Company markets many of its electronic books in the read
only memory ("ROM") cartridge format for insertion into the cartridge slots on
the BOOKMAN platform.

In 1996, the Company acquired certain assets of the ROLODEX(R) Electronics
product line and the associated trademark license. Under the license, the
Company builds and markets databanks and organizers under the ROLODEX(R)
Electronics mark.

In September 1997, the Company began shipments of its first personal
computer companion product, the REX(TM) PC Companion, a credit card-sized
device that downloads information from a personal computer ("PC"). Management
believes that the REX product line is competitively positioned within the
market for computer companion devices because it achieves remarkable
functionality at an ultra-compact size and ultra-low weight. Contact,
scheduling and other information can be downloaded from a PC to the REX card
by inserting the card into a PC card slot in a laptop computer or into a REX
cradle which plugs into the serial port of a desktop PC. The REX card has
received excellent reveiws and considerable media attention.

The Company was incorporated in 1983 in the Commonwealth of Pennsylvania as
the successor to a business commenced in 1981. The Company's principal
executive offices are located at One Franklin Plaza, Burlington, New Jersey
08016-4907, and its telephone number is (609) 386-2500.

COMPETITIVE ADVANTAGES

The Company believes that it has the following competitive advantages:

.Strong Share in Electronic Reference Products. Franklin is the preeminent
company in the hand-held electronic reference market, with leading positions
in the United States and certain markets internationally. The

1

Company believes it has dominant market share in North America, Europe and
Australia, as well as a major presence in the Middle East. Over the past
twelve years, Franklin has sold more than eighteen million units worldwide and
currently markets over 250 electronic reference products globally.

. Breadth and Strength of Distribution. The Company distributes its products
through 45,000 retail outlets in more than fifty countries. The acquisition of
the ROLODEX(R) Electronics products and trademark has allowed the Company to
secure additional shelf space at many of these critical distribution outlets.
The Company also uses direct channels to serve multiple markets, such as the
professional, educational and customized application markets. In the
professional market, Franklin has achieved considerable success with its
electronic format medical publications. In the educational market, the
Company's electronic books are used in over 21,000 schools in the United
States. Due to the success of its electronic Bible, the Company has also
achieved substantial sales in the religious market, with Franklin products
currently distributed to approximately 7,000 Christian-affiliated bookstores.

. Technological Leadership in Refining Information for Electronic
Use. Franklin has significant expertise in providing high quality content and
functionality through cost-effective hardware designs of electronic
information products. The Company's products combine sophisticated technology
with a user-friendly interface designed for convenient and rapid retrieval of
data. In essence, the Company sells answers, not simply information devices or
large databases. Franklin's ability to compress data and to design systems
that permit quick and intelligent information retrieval enables it to offer
compact products with high functionality. For example, the Company compresses
the almost three thousand page Physicians' Desk Reference into the memory
space of five megabytes. The Company has been able to manufacture higher
performance products at lower cost due in part to declining prices of ROM
chips. The Company's vertically integrated research and development effort,
devoted to developing both the hardware and software for its products, also
enables it quickly to utilize both superior and cost-minimizing technologies.
As a result, the cost of Franklin's products to consumers has decreased over
the years to prices approaching those of print versions of reference
publications, offering consumers added value at attractive price points.

. Long-standing Relationships and Licenses with Many Top Publishers. The
Company has electronic rights to over 200 titles, including several versions
of English and bilingual dictionaries, Bibles, and the Physicians' Desk
Reference. The Company obtains its licenses from a variety of well-established
publishers, such as Merriam-Webster, HarperCollins, Havas, and Bertelsmann.
While many of these licenses are exclusive, all are supported by long-standing
relationships with the publishers, providing Franklin with what it considers
to be a significant competitive advantage.

. Efficient and Cost-Effective Manufacturing Process. Franklin manages the
entire manufacturing process of its electronic products, from design to sale,
but does not own actual manufacturing facilities. This "virtual manufacturing"
model enables the Company to produce its electronic products in the most cost-
effective manner by allowing the Company to outsource the manufacturing and
assembly functions to third parties which meet the Company's cost and quality
specifications. In this way, the Company maintains a high degree of
flexibility and adaptability in its electronic product sourcing operations.

BUSINESS STRATEGIES FOR GROWTH

The Company's products are intended to deliver portable knowledge. Franklin
strives to be an innovator and a world leader for providing instant answers in
hand-held platforms for people on the go. The Company's strategy to fulfill
that mission is to leverage its leading market position by exploiting the
following opportunities:

. Expansion of REX Product Line. The Company recently entered the growing
market for personal computer companion products with the introduction of the
REX PC Companion that is updated simply by plugging into a standard PC card
slot or REX cradle. The Company believes that the REX product line is

2

competitively positioned against existing computer companions in the market
because of its uniquely compact size, functionality and price. The REX card
has received excellent reviews and considerable media attention, strengthening
the Company's reputation for product innovation and quality. The Company plans
to expand the range of its computer companions and plans to use the internet
as a distribution point for downloading information for its products.

. Consumer Driven Product Development and Marketing. While the Company has
built strong distribution for its major products, it believes that further
opportunities lie in its ability to take a more marketing driven approach to
product development. The Company has begun a consumer review to determine: (i)
the level of satisfaction among Franklin's current customers; (ii) the optimal
feature set for certain price points; (iii) new features and applications to
increase sales and margins; and (iv) how to encourage those who use
competitive products or those who do not use electronic information products
to become Franklin customers. The Company believes a better understanding of
its customers will allow it to boost sales, lower costs, accelerate throughput
at retail, and lead to successful new product introductions.

. Investment in Marketing. The Company believes that a major opportunity
lies in broadening consumer awareness of the hand-held and desktop electronic
reference category in order to generate mass market interest in the Company's
products. To date, the Company has engaged in limited advertising on the
national or local levels. The Company has, however, enjoyed success with its
limited advertising campaigns. For example, television advertising with Johnny
Cash as a spokesperson for the Company's Bibles from 1994 through 1996 was
successful. Investment in advertising and marketing should increase the
Company's revenues, enable the Company to preserve its margins, and help build
distribution as retailers stock inventory behind marketing campaigns and
concerted product launches.

. Continuing Upgrade of Reference Products. The Company's reference product
line has been a high margin business and continues to represent the major
portion of Franklin's revenue. Dictionaries, thesauruses, spell correctors,
and encyclopedias have been the Company's mainstream consumer electronics
products. To preserve that momentum, the Company plans to upgrade and enhance
these products. Reference product platforms are to be improved. The Company
plans to continue to upgrade content by acquiring recognized and consumer-
desired databases.

. Use Of The Internet To Distribute Content. The Company intends to publish
certain reference works on its web page (www.franklin.com.rex) in an
electronic format for instant downloading to REX cards and other hand-held
electronic products. In this way, the Company intends to merge its expertise
in refining reference data for electronic products with its competitive
advantages in portability, size, and the standard PCMCIA format of the REX
line.

. International Growth. Prior to 1992, the Company's international sales
were made exclusively through a network of independent distributors. Since
then, the Company has had success in selling its products directly through
wholly-owned, local subsidiaries in international markets, such as the United
Kingdom which was established to market and distribute British English
versions of the Company's American English products. Notwithstanding slowed
growth in international sales over the past two fiscal years, the Company
intends to expand the number of countries in which it markets and sells its
products and anticipates that its international sales will continue to grow.

. Exploitation of OEM Opportunities. OEM (or "Original Equipment
Manufacturer") opportunities are business agreements in which the Company
develops products for resale by its partners. The Company has such agreements
in the medical publishing and French and Spanish markets and will seek to
broaden its activities to other vertical markets and personal computer
companion products. These arrangements offer Franklin marketing

3

benefits including access to incremental distribution opportunities that would
normally require long lead times, and allow the Company to achieve large
volume sales with lower marketing expenses.

RISK FACTORS

The Company believes that the most significant risks to its business include
those set forth below.

.Dependence on New Products and Titles. The Company depends to a certain
extent on the introduction of successful new products and titles to generate
sales growth and replace revenues from certain older titles and product
models. The Company currently has several new products and titles under
development; however, significant development efforts for a number of the
Company's proposed new products and titles will be required prior to their
commercialization. A significant delay in the introduction of a new product or
title could have a material adverse effect on the ultimate success of the
product or title. In addition, if revenues from new products and titles fail
to replace revenues from certain existing products and titles, the Company's
operating results and growth could be adversely affected. There can be no
assurance that new products and titles currently under development will be
introduced on schedule, that they will generate significant revenues or that
the Company will be able to introduce additional new products and titles in
the future.

.Changes in Technology. In general, the computer industry, both with respect
to software and hardware, is subject to rapidly changing technology.
Accordingly, the technology underlying the Company's products may similarly be
subject to change. The introduction of products embodying new technologies and
the emergence of new industry standards could exert price pressure on the
Company's existing products or render such products unmarketable or obsolete.
The Company's ability to anticipate changes in technology and industry
standards and to develop and introduce new and enhanced products, as well as
additional applications for existing products, in each case on a timely and
cost-effective basis, will be a critical factor in the Company's ability to
grow and remain competitive. There can be no assurance that technological
changes will not materially adversely affect the Company's business.

.Competition. The consumer electronics and computer companion marketplaces
are highly competitive and characterized by rapid technological advances and
the regular introduction of new products or enhancements to existing products.
The Company believes it faces various degrees of competition at different
price points in these markets. Competitive factors include product quality and
reliability, price, performance, marketing and distribution capability,
service, and reputation. There can be no assurance that companies currently in
the consumer electronics or computer companion market will not enter the
markets in which the Company currently markets its products. Many of such
companies have greater capital, research and development, marketing and
distribution resources than the Company. If new competitors emerge or the
existing markets become more competitive, the Company could experience
significant pressure on prices and margins.

.Inventory Management. The Company's lead times are necessarily long because
of the custom nature of certain components and because most of its components
and products are manufactured and assembled in Asia. Accordingly, production
and procurement planning are critically related to the Company's anticipated
sales volume. Any significant deviation from projected future sales could
result in material shortages or surpluses of inventory. Shortages could cause
the Company's distribution base to shrink as customers turn to the Company's
competitors. Inventory surpluses could cause cash flow and other financial
problems, which might cause the Company to liquidate inventory. There can be
no assurance that the Company's forecasts of demand for its products will be
accurate. Inaccurate forecasts, or unsuccessful efforts by the Company to cope
with surpluses or shortages, could have a material adverse effect on the
Company's business.

.Dependence on Key Suppliers. Certain integrated circuits essential to the
functioning of the Company's products are manufactured by a relatively small
number of overseas suppliers. Missed, late or erratic deliveries of custom ROM
chips and other parts could materially adversely impact the timing of new
product deliveries as well as the Company's ability to meet demand for
existing products. If any one of the integrated circuit suppliers

4

were unable to meet its commitments to the Company on a timely basis, such
failure could have a material adverse effect on the Company's business. The
REX product line is manufactured for the Company on an exclusive basis by
Citizen Watch Company of Japan ("Citizen"). If Citizen were unable to meet its
commitments to the Company on a timely basis, such a failure could have a
material adverse effect on the Company's business.

.Intellectual Property Rights. The Company owns utility and design patents in
the United States and elsewhere on its products. There can be no assurance (i)
that the claims allowed under any patents will be sufficiently broad to
protect the Company's technology; (ii) that the patents issued to the Company
will not be challenged, invalidated or circumvented; or (iii) as to the degree
or adequacy of protection any patents or patent applications will afford. The
Company also claims proprietary rights in various technologies, know-how,
trade secrets and trademarks that relate to its principal products and
operations, none of which rights is the subject of patents or patent
applications in any jurisdiction. There can be no assurance as to the degree
of protection these rights may or will afford the Company.

.International Sales and Currency Fluctuations. The Company expects that
international sales will continue to constitute a material portion of the
Company's business. The Company's international business is subject to various
risks common to international activities, including political and economic
instability and the need to comply with export laws, tariff regulations and
regulatory requirements. There can be no assurance that political or economic
instability in any given country or countries will not have an adverse impact
on the Company's overall operations. Because approximately 30% of the
Company's sales are made in currencies other than the U.S. dollar, the Company
is subject to the risk of fluctuation in currency values from period to
period. In an effort to minimize this risk, the Company enters into foreign
exchange forward contracts with financial institutions to limit its exposure
to loss resulting from fluctuations in the currency markets on anticipated
cash flows associated with certain firmly committed transactions. The risk
associated with fluctuations in currency values can be expected to increase to
the extent the Company succeeds in its goal of expanding its international
operations. There can be no assurance that the Company will be able to hedge
effectively the risk associated with fluctuations in currency values or that
such hedging itself will not expose the Company to losses from time to time.

PROCESS OF REFINING INFORMATION FOR USE IN ELECTRONIC PRODUCTS

The process of refining information for publishing electronic books or for
use in other electronic products is analogous in many ways to the process of
publishing print books. For example, just as a traditional book publisher
acquires a manuscript, the development of an electronic version of a reference
work normally commences with the Company's acquisition of rights to a
reference work or database which it has identified for one or more proposed
products. The Company licenses the use of such reference works or databases
for appropriate electronic use.

Even though databases are usually delivered to the Company in electronic
form, the Company thoroughly reviews and cleans the data by removing errors in
preparation for its electronic publication. This process is analogous to a
traditional book publisher proofreading a manuscript. The data must then be
analyzed and in most cases compressed to store it economically in as small a
memory as possible and the Company must design systems to retrieve information
quickly from its compressed state. Similar to a traditional book publisher
editing a manuscript and preparing a detailed index, the Company then designs
the user interface, which permits the user of a product to locate and read the
desired data quickly and intuitively. The Company has developed proprietary
software tools, utilities, custom databases and systems that substantially
reduce the time involved in completing these tasks and aid in the more
efficient development of semi-standard software systems embedded in the
electronic work. The Company believes that its vertically integrated
development team is unique in the industry since it has an in-house group of
employees skilled in editorial, data preparation, and computational linguistic
work, not only in English, but in a variety of languages.

5

For electronic reference products, a prototype chip containing the
compressed data and interface software is then carefully tested before final
chips are produced. To complete the product, the chips are assembled in a
hardware platform or in a card, similar to a traditional book publisher
printing and binding a hard copy book.

PRODUCTS

ELECTRONIC REFERENCE PRODUCTS

Franklin currently markets more than 250 electronic reference products in
various categories including thesauruses, dictionaries, bilingual
dictionaries, the Bible, the Concise Columbia Encyclopedia and educational and
medical publications. Different versions of the Company's electronic reference
products use different databases and provide various levels of functionality.

Dictionaries

Franklin's electronic spelling products (the "Spelling Ace line") operate as
phonetic spelling error detectors and correctors, puzzle solvers, word list
builders and word finders. These products permit the user to obtain the
correct spelling of a word that the user does not know how to spell correctly.
For example, if the user phonetically types in "krokodyl," the book will
display a list of seven words including, as the first choice, "crocodile." The
Company markets various versions in the Spelling Ace line incorporating
different databases. The most popular version is based on a list of over
80,000 American English words licensed to the Company by Merriam-Webster.

The Company's electronic thesaurus line (the "Wordmaster(R)") provides
phonetic spelling features, and also acts as a thesaurus once a word is found.
For example, if a user enters the word "baffled," the thesaurus will display
eleven different synonyms, including "frustrated," "disappointed" and
"foiled." The most popular version of the Wordmaster contains over 496,000
synonyms and 77,000 thesaurus definitions for each of the more than 80,000
entry words from Merriam-Webster's Collegiate Thesaurus.

The Company's top-of-the-line electronic dictionary is the BOOKMAN Merriam-
Webster's Collegiate Dictionary which contains over 195,000 words and their
definitions, parts of speech, hyphenation points and different word forms
(inflections). All of the Company's electronic dictionaries provide phonetic
spelling correction and many provide thesaurus features as well.

The Company markets versions of its dictionaries that include speech
synthesis circuitry (based on text to speech technology in which algorithms
are used to convert text into sound) which allows the Company's products to
pronounce, in computer generated speech, relevant words contained in the
various databases. The Company also has developed and sold audible products
that use digitally recorded and compressed speech, which sounds more like a
human voice.

The Company's line of products also includes bilingual dictionaries. Each
contains more than 200,000 words in both English and either Spanish, French,
German, Italian, Arabic, Hebrew or Korean, and each provides complete
translations, definitions, verb conjugations and a gender guide, and plays a
variety of language learning games to help teach the language. The
Spanish/English dictionary is marketed in versions with and without speech
synthesis for both Spanish and English words. Each of the other bilingual
dictionaries is equipped with speech synthesis for the English words. The
Company currently markets a French/German dictionary and bilingual
dictionaries for several other languages, including other language pairs that
do not include English, such as German/Italian and French/Spanish.

Franklin has a speaking dictionary designed to facilitate use by blind,
visually impaired or learning disabled individuals, as well as others with
special needs. This dictionary incorporates speech technology which pronounces
every word at user adjustable volumes and speeds. In addition, this dictionary
is equipped with full audio feedback, which allows every key on the keyboard
to speak its letter or function. Other features include a keyboard with high-
contrast lettering and raised locator dots, a large high-contrast screen with
adjustable fonts and headphones.

6

Children's Products

Since 1990, the Company has successfully sold children's versions of its
reference products, such as a children's dictionary based on the word list
from Webster's Elementary Dictionary. In 1997, the Company introduced a new
line of children's products, that includes the Homework Wiz(TM) electronic
dictionary. Certain models include a text-to-speech voice synthesizer enabling
the product to speak words and definitions for children. The Company expects
to expand its electronic reference offerings for children.

The Bible

Franklin's electronic Holy Bible is a hand-held edition of the entire text
of the Bible, which allows for retrieval of text by searches based on single
words, word groups or synonyms. For example, a search for the words "valley"
and "shadow" will retrieve the Twenty-third Psalm. Because of its built-in
ability to conduct full-text word searches, the Franklin Bible is a fully
automated concordance. The Company sells the Bible on its BOOKMAN platform and
on cards designed for use with its BOOKMAN platform. The Company sells both
the King James and the New International versions of the Bible, as well as a
children's version of the Bible, and markets a Bible question-and-answer card.
The Company sells electronic versions of a Spanish language Bible, the Reina
Valera edition, and a German language Bible that is commonly known as the
Luther Bible.

Medical Publications

From 1992 through 1997, the Company successfully promoted a line of medical
book cards, such as the Physicians' Desk Reference, The Medical Letter
Handbook of Adverse Drug Interactions, the Washington University Manual of
Medical Therapeutics, Harrison's Principles of Internal Medicine Companion
Handbook, The Merck Manual and the Guide to Antimicrobial Therapy, for its
Digital Book System ("DBS"). The DBS platform provides for the insertion of up
to two ROM cards.
In March 1998, the Company introduced a new BOOKMAN platform, the Pocket
PDR, to replace the DBS in the medical marketplace. The new Pocket PDR
platform has many of the same popular features of the DBS, such as two card
slots and a broad range of titles. The platform uses Franklin's proprietary,
faster microprocessor and has an 8-line screen which is particularly useful
when accessing and viewing drug information monographs. As a part of the
transition from the DBS to the new platform, BOOKMAN card versions of the
Physicians' Desk Reference, The Medical Letter Handbook of Adverse Drug
Interactions, The Merck Manual, and the Washington University Manual of
Medical Therapeutics were developed for sale at the time of availability of
the new platform. BOOKMAN cards based on newly published print editions of
Harrison's Principles of Internal Medicine and The Harriet Lane Handbook are
being developed for sale by the Company in fall 1998.

The Company has a line of BOOKMAN products for use by nurses in the United
States. The keystone of this line is a BOOKMAN platform having the popular
Nursing Diagnoses and Classifications published by the North American Nursing
Diagnosis Association, a reference text that classifies and defines medical
conditions specific to nursing. The Company also sells Lippincott's Pocket
Manual of Nursing Practice and Springhouse's Nursing Drug Handbook as BOOKMAN
cards for the nursing platform.

The Company has developed products for the expanding consumer market for
medical information by publishing general medical books in the BOOKMAN format.
The Company publishes the Parents' Emergency Medical Guide and the PDR Family
Guide to Prescription Drugs.

Entertainment Titles

The Company sells a Crossword Puzzle Solver electronic book which provides
correct spelling for over 250,000 words and phrases from Merriam-Webster's
Official Crossword Puzzle Dictionary for use by word puzzle enthusiasts. The
Company has also produced the Total Baseball Encyclopedia, The Official
Scrabble Players' Dictionary, and Parker's Wine Guide, an authoritative guide
to wines and vineyards.

7

The Concise Columbia Encyclopedia and Bartlett's Familiar Quotations

The Company has developed and markets a hand-held general usage encyclopedia
which contains the entire text of the Concise Columbia Encyclopedia. The
electronic encyclopedia allows for rapid search of the entire text by single
words, word groups or synonyms. Special features include phonetic-based
spelling correction, hypertext, bookmarks to return quickly to often used
entries, a filtering search feature that facilitates narrowing searches by
subject, region or time period, and an assortment of factual quizzes.

The Company has developed and markets a BOOKMAN card containing the 16th
Edition of the renowned reference work Bartlett's Familiar Quotations under
license from Little, Brown & Co. The BOOKMAN version of Bartlett's Familiar
Quotations contains over 20,000 famous quotations by over 2,500 authors that
are searchable by key word, time period, or author.

International Titles

The Company has developed and produced British English versions of its
American English electronic reference products for international markets,
particularly the United Kingdom and Australia, such as an electronic speller
based on a list of over 70,000 words licensed from HarperCollins and a
children's dictionary incorporating a database from the Oxford Children's
Dictionary. The Company has French monolingual electronic reference products
for the French market, German electronic reference products for the German-
speaking market, Italian monolingual products for the Italian market, and a
Spanish monolingual dictionary for Spain and South America. The Company has
omnibus agreements for publishing electronic reference products with two major
European publishers, Bertelsmann and Havas by which the parties will jointly
develop, publish, and distribute titles in hand-held electronic platforms and
ROM cards. Havas publishes dictionaries, thesauruses, encyclopedias and other
works under the following well known French trademarks: Le Robert, Larousse,
Nathan, Dalloz, Masson and Bouquins.

English as a Second Language ("ESL") Products

In addition to its standard bilingual dictionaries, the Company has produced
bilingual electronic learners' dictionaries based on the Oxford Students'
Dictionary of Current English that have English definitions in simplified
language. These learners' dictionaries are intended to aid native Arabic,
Hebrew, and Korean speakers to learn English as a second language. The Company
produces a hand-held electronic tutor that utilizes digitally recorded and
compressed speech technology to pronounce a basic vocabulary of English words
for the ESL student and provides identification of words through the use of
graphic images. The user speaks into a microphone built into the electronic
book, which records and plays back the user's pronunciation of a word as well
as the proper pronunciation stored in the product, thereby allowing the user
to compare the two pronunciations and correct his or her pronunciation as
appropriate. The Company is working toward a Chinese/English product to be
sold into the worldwide ESL market of native Chinese speakers.

Software Reference/Retrieval Products

The Company's subsidiary, Proximity Technology Inc., designs linguistic
software that performs spelling error detection and correction, thesaurus and
dictionary functions in conjunction with databases of words in 20 languages
and dialects. The Company has retrieval software products, such as Friendly
Finder, a fuzzy search program for searching databases on PC's. The Company
markets this software for use in computers of all sizes, as well as on the
internet. The Company competes with INSO, Inc. in respect of these software
products.

ELECTRONIC ORGANIZERS

In 1997, the Company began to sell a line of organizers and databanks under
the ROLODEX(R) Electronics trademark which had been licensed by the Company
late in 1996. Since acquiring the ROLODEX(R) Electronics product line, the
Company has updated and improved both low priced databanks, that allow users
to store and retrieve names and telephone numbers, and higher priced and more
advanced personal organizers, that can interface with desktop PC's.

8

The Company believes that not only does the hand-held organizer market
complement its existing businesses but also that there is potential to improve
the market share of the ROLODEX(R) Electronics business given Franklin's
existing competitive strengths.

The Company sells a line of voice-controlled electronic organizers under the
ROLODEX(R) Electronics brand name utilizing speech recognition technology
acquired by the Company in 1997. The acquired technology was developed for low
cost, low power consumption, portable and compact applications in which an
electronic device is controlled by spoken voice input.

PERSONAL COMPUTER COMPANION PRODUCTS

In September 1997, the Company began to sell the REX PC Companion line of
products, its first computer companion product. The REX card is a credit card
sized organizer that downloads a user's personal information, such as
schedules, names, addresses, and phone numbers, from a PC. The REX product
line provides the functionality of a Personal Data Assistant ("PDA") at an
ultra-compact size and ultra-low weight. A REX card is the size of a PCMCIA
card (sometimes referred to generically as a "PC card") that fits into an
industry standard size PCMCIA slot. Contact, scheduling and other information
can be downloaded from a PC to the REX card by inserting the card into a PC
card slot in a laptop computer or into a REX cradle which plugs into the
serial port of a desktop PC. The REX PC Companion contains software that
allows the importation of personal information from popular software packages
such as Lotus Organizer, Sidekick, Outlook, ACT!, and Microsoft Schedule+. The
REX PC Companion line was the result of a three party strategic alliance
developed by the Company with Starfish Software Inc. ("Starfish"), that
provided software development services, and Citizen, that manufactures the REX
hand-held product on an exclusive basis for resale by the Company.

While the Company has encountered to date no PCMCIA or PC card sized
competition for the REX card, the Company believes that the success of the REX
product line may lead to the introduction of products having similar form
factors by third parties. While the Company believes that intellectual
property rights and time to market issues provide it with significant
competitive advantages in connection with the REX line, there can be no
assurance that the Company will continue to sell the REX product line without
more direct competitive pressure.

The Company expects to expand the REX line, both through improved hardware
implementations and through improved software functionality, including the
ability to download reference information into a REX card from a PC that is
connected to the internet. The first such service is expected to provide
English/Spanish and English/French translators for downloading to REX cards
from the Company's web page at "www.franklin.com.rex."

RESEARCH AND DEVELOPMENT AND CONTENT ACQUISITION

The Company has a group of approximately 100 persons that performs research
and development relating to new electronic information products as well as
improvements to existing products. The group also conducts ongoing research in
connection with the development of new software for the Company's products.
The Company focuses its hardware development efforts on creating new
platforms. For example, the BOOKMAN technology was developed by the Company's
internal research and development group.

The Company maintains a full-time internal development group of hardware and
software engineers dedicated to the critical function of developing
proprietary microprocessors and VLSIs that integrate both general purpose
microprocessors (or the Company's proprietary microprocessor) and custom
design circuits for electronic products. Through this extensive effort the
Company is able to reduce the cost of components for its platforms and cards
on an ongoing basis. The Company regularly engages in programs to redesign its
platforms and to develop new VLSIs for its products.

9

The Company is currently developing products utilizing digitally recorded
and compressed speech technology, which are intended to help the user learn
proper English pronunciation. The Company intends to focus its efforts
regarding these products in the ESL market. The Company has expertise in and
has licensed rights to certain text-to-speech technology ("TTS"), which allows
for the synthesis of audible voice through software. The Company is
consolidating its efforts in speech-related technology into a research and
development group targeted toward application of TTS, compressed digitally-
recorded speech, voice recognition, and voice recording for use in small, low
priced, electronic products.

The REX PC Companion was developed by the Company in a three party strategic
alliance with Starfish, which developed certain software, and Citizen, which
manufactures the REX card on an exclusive basis for the Company. The Company
expects to expand its computer companion line of products through strategic
alliances with third parties.

The Company maintains a program to acquire, commission or develop internally
databases that it believes are capable of being effectively adapted to
electronic format and that can be positioned and marketed by it in the market
that it serves. The Company generally obtains a long-term license from the
owner of the database and pays the owner a recoupable advance, followed by the
payment of royalties based on sales. The Company has an in-house group of
employees skilled in editorial, data preparation and computational linguistic
work, not only in English, but in a variety of languages. The Company also
receives requests to develop products incorporating specific databases from
third party licensors and customers on an OEM basis.

MANUFACTURING

The Company arranges for the assembly of its products by placing purchase
orders with established third party manufacturers in China, Taiwan, Malaysia,
Thailand, the Philippines and Indonesia. The Company believes that it could
locate alternate manufacturers for its products if any of its current
manufacturers is unable, for any reason, to meet the Company's needs.

The Company designs certain custom integrated circuits, which are
manufactured by third parties for use in the Company's products. Franklin also
creates the mechanical, electronic and product design for its hardware
platforms and designs and owns the tools used in the manufacture of its
products. The Company's electronic products are based on general purpose
microprocessors (or the Company's proprietary microprocessor), general purpose
static random access memory chips and custom-designed ROM chips. The Company
designs VLSIs that integrate both general purpose microprocessors and custom-
designed circuits in order to reduce the cost of the components in its
platform. In order to minimize the effect of any supplier failing to meet the
Company's needs, the Company generally attempts to source these parts from
multiple manufacturers. In those cases where the Company chooses to use a
single source for economic reasons, alternative suppliers are generally
available.

The Company utilizes its offices in Hong Kong and Tokyo to facilitate
component procurement and manufacturing and to conduct on-site quality control
inspection by Company personnel of electronic products. The Company's products
are generally shipped at the Company's expense to its facility in New Jersey,
where the Company maintains inspection, quality control, packaging,
warehousing, and repair operations for distribution in the United States, and
to similar facilities in Europe and elsewhere for its foreign operations.

SALES AND MARKETING

Franklin's products are marketed domestically through the Company's own
sales and marketing force and through independent sales representative
organizations, which are supervised by the Company's internal sales
department.

10

Consumer Sales

Franklin's product are sold in over 30,000 retail establishments in the
United States. These are comprised of mass market retailers, discount chains,
bookstores, independent electronic stores, department stores and catalog
companies such as The Sharper Image. The Company's larger retail chains
include Radio Shack, Wal-Mart, K-mart, Service Merchandise, Office Max, Office
Depot, Circuit City, and Staples. Consumers can also order products directly
from Franklin by calling 1-800-BOOKMAN or by visiting the Company's website at
"www.franklin.com."

Franklin commonly participates with its retailers in promotional efforts,
such as in-store displays, catalog and general newspaper advertisements. The
Company promotes its products with advertisements in magazines and newspapers
and on television and radio. For the 1999 fiscal year, the Company plans to
increase its media advertising efforts in order to expand consumer awareness
of its reference and computer companion products. The Company also displays
its publications at trade shows (including the Consumer Electronics Show, PC
Expo, and COMDEX) and advertises in trade and consumer magazines.

International Sales

The Company sells its products worldwide through its wholly-owned, local
subsidiaries and a network of independent distributors. Franklin's subsidiary
in the United Kingdom markets and distributes British English versions of its
products in the United Kingdom. The Company's subsidiaries in France, Canada,
Germany, Belgium, Mexico, and Australia market and distribute the Company's
products, including those specifically developed for these markets. In each of
these countries, the Company marketed its products through distributors prior
to direct marketing through subsidiaries. The Company is in the process of
closing its operations in Colombia and Italy.

Medical Sales

In 1998, the Company's Medical Division began a transition from the DBS to
the new Pocket PDR BOOKMAN platform. This division has licensed databases from
respected medical publishers for the rapid delivery of massive, complicated
information in a highly portable format. Selected medical databases are being
sold, or are in development, as BOOKMAN cards for the Pocket PDR platform.
Sales efforts of the Medical Division are augmented by co-marketing efforts
with the Company's licensors of medical databases.

The Company has a line of BOOKMAN products targeted for use by nurses in the
United States, and is producing products for the consumer market for medical
information such as the Parents' Emergency Medical Guide and the PDR Family
Guide to Prescription Drugs.

Education Sales

The Company's Franklin Learning Resources division is dedicated to the sale
of electronic books directly to educators and school systems throughout the
United States. The Company's electronic books are in use in over 21,000
schools in the United States. In addition, custom curriculae are created
around the books to meet school requirements.

OEM Sales

In prior years, the Company had developed electronic catalogs for use by
employees or customers of large corporations. In fiscal year 1998, the Company
produced an electronic index for Plaza y Janes, a Spanish print publisher. The
Company continues to produce for Societe Generale, a print publisher in
France, a custom electronic index to its popular Encyclopedie Bordas. The
Company continues to pursue opportunities for custom versions of its products
with the belief that there is a large market for such products worldwide.

11

PATENTS, TRADEMARKS AND COPYRIGHTS

The Company owns more than twenty-five United States utility and design
patents on its electronic reference products and a number of international
patents on its products. The Company actively pursues the acquisition and
enforcement of patent rights and, in furtherance thereof, maintains an ongoing
program to apply for and prosecute patent applications and to enforce its
rights in patents that issue therefrom.

Franklin owns certain trademark rights, including "Franklin(R)", "REX",
"BOOKMAN(R)", "Spelling Ace(R)", "Wordmaster(R)", "Digital Book System(R)",
"Next Century(R)" and "Language Master" and has an exclusive license for the
mark ROLODEX(R) Electronics in the United States and various foreign
countries.

Copyrights to certain word lists incorporated in the Company's electronic
books are the property of the Company's licensors. The Company owns copyrights
in certain programs and algorithms used in, as well as the compilations of,
its electronic books.

COMPETITION

The Company is the market leader for hand-held electronic reference
products. The Company's main domestic competitor in the electronic book
category is Seiko Instruments USA Inc., which markets spelling correctors,
thesauruses, dictionaries and a Spanish translator. The Company believes it
has various degrees of competition at different price points in the consumer
market. The Company's major competitor, Seiko, focuses primarily on the
modestly-priced end of the market. The Company's main international
competitors are Lexibook, which markets French monolingual spelling
correctors, thesauruses and dictionaries in France and similar products in
other European countries, and Hexaglot which markets German centric bilinguals
and translators in Germany.

Competitive factors for electronic reference products are product quality
and reliability, functionality, price, performance, speed of retrieval,
quality of underlying databases, quality of spelling correction, portability,
distribution capability, service and corporate reputation. The Company
believes it is the leader in respect of each such factor. The Company's
reference products enjoy a reputation for quality resulting from their
content, hardware design and easy-to-use applications. The Company's reference
products are characterized by their capacity to permit the user to define the
kind of information being sought and to provide information responsive to the
user's request.

A number of prominent electronics manufacturers, including Sharp Electronics
Corporation, Casio, Royal, Psion, 3Com, LG Electronics and Hewlett-Packard
Company, market palmtop personal organizer products, and personal digital
assistants that offer varying degrees of electronic reference capabilities and
personal information management functions.

Sharp Electronics, Casio, and Royal are the Company's primary competitors in
electronic organizers. Competitive factors for electronic organizers are size,
product quality and reliability, functionality, price, performance, marketing
and distribution capability and corporate reputation. The Company believes
that it competes effectively in respect of each of the factors.

In the highly competitive worldwide marketplace for personal computer
companion products, the Company expects that its competition will be, among
others, Sharp Electronics Corporation, Psion, 3Com, Casio, LG Electronics,
Texas Instruments, Philips Electronics, and Hewlett-Packard Company.
Competitive factors for personal computer companion products are size,
quality, memory capacity, reliability, functionality, price, marketing
capability, corporate reputation, and customer service. The Company believes
that REX is the smallest product of its type and is competitive in quality,
reliability, functionality, and price. Many competitors in this market have
greater capital, research and development, marketing and distribution
resources than the Company and there can be no assurance that the Company can
successfully compete in this market.

12

EMPLOYEES

As of June 18, 1998, the Company employed approximately 250 persons in the
United States, approximately 30 persons in Asia, and approximately 85 persons
in international sales and marketing subsidiaries. None of the Company's
employees is represented by a union. The Company believes its relations with
its employees are satisfactory.

- --------
Merriam-Webster's is a trademark of Merriam-Webster, Inc.; Physicians' Desk
Reference and Pocket PDR are trademarks of Medical Economics Data, a division
of Medical Economics Company, Inc.; Starfish and Sidekick are trademarks of
Starfish Software, Inc.; Lotus is a trademark of IBM; Outlook and Schedule+
are trademarks of Microsoft; ACT! is a trademark of Symantec; and ROLODEX(R)
is a registered trademark of Sterling Plastics Co., a division of Newell Co.

Except for the historical information contained herein, the matters discussed
in this report are forward looking statements that involve risks to and
uncertainties in Franklin's business, including, among other things, the
timely availability and acceptance of new electronic reference products,
organizers and computer companions, changes in technology, the impact of
competitive electronic products, the management of inventories, the company's
dependence on third party component suppliers and manufacturers, including
those that provide Franklin-specific parts, and other risks and uncertainties
that may be detailed from time to time in the Company's reports filed with the
Securities and Exchange Commission.

ITEM 2. PROPERTIES

The Company owns a 90,000 square foot corporate headquarters in Burlington,
New Jersey. The Company believes this facility will satisfy its foreseeable
needs for office, laboratory and warehousing space.

ITEM 3. LEGAL PROCEEDINGS

In 1998, the Company was served with a class action complaint in the
Superior Court of New Jersey having warranty, negligence, and state consumer
statute claims based on an alleged defect in the "to-do list" function of the
desktop software provided with the REX PC Companion. The Company intends
vigorously to defend this class action litigation.

The Company is subject to litigation from time to time arising in the
ordinary course of its business. The Company does not believe that any such
litigation, including the class action litigation identified above, is likely,
individually or in the aggregate, to have a material adverse effect on the
financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NONE

13

EXECUTIVE OFFICERS OF THE REGISTRANT

NAME AGE POSITION
- ---- --- --------

H. Andrew Cross 42 President and Chief Executive Officer; Director
Kenneth H. Lind 45 Senior Vice President, Chief Financial Officer, and Treasurer
Barry J. Lipsky 47 Executive Vice President; Director
Michael R. Strange 50 Executive Vice President; Director
Toni M. Tracy 49 Vice President, Publisher Relations
Gregory J. Winsky 48 Senior Vice President, General Counsel, and Secretary

Mr. Cross joined the Company in April 1998 as President and Chief Executive
Officer. From 1996 to 1998 he was Executive Vice President of MobileComm
Communications, a nationwide provider of paging and wireless services. From
1994 to 1996, he was Senior Vice President of Marketing and Sales for Nabisco
Holdings. From 1982 to 1994, Mr. Cross was employed in a variety of executive
marketing positions by The Pepsi Cola Company.

Mr. Lind joined the Company in March 1983 and was elected Controller of the
Company in May 1984, Treasurer in October 1984, Vice President in January 1986
and Senior Vice President in 1998. From 1977 to 1983, Mr. Lind was associated
with Coopers & Lybrand.

Mr. Lipsky joined the Company as Vice President in February 1985. He was
elected Executive Vice President in 1997. From 1972 to 1985, Mr. Lipsky was
Vice President of Manufacturing of Mura Corporation.

Mr. Strange has been an executive officer of the Company since 1984 and
Executive Vice President of the Company since 1985. From 1982 to 1983, Mr.
Strange was Vice President of Manufacturing at Metrologic Instruments, a
manufacturer of bar-code scanning equipment, and from 1979 to 1982 was the
Director of Worldwide Operations of Exide Electronics, a manufacturer of large
scale uninterruptible power supplies.

Ms. Tracy joined the Company in February 1995 as Vice President of the
Company's Medical Division and was elected Vice President, Publisher
Relations, of the Company in May 1996. In September 1996, Ms. Tracy was named
President of the Medical Division. From 1984 until 1995, Ms. Tracy was
employed by Churchill Livingstone, the medical publishing subsidiary of
Pearson plc, a British media conglomerate, in a variety of publishing
positions and last held the position of Executive Vice President and Publisher
of Churchill Livingstone International, an Anglo-American medical publishing
enterprise.

Mr. Winsky was elected Vice President and Secretary of the Company in June
1984 and was elected Senior Vice President in January 1993. From 1980 to 1984,
Mr. Winsky was assistant counsel for SPS Technologies, Inc., a manufacturer of
parts for the aircraft industry, and from 1978 to 1980, was an associate at
the Philadelphia law firm of Schnader, Harrison, Segal & Lewis.

14

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "FEP." The following table sets forth the range of
the high and low closing sales prices as reported by the NYSE for the last two
fiscal years:

SALES
------------------
QUARTER ENDED HIGH LOW
------------- -------- -------

June 30, 1996............................................ $28 3/4 $20
September 30, 1996....................................... 20 1/8 12 5/8
December 31, 1996........................................ 14 1/2 11 3/8
March 31, 1997........................................... 13 3/8 11 3/8
June 30, 1997............................................ 11 1/2 9 3/8
September 30, 1997....................................... 15 1/4 9 3/8
December 31, 1997........................................ 15 7/8 11 3/4
March 31, 1998........................................... 14 3/16 11 3/8

The approximate number of holders of record of the common stock as of June
1, 1998 was 1,049.

The Company has not declared cash dividends on the common stock and does not
have any plans to pay any cash dividends on the common stock in the
foreseeable future. The Board of Directors of the Company anticipates that any
earnings that might be available to pay dividends on the common stock will be
retained to finance the business of the Company and its subsidiaries.

15

ITEM 6. SELECTED FINANCIAL DATA

The following tables should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section appearing elsewhere herein.

(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
YEAR ENDED MARCH 31,
----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------

STATEMENT OF OPERATIONS DATA
Sales.......................... $100,240 $ 88,650 $100,823 $83,273 $66,149
Cost of Sales.................. 57,456 46,074 53,666 46,745 38,454
-------- -------- -------- ------- -------
Gross Profit................... 42,784 42,576 47,157 36,528 27,695
-------- -------- -------- ------- -------
Expenses:
Sales and marketing.......... 22,303 17,621 17,237 12,822 10,075
Research and development..... 5,537 5,472 5,544 5,190 4,167
General and administrative... 9,585 8,534 8,125 7,185 4,905
Non-recurring charge......... 3,327 -- -- -- --
-------- -------- -------- ------- -------
Total operating expenses... 40,752 31,627 30,906 25,197 19,147
-------- -------- -------- ------- -------
Operating Income............... 2,032 10,949 16,251 11,331 8,548
Interest expense............. (3,385) (775) (36) (12) (442)
Interest and investment
income...................... 1,883 560 505 92 455
-------- -------- -------- ------- -------
Income Before Income Taxes..... 530 10,734 16,720 11,411 8,561
Income Tax (Benefit)
Provision..................... (899) 4,079 6,354 (1,000) 471
-------- -------- -------- ------- -------
Net Income..................... $ 1,429 $ 6,655 $ 10,366 $12,411 $ 8,090
======== ======== ======== ======= =======
Net Income Per Share:
Earnings Per Common Share.... $ 0.18 $ 0.83 $ 1.33 $ 1.64 $ 1.13
======== ======== ======== ======= =======
Earnings Per Common Share--
Assuming Dilution........... $ 0.18 $ 0.82 $ 1.25 $ 1.56 $ 1.06
======== ======== ======== ======= =======
Weighted Average Shares........ 8,069 8,006 7,799 7,546 7,162
======== ======== ======== ======= =======
Weighted Average Shares--Assum-
ing Dilution.................. 8,156 8,123 8,281 7,974 7,661
======== ======== ======== ======= =======

AT MARCH 31,
----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------

BALANCE SHEET DATA
Working Capital................ $ 74,783 $ 77,796 $ 45,824 $38,839 $30,032
Total Assets................... 136,188 131,055 82,869 70,574 49,673
Long-term Liabilities.......... 45,089 44,518 653 -- --
Shareholders' Equity........... 74,746 73,603 65,538 53,973 39,703

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

Revenues increased by 13.1% in fiscal 1998 over fiscal 1997 as the Company
entered the computer companion market with the REX PC Companion and sold new
electronic organizer products in the ROLODEX(R) Electronics line. The
Company's revenues had declined by 12.1% in fiscal 1997 from fiscal 1996 as a
result of a 21.8% decline in domestic consumer sales, offset in part by an
increase in international sales. Prior to 1997, the Company had enjoyed four
consecutive years of sales increases.

The Company expects sales growth in the near term to be primarily driven by
increases in sales of electronic reference products and the REX line. The
introduction of personal computer companion and organizer products in fiscal
1998 resulted in higher sales in the United States. The increase in the
Company's sales for fiscal year 1998 is primarily attributable to higher
domestic sales. International growth, which began to slow in fiscal 1997,
slowed even more in the 1998 fiscal year. International sales were only 3.2%
higher in fiscal 1998 than fiscal 1997. In fiscal 1997, international sales
had been up by 6.5% over the 1996 fiscal year, coming off an increase of 29.3%
in the year before. The growth in fiscal 1995 and fiscal 1996 in international
sales was largely related to the introduction of foreign language products. As
the Company continues to introduce new foreign language reference and computer
companion products, bilingual electronic dictionaries, and products targeted
at the ESL market, management anticipates that the Company's international
sales should increase.

In fiscal year 1998, gross margins declined with the introduction of
personal computer companion and organizer products. These products are sold
into a more competitive marketplace and do not have the licensed content that
forms the basis for the Company's electronic reference products. Prior to the
1998 fiscal year, the Company's gross profit margins increased primarily due
to the decline in cost of ROM chips and the Company's cost reduction efforts
(which enabled the Company to lower its product prices), and the introduction
of new products which command higher gross margins. Gross margin percentages
in the future are likely to decline as the Company's revenue mix relies more
heavily on personal computer companion and organizer products.

Operating expenses as a percentage of sales increased in fiscal year 1997
primarily because sales decreased. Operating expenses in fiscal year 1998
increased both as an absolute matter and as a percentage of sales, mainly
because of increases in sales and marketing attributable to increased
advertising and to introductions of computer companion and organizer products,
as well as $3.3 million in certain non-recurring charges related to
restructuring the Company. The Company anticipates that, as it furthers its
strategy of popularizing REX and BOOKMAN products by advertising, and
expanding its shelf space with the ROLODEX(R) Electronics line, its sales and
marketing expenses will continue to increase.

17

RESULTS OF OPERATIONS

The following table summarizes the Company's historical results of
operations as a percentage of sales for fiscal 1998, 1997 and 1996:

(DOLLARS IN THOUSANDS)

YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996
-------- ------- --------

SALES:
Domestic Sales................................... $ 66,610 $56,072 $ 70,220
International Sales.............................. 33,630 32,578 30,603
-------- ------- --------
Total Sales........................................ $100,240 $88,650 $100,823
======== ======= ========
AS A PERCENTAGE OF TOTAL SALES:
Domestic Sales................................... 66.5% 63.3% 69.6%
International Sales.............................. 33.5 36.7 30.4
-------- ------- --------
Total Sales...................................... 100.0% 100.0% 100.0%
Cost of Sales.................................... 57.3 52.0 53.2
-------- ------- --------
Gross Profit..................................... 42.7 48.0 46.8
-------- ------- --------
Expenses:
Sales and marketing............................ 22.3 19.9 17.1
Research and development....................... 5.5 6.2 5.5
General and administrative..................... 9.6 9.6 8.1
Non-recurring charge........................... 3.3 * *
-------- ------- --------
Total operating expenses..................... 40.7 35.7 30.7
-------- ------- --------
Operating Income................................. 2.0 12.3 16.1
Interest expense............................... (3.4) (0.8) *
Interest and investment income................. 1.9 0.6 0.5
-------- ------- --------
Income Before Income Taxes....................... 0.5 12.1 16.6
Income Tax (Benefit) Provision................... (0.9) 4.6 6.3
-------- ------- --------
Net Income....................................... 1.4% 7.5% 10.3%
======== ======= ========

- --------
* less than 0.1%

Year Ended March 31, 1998 compared with Year Ended March 31, 1997

Sales of $100.2 million for the year ended March 31, 1998 were 13.1% higher
than sales of $88.7 million for the earlier year. The sales increase is
attributable to higher sales in the domestic consumer market, including sales
of the new REX PC Companion which began in September 1997. Growth of
international sales, which had outpaced domestic sales growth over the past
two years, slowed as those sales were only 3.2% higher than in the 1997 fiscal
year primarily due to declines in sales in the United Kingdom and France.
Foreign currency fluctuations did not have a significant effect on the
Company's results of operations from year to year. Royalties for software
licensing remained at 2% of sales.

Gross profits were unchanged at $42.8 million in fiscal 1998 compared with
$42.6 million last year, notwithstanding the large increase in sales. Gross
profit margins decreased from 48.0% in fiscal 1997 to 42.7% in fiscal 1998 as
a result of product mix shifting toward personal computer companion and
organizer products that bear smaller profit margins because these products are
sold into more competitive markets and do not have the content of reference
products.

18

Total operating expenses increased to $40.8 million in fiscal 1998 from
$31.6 million in the prior year. The Company recorded $3.3 million non-
recurring charges, of which $2.4 million were related to the contractual
commitment to the former Chairman and Chief Executive Officer under his
employment agreement on his departure from the Company. Non-recurring charges
also included the costs of restructuring foreign operations and costs relating
to the Company's evaluation of strategic alternatives. Sales and marketing
expenses increased from $17.6 million in fiscal 1997 to $22.3 million in
fiscal 1998 primarily due to increased expenditures for advertising and
marketing in both domestic and international operations. Research and
development expenses were constant at $5.5 million from year to year. General
and administrative expenses increased from $8.5 million in fiscal 1997 to $9.6
million in fiscal 1998 due to increased personnel cost primarily in connection
with the start up of new international subsidiaries and in connection with the
acquisition of the ROLODEX(R) Electronics line. Net interest expense was $1.3
million higher than last year. The Company issued $40,000,000 in 7.71% Senior
Notes at the end of March 1997. Interest expense of $3.4 million mainly in
connection with interest paid on the Notes exceeded interest income of $1.9
million from the Company's investments during the 1998 fiscal year.

Year Ended March 31, 1997 compared with Year Ended March 31, 1996

Sales of $88.7 million for the year ended March 31, 1997 were 12.1% lower
than sales of $100.8 million one year earlier. The sales decrease is
attributable to lower sales of electronic books in the domestic consumer
market offset in part mainly by increases in sales outside of the United
States and secondarily by the Company's sales of personal information
management products in the ROLODEX(R) Electronics line. While international
sales increased 6.5% from year-to-year, this increase was less than in prior
years and international growth slowed in the last quarter of the 1997 fiscal
year. Foreign currency fluctuations did not have a significant effect on the
Company's results of operations from year to year. Royalties from technology
licensees were approximately 2% of sales in fiscal 1997, down from 3% of sales
in fiscal 1996.

Decreased sales primarily contributed to the decrease in gross profits from
$47.2 million in fiscal 1996 to $42.6 million in fiscal 1997. Gross profit
margins increased from 46.8% to 48.0% from year to year.

Total operating expenses increased to $31.6 million in fiscal 1997 as
compared with $30.9 million in fiscal 1996. Sales and marketing expenses
increased slightly from $17.2 million in fiscal 1996 to $17.6 million in
fiscal 1997 as advertising increases were offset in part by decreases in
variable expenses linked to sales volume. Research and development expenses
were level over the two years at $5.5 million. General and administrative
expenses increased from $8.1 million in fiscal 1996 to $8.5 million in fiscal
1997 primarily because of increased expenses of international subsidiaries,
both those newly organized and those continuing in their operations. Interest
expense increased from year to year as the Company drew down $16,000,000 from
its credit facility in October 1996 to finance the ROLODEX(R) Electronics
acquisition.

INFLATION AND CURRENCY TRANSACTIONS

Inflation has had no significant effect on the operations of the Company for
the three years ended March 31, 1998. However, competitive pressures and
market conditions in the future may limit the Company's ability to increase
prices to compensate for general inflation or increases in prices charged by
suppliers.

The Company's operating results may be affected by fluctuations in currency
exchange rates. The Company enters into foreign exchange forward contracts
with financial institutions to limit its exposure to losses on anticipated
cash flows resulting from fluctuations in the currency markets. Anticipated
transactions are comprised of sales of the Company's products in currencies
other than U.S. dollars made through the Company's subsidiaries and purchases
of inventory in currencies other than the U.S. dollar. As of March 31, 1998
and 1997, the Company had approximately $18.6 million and $15.9 million,
respectively, of outstanding foreign exchange contracts for the purchase or
sale of foreign currencies. The deferred gains and losses on such contracts
were immaterial at March 31, 1998 and 1997. Such hedging has had no
significant effect on the operations of the Company for the three years ended
March 31, 1998. The duration of these anticipated hedging transactions
generally does not exceed one year.

19

SEASONALITY

The Christmas selling season (October, November and December) and the "back
to school" season (mid-August to mid-September) are the strongest selling
periods for the Company's products. The timing of the publication of new books
may also significantly affect revenues and cause quarterly revenues and
earnings fluctuations.

The following table sets forth unaudited net sales (in thousands) for each
of the Company's last twelve fiscal quarters:

QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------------- ------------- ------------- -------------

Fiscal 1998............. $16,614 $25,782 $36,016 $21,828
Fiscal 1997............. 15,071 24,231 31,986 17,362
Fiscal 1996............. 18,619 27,077 34,451 20,676

LIQUIDITY AND CAPITAL RESOURCES

On March 27, 1997, the Company completed the issuance to insurance companies
of $40,000,000 in aggregate principal amount of 7.71% senior notes in a
private placement transaction and contemporaneously entered into a new
$20,000,000 revolving credit agreement with the Chase Manhattan Bank ("Chase")
and Summit Bank ("Summit"). Management believes that the proceeds of the
senior note offering, cash flow from operations, and the revolving line of
credit will be adequate to provide for the Company's liquidity and capital
needs for the foreseeable future.

Prior to the issuance of the senior notes and the execution of the new
revolving credit agreement, in order to accommodate seasonal inventory and
accounts receivable buildup, the Company financed its day to day operations by
drawing down advances, on an as needed basis, against its then existing credit
facility with Chase. Borrowing against the line of credit bear interest at the
bank's prime rate or 1% over LIBOR. The Company pays a commitment fee of one
quarter of one percent per annum on the unused portion of the line of credit.
At March 31, 1998, there were no borrowings under the revolving line of
credit.

The Company evaluates on a continuous basis software enhancements and
updates based on new technologies to improve its information systems. The
Company has assessed its current systems that support the Company's operations
in conjunction with year 2000 compliance. The Company has undertaken a program
to modify its existing operational software to insure functionality and
continued operations beyond the year 2000. The cost is estimated to be less
than $500,000 and will be expensed as incurred.

The Company has no material commitments for capital expenditures in the next
twenty-four months.

20

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

PAGE
----

INDEPENDENT AUDITOR'S REPORT............................................... 21
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended March 31, 1998, 1997 and 1996............................... 22
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and 1997................................................. 23
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended March 31, 1998, 1997 and 1996............................... 24
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended March 31, 1998, 1997 and 1996............................... 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1998, 1997 and 1996............................... 26

INDEPENDENT AUDITOR'S REPORT

Shareholders and Directors
Franklin Electronic Publishers, Inc.
Burlington, New Jersey 08016

We have audited the accompanying balance sheet of Franklin Electronic
Publishers, Incorporated and subsidiaries as of March 31, 1998 and March 31,
1997 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Franklin Electronic
Publishers, Inc. and subsidiaries as of March 31, 1998 and March 31, 1997, and
the results of its operations and cash flows for each of the three years ended
March 31, 1998 in conformity with generally accepted accounting principles.

RADIN, GLASS & CO., LLP
Certified Public Accountants

New York, New York
May 26, 1998

21

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

YEAR ENDED MARCH 31,
---------------------------
1998 1997 1996
-------- ------- --------

SALES.............................................. $100,240 $88,650 $100,823
COST OF SALES...................................... 57,456 46,074 53,666
-------- ------- --------
GROSS PROFIT....................................... 42,784 42,576 47,157
-------- ------- --------
EXPENSES:
Sales and marketing.............................. 22,303 17,621 17,237
Research and development......................... 5,537 5,472 5,544
General and administrative....................... 9,585 8,534 8,125
Non-recurring charge............................. 3,327 -- --
-------- ------- --------
Total operating expenses....................... 40,752 31,627 30,906
-------- ------- --------
OPERATING INCOME................................... 2,032 10,949 16,251
Interest expense................................. (3,385) (775) (36)
Interest and investment income................... 1,883 560 505
-------- ------- --------
INCOME BEFORE INCOME TAXES......................... 530 10,734 16,720
INCOME TAX (BENEFIT) PROVISION..................... (899) 4,079 6,354
-------- ------- --------
NET INCOME......................................... $ 1,429 $ 6,655 $ 10,366
======== ======= ========
NET INCOME PER SHARE:
EARNINGS PER COMMON SHARE........................ $ 0.18 $ 0.83 $ 1.33
======== ======= ========
EARNINGS PER COMMON SHARE--ASSUMING DILUTION..... $ 0.18 $ 0.82 $ 1.25
======== ======= ========
WEIGHTED AVERAGE SHARES............................ 8,069 8,006 7,799
======== ======= ========
WEIGHTED AVERAGE SHARES--ASSUMING DILUTION......... 8,156 8,123 8,281
======== ======= ========

See notes to consolidated financial statements.

22

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

MARCH 31,
------------------
1998 1997
-------- --------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 3)....................... $ 33,923 $ 45,040
Accounts receivable, less allowance for doubtful accounts
of $903 and $839........................................ 16,684 9,806
Inventories (Note 4)..................................... 34,692 30,617
Deferred income tax asset (Note 13)...................... 1,677 2,122
Prepaids and other assets................................ 4,160 3,145
-------- --------
TOTAL CURRENT ASSETS..................................... 91,136 90,730
-------- --------
PROPERTY AND EQUIPMENT (Note 5)............................ 10,712 11,211
-------- --------
OTHER ASSETS:
Trademark, less accumulated amortization of $583 and $194
(Note 9)................................................ 14,964 15,353
Advance royalties and licenses........................... 5,577 2,221
Software development costs............................... 5,360 4,982
Other assets............................................. 8,439 6,558
-------- --------
TOTAL OTHER ASSETS....................................... 34,340 29,114
-------- --------
TOTAL ASSETS............................................... $136,188 $131,055
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 6)........... $ 15,950 $ 12,650
Current portion of long-term liabilities................. 403 284
-------- --------
TOTAL CURRENT LIABILITIES................................ 16,353 12,934
-------- --------
LONG-TERM LIABILITIES (Note 7)............................. 45,089 44,518
-------- --------
SHAREHOLDERS' EQUITY: (Note 11)
Preferred stock, $2.50 par value, authorized 10,000,000
shares, none issued or outstanding...................... -- --
Common stock, no par value, authorized 50,000,000 shares,
issued and outstanding 8,072,026 and 8,060,133 shares... 50,489 50,235
Retained earnings........................................ 25,249 23,820
Foreign currency translation adjustment (Note 12)........ (992) (452)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................... 74,746 73,603
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $136,188 $131,055
======== ========

See notes to consolidated financial statements.

23

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(IN THOUSANDS)

YEAR ENDED MARCH 31,
----------------------------
1998 1997 1996
-------- -------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME..................................... $ 1,429 $ 6,655 $ 10,366
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization................ 5,871 4,909 3,790
Provision for losses on accounts receivable.. 75 83 51
Loss on disposal of property and equipment... 43 13 96
Deferred income taxes........................ 446 (399) (101)
Source (use) of cash from change in operating
assets and liabilities excluding the effects
of acquisition:
Accounts receivable........................ (6,439) 2,905 (2,239)
Inventories................................ (3,118) 5,177 (13,974)
Prepaids and other assets.................. (838) (116) (990)
Accounts payable and accrued expenses...... 1,894 (4,298) 77
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................... (637) 14,929 (2,924)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........... (2,419) (2,671) (5,624)
Proceeds from sale of property and equip-
ment........................................ 118 107 471
Change in other assets....................... (7,966) (5,908) (3,852)
Cash paid for acquisitions, net of cash ac-
quired...................................... (304) (17,526) --
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES.......... (10,571) (25,998) (9,005)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Notes.............. -- 40,000 --
Proceeds from mortgage....................... -- 4,260 --
Principal payments of mortgage............... (284) (213) --
Proceeds from issuance of common shares and
warrants.................................... 121 162 1,099
Income tax credit-stock options.............. -- 1,196 --
Other liabilities............................ 794 103 653
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 631 45,508 1,752
EFFECT OF EXCHANGE RATE CHANGES ON CASH.......... (540) (226) (14)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (11,117) 34,213 (10,191)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.......................................... 45,040 10,827 21,018
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....... $ 33,923 $ 45,040 $ 10,827
======== ======== ========
SUPPLEMENTAL DATA:
Cash paid during the year:
Income taxes................................. $ 851 $ 3,472 $ 5,152
Interest..................................... $ 3,377 $ 741 $ 36
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase and retirement of treasury shares
received under employee stock option plan and
warrants exercised............................ $ 96 $ 1,582 $ 378
Issuance of common shares related to acquisi-
tion.......................................... $ -- $ 152 $ --

See notes to consolidated financial statements.

24

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT SHARE DATA)

COMMON STOCK TOTAL
------------------ RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS OTHER EQUITY
--------- ------- -------- ----- -------------

BALANCE--MARCH 31, 1995...... 7,710,150 $47,386 $ 6,799 $(212) $53,973
Issuance of common shares
under employee stock
option plan............... 154,741 1,427 -- -- 1,427
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for services
(unearned portion $118)... (2,150) 114 -- -- 114
Issuance of common shares
for warrants exercised.... 7,692 50 -- -- 50
Purchase and retirement of
treasury shares received
under employee stock
option plan............... ( 8,718) (378) -- -- (378)
Income for the period...... -- -- 10,366 -- 10,366
Foreign currency
translation adjustment.... -- -- -- (14) (14)
--------- ------- ------- ----- -------
BALANCE--MARCH 31, 1996...... 7,861,715 48,599 17,165 (226) 65,538
Issuance of common shares
under employee stock
option plan............... 43,121 509 -- -- 509
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for services
(unearned portion $290)... 27,150 126 -- -- 126
Issuance of common shares
for warrants exercised.... 189,993 1,235 -- -- 1,235
Issuance of common shares
related to acquisition.... 6,748 152 -- -- 152
Purchase and retirement of
treasury shares received
under employee stock
option plan and warrants
exercised................. (68,594) (1,582) -- -- (1,582)
Income tax credit--stock
options................... -- 1,196 -- -- 1,196
Income for the period...... -- -- 6,655 -- 6,655
Foreign currency
translation adjustment.... -- -- -- (226) (226)
--------- ------- ------- ----- -------
BALANCE--MARCH 31, 1997...... 8,060,133 50,235 23,820 (452) 73,603
Issuance of common shares
under employee stock
option plan............... 25,960 217 -- -- 217
Issuance of shares and
amortization of deferred
compensation expense for
shares issued for services
(unearned portion $67).... (7,300) 133 -- -- 133
Purchase and retirement of
treasury shares received
under employee stock
option plan............... (6,767) (96) -- -- (96)
Income for the period...... -- -- 1,429 -- 1,429
Foreign currency
translation adjustment.... -- -- -- (540) (540)
--------- ------- ------- ----- -------
BALANCE--MARCH 31, 1998...... 8,072,026 $50,489 $25,249 $(992) $74,746
========= ======= ======= ===== =======

See notes to consolidated financial statements.

25

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. LINE OF BUSINESS

Franklin Electronic Publishers, Incorporated and its wholly-owned
subsidiaries (the "Company") design, develop and publish electronic reference
products and related software. Other activities represent less than 10% of
sales, operating income and identifiable assets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, after elimination of intercompany accounts
and transactions. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Inventories:

Inventories are valued at the lower of cost or market determined by the
first-in, first-out method of accounting.

Property and Equipment:

Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, ranging
from three to five years for furniture, equipment, tooling and computer
software purchased and 40 years for building and improvements.

Leasehold improvements are amortized over the term of the lease or the
estimated life of the improvement, whichever is shorter. When assets are sold
or retired, their cost and related accumulated depreciation are removed from
the appropriate accounts. Any gains and losses on dispositions are recorded in
current operations. Maintenance and minor repairs are charged to operations as
incurred.

Trademark and Goodwill:

Trademark and Goodwill are recorded at cost. The ROLODEX(R) Electronics
trademark is being amortized over a 40 year period. Goodwill of purchased
businesses is being amortized over a 30 year period.

Right of Return and Refurbishing Costs:

The Company initiates special programs with customers to test market certain
products, promotions or market segments. These arrangements normally require
the customer to pay for the merchandise under normal terms. The Company defers
the recognition of certain revenues from these programs until such time as the
revenue recognition requirements of Statement of Financial Accounting Standard
(SFAS) No. 48, "Revenue Recognition when Right of Return Exists", are met.

The Company's sales are made with the right of exchange for defective
products within one year from the original retail purchase. The Company
provides for the cost of refurbishing such products.

Price Protection:

The Company maintains a policy of providing price protection to its dealers
under which the Company issues credits in the event it reduces its prices.
These credits are generally computed by multiplying either the

26

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

number of units purchased within ninety days prior to the price reduction or
the number of units on hand at retail at the time of the price reduction by
the dollar amount of the price reduction. A provision for costs related to a
reduction in prices is made at such time as the Company determines that a
price reduction will be effective or is reasonably anticipated.

Software Development Costs:

The capitalization of such costs and the related amortization is in
accordance with SFAS No. 86. Software costs, which are capitalized after
technological feasibility is established, totaled $2,100,000, $2,440,000 and
$2,100,000 for the fiscal years ended March 31, 1998, 1997 and 1996,
respectively.

Amortization included in the accompanying Consolidated Statement of
Operations for fiscal years ended March 31, 1998, 1997 and 1996 was
$1,721,000, $1,375,000 and $1,089,000, respectively.

Advertising Costs:

Advertising costs are expensed as incurred except for direct response
advertising, the costs of which are deferred and amortized over the period the
related sales are recorded.

Fair Value of Financial Instruments:

The carrying amounts reported in the balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate fair value
based on the short-term maturity of these instruments. The carrying amount of
the Company's borrowings under the Notes approximates fair value.

Accounting for Long-Lived Assets:

The Company reviews long-lived assets, certain identifiable assets and any
goodwill related to those assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts
may not be recoverable. At March 31, 1998 the Company believes that there has
been no impairment of its long-lived assets.

Income Taxes:

The Company utilizes the liability method of accounting for income taxes as
set forth in SFAS No. 109, "Accounting for Income Taxes". Under the liability
method, deferred taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.

Earnings Per Share:

On December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." Earnings per common share are computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding during the period. The earnings per common share, assuming
dilution, computation gives effect to all dilutive potential common shares
during the period. The computation assumes that the outstanding stock options
and warrants were exercised and that the proceeds were used to purchase common
shares of the Company. Earnings per share computation for the years ended
March 31, 1997 and 1996 have been restated to reflect this new standard.

27

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED

Stock Based Compensation:

The Company accounts for stock transactions in accordance with APB Opinion
No. 25, "Accounting For Stock Issued To Employees." Accordingly, no
compensation is recorded on the issuance of employee stock options at fair
market value.

3. CASH AND CASH EQUIVALENTS

The Company classifies as cash equivalents highly liquid investments with
maturities of less than ninety days totaling $32,608,000 and $42,537,000 at
March 31, 1998 and 1997, respectively.

4. INVENTORIES

Inventories consist of the following (in thousands):

MARCH 31,
---------------
1998 1997
------- -------

Finished products............................................ $29,528 $25,698
Parts........................................................ 5,164 4,919
------- -------
$34,692 $30,617
======= =======

5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

MARCH 31,
---------------
1998 1997
------- -------

Land........................................................ $ 849 $ 497
Building and improvements................................... 5,649 5,434
Furniture and equipment..................................... 5,993 6,562
Tooling..................................................... 4,419 5,327
Computer software purchased................................. 1,855 2,894
------- -------
18,765 20,714
Accumulated depreciation.................................... 8,053 9,503
------- -------
$10,712 $11,211
======= =======

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following (in
thousands):

MARCH 31,
---------------
1998 1997
------- -------

Trade accounts payable...................................... $ 7,164 $ 4,496
Accrued payroll, bonus, payroll benefits and taxes.......... 4,769 2,955
Accrued royalties........................................... 1,154 1,031
Accrued advertising......................................... 255 961
Advance payments by customers............................... 104 656
Income taxes payable........................................ -- 1,296
Accrued expenses--other..................................... 2,504 1,255
------- -------
$15,950 $12,650
======= =======

28

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

7. LONG-TERM LIABILITIES

Long-term liabilities consists of the following (in thousands):

MARCH 31,
---------------
1998 1997
------- -------

Notes payable................................................ $40,000 $40,000
Mortgage note payable........................................ 3,763 4,047
Other........................................................ 1,729 755
------- -------
45,492 44,802
Less current portion......................................... 403 284
------- -------
$45,089 $44,518
======= =======

During the year ended March 31, 1997, the Company sold $40,000,000 of 10-
year promissory notes (the "Notes") to institutional investors. The Notes,
which mature on March 31, 2007, carry an interest rate of 7.71% per year.
Principal payments are required over seven years starting at the end of the
fourth year. The Note agreement contains normal financial covenants, including
a restriction on dividends and other restricted payments in excess of
$7,500,000, subject to adjustments for earnings and sales of common stock. The
Note agreement contains a prepayment penalty and a provision for repurchase
should there be a change of control, in addition to financial covenants.

Also in connection with the Note offering, the Company reduced its Revolving
Credit Agreement with a bank to $20,000,000. Repayment on borrowings is due on
March 31, 2000. Interest on loan advances is payable at either the bank's
prime rate (8.50% at March 31, 1998) or 1% over LIBOR. The Company also pays a
commitment fee of one quarter of one percent per annum on the unused portion
of the line of credit. The line of credit requires the Company to maintain
minimum working capital levels and ratios in addition to normal bank
covenants. As of March 31, 1998 and 1997, there were no amounts outstanding
under this credit agreement.

During the year ended March 31, 1997, the Company obtained a $4,260,000
mortgage on its new facility in Burlington, New Jersey. The mortgage carries
an interest rate of 1% over LIBOR (5.7% at March 31, 1998) and matures on June
28, 2006. The Company has the option to convert the mortgage to a fixed
interest rate.

The maturities of long-term liabilities for the five years after March 31,
1998 are as follows: 1999--$403,000; 2000--$403,000; 2001--$6,117,000; 2002--
$6,117,000; 2003--$6,117,000.

8. ADVERTISING AND MEDIA COSTS

Advertising costs for the years ended March 31, 1998, 1997 and 1996 were
$7,626,000, $6,632,000 and $6,625,000, respectively. Deferrals of direct
response advertising were not material.

The Company has sold certain products in exchange for credits entitling the
Company to purchase media placements, travel and other items. Such products
are expected to be sold so as not to compete with the Company's normal
distribution. These credits have been recorded at their estimated fair market
value, which is less than their face amount and approximates their cost to the
Company.

9. TRADEMARK

During the year ended March 31, 1997, the Company acquired the trademark
license of the ROLODEX(R) Electronics product line and certain other assets
from Insilco Corporation. The purchase price exceeded the fair value of the
net assets acquired by $15,547,000, which is being amortized over 40 years.

29

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

10. COMMITMENTS AND CONTINGENCIES

Lease Commitments:

Rent expense under all operating leases was $1,110,000, $858,000 and
$792,000 for the years ended March 31, 1998, 1997 and 1996, respectively. The
future minimum rental payments to be made under noncancellable operating
leases, principally for facilities, as of March 31, 1998 were as follows (in
thousands):

YEARS ENDING MARCH 31,
----------------------------------------------------------

1999............. $633
2000............. $589
2001............. $359

2002............. $198
2003............. $176

Royalty and License Agreements:

The Company acquires the rights to reference works, databases and software
from various publishers and technology companies under renewable contracts of
varying terms. Royalties and license fees are based on a per unit charge or as
a percentage of revenue from products utilizing such databases or software
licenses.

Employment Agreement and Bonus Plan:

During the year ended March 31, 1998, the Company incurred a non-recurring
charge of $2,434,000 under the employment agreement with its former chief
executive officer.

In April 1998, the Company hired a new President and Chief Executive Officer
pursuant to the terms of a letter agreement which provided for an annual
compensation of $300,000 for the year ending March 31, 1999. Pursuant to the
agreement, the Company issued two stock options to the President. The first is
a five-year option to purchase 35,000 shares of the Company's common stock at
$3.50 per share, vesting at the rate of 2,916 shares per month during the
first year of employment. The second is a ten-year option to purchase 275,000
shares of the Company's common stock at $12.25 per share, vesting at the rate
of 68,750 shares per year during the first four years of employment.

The Company maintains a bonus plan approved by the Board of Directors. In
the year ended March 31, 1998, an aggregate of 8% of the Company's
consolidated pretax earnings for the year were set aside for distribution
pursuant to the employment agreement described above and to employees at the
discretion of the Board. For the year ending March 31, 1999, 2% of
consolidated pretax earnings have been set aside for payment to the President
pursuant to the letter agreement and a bonus plan, based on a formula relating
to achieving target objectives and employees' salary, has been instituted by
the Board of Directors.

Litigation:

In 1998, the Company was served with a class action complaint in the
Superior Court of New Jersey having warranty, negligence, and state consumer
statute claims based on an alleged defect in the "to-do list" function of the
desktop software provided with the REX PC Companion. The Company intends to
vigorously defend this class action litigation. The Company is subject to
litigation from time to time arising in the ordinary course of its business.
The Company does not believe that any such litigation, including the class
action litigation identified above, is likely, individually or in the
aggregate, to have a material adverse effect on the financial condition of the
Company.

30

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

11. SHAREHOLDERS' EQUITY

Restricted Stock Plan and Unearned Portion of Common Stock Issued for
Services:

The Company maintains a Restricted Stock Plan which provides for the grant
of shares of common stock for services. The shares are subject to a
restriction on transfer which requires the holder to remain employed by the
Company for up to three years in order to receive the shares. As of March 31,
1998, under the Plan, 25,100 shares of common stock were available for
distribution by the Board of Directors.

Employee Stock Options:

The Company's 1988 Employee Stock Option Plan expired by its terms on April
25, 1998. Because the Plan terminated, no further option grants may be made
under the Plan. On May 1, 1998, the Board of Directors approved the Company's
1998 Stock Option Plan to replace the expired plan, subject to shareholder
approval at the Company's 1998 Annual Meeting of Shareholders. Under the 1998
Plan, 750,000 shares of the Company's common stock have been reserved for
issuance, subject to shareholder approval. The Plan will authorize the Company
to grant options to purchase shares of common stock to key employees,
consultants and outside directors of the Company.

The Plan provided for granting of options to purchase shares of common stock
at not less than the fair market value on the date of grant for incentive
stock options and at not less than 75% of the fair market value on the date of
grant for non-incentive stock options. An option may not be granted for a
period in excess of ten years from the date of grant. Options are not
transferable by the optionee other than upon death.

Under the terms of the Plan, an employee may deliver shares of the Company's
common stock as payment for options being exercised. The shares are valued at
the closing price on the date of exercise. Shares received by the Company as
payment for options exercised were held by the employees for periods greater
than six months; therefore, no compensation was recorded by the Company. The
shares received by the Company have been retired.

During the fiscal year ended March 31, 1998, under the Plan options to
purchase 464,500 shares at $9.63 to $14.88 were granted to employees and
outside directors of the Company.

Accounting for Employee Stock Options:

The Company accounts for its stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", under which no compensation
expense is recognized. In fiscal 1997, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", for disclosure purposes;
accordingly, no compensation expense is recognized for options granted at fair
market value in the results of operations for its stock option plan as
required by APB Opinion No. 25.

For disclosure purposes the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for stock options granted
during the years ended March 31, 1998, 1997 and 1996, respectively: annual
dividends of $0.00 for all years, expected volatility of 46.6%, 46.6% and
43.3%, risk-free interest rate of 5.7%, 6.0% and 6.5% and expected life of
five years for all grants. The weighted-average fair value of the stock
options granted during the years ended March 31, 1998, 1997 and 1996 was
$5.50, $9.48 and $13.33, respectively.

If the Company recognized compensation cost for the employee stock option
plan in accordance with SFAS No. 123, the Company's pro forma net income and
earnings per share would have been $0.1 million and $0.01 in 1998, $5.8
million and $0.72 in 1997 and $10.1 million and $1.22 in 1996. The SFAS No.
123 method of accounting does not apply to options granted prior to March 31,
1995 and, accordingly, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.

31

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

11. SHAREHOLDERS' EQUITY--CONTINUED

The following table summarizes the changes in options outstanding and the
related price ranges for shares of the Company's common stock:

STOCK OPTIONS
---------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------

Outstanding at March 31, 1995.................... 633,363 $12.07
Granted........................................ 234,250 28.59
Exercised...................................... (154,741) 9.22
Expired or cancelled........................... (64,668) 20.54
---------
Outstanding at March 31, 1996.................... 648,204 18.47
Granted........................................ 376,301 19.32
Exercised...................................... (43,121) 11.80
Expired or cancelled........................... (39,543) 25.70
Adjustment due to "like-value exchange"........ (84,707) --
---------
Outstanding at March 31, 1997.................... 857,134 14.44
Granted........................................ 464,500 11.79
Exercised...................................... (25,960) 8.38
Expired or cancelled........................... (281,200) 15.10
---------
Outstanding at March 31, 1998.................... 1,014,474 13.21
=========

The following table summarizes information about stock options outstanding
at March 31, 1998:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXRCISE PRICESE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------

$ 3.00 -$10.13.......... 281,215 7.55 $ 8.82 104,715 $ 6.75
11.25 - 13.50.......... 156,068 7.50 11.85 126,402 11.68
14.00 - 14.63.......... 273,291 7.37 14.02 193,073 14.04
14.88 - 15.75.......... 155,400 9.28 14.90 8,900 15.28
16.25 - 31.63.......... 148,500 6.28 19.73 148,500 19.73
--------- -------
$ 3.00 -$31.63.......... 1,014,474 581,590
========= =======

Options exercisable and the weighted average exercise price at March 31,
1997 and March 31, 1996 were 386,016 options and $13.58, and 297,486 options
and $12.54, respectively.

12. FOREIGN CURRENCY TRANSLATION

Unrealized gains and losses resulting from translating foreign subsidiaries'
assets and liabilities into U.S. dollars are deferred in an equity account on
the balance sheet until such time as the subsidiary is sold or liquidated.

The Company enters into foreign exchange forward contracts with financial
institutions to limit its exposure to loss resulting from fluctuations in the
currency markets on anticipated cash flows associated with certain firmly
committed transactions. Anticipated transactions are comprised of sales of the
Company's products made through

32

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

12. FOREIGN CURRENCY TRANSLATION--CONTINUED

the Company's international subsidiaries and purchases of inventory in
currencies other than the U.S. dollar. As of March 31, 1998 and 1997, the
Company had approximately $18,650,000 and $15,900,000, respectively, of
outstanding foreign exchange contracts for the purchase or sale of foreign
currencies. The major currency exposures hedged were the Japanese Yen, the
British Pound, the French Franc and the German Mark. The deferred gains and
losses on such contracts were immaterial at March 31, 1998 and 1997. The
duration of these hedging transactions generally does not exceed one year.

Unrealized gains and losses on foreign exchange forward contracts designated
as hedges are deferred and recognized in income in the same period as the
hedged transactions.

13. INCOME TAXES

The components of the net deferred tax asset consist of the following (in
thousands):

MARCH 31,
-------------
1998 1997
------ ------

Temporary differences......................................... $1,319 $1,668
Foreign loss carryforwards.................................... 358 454
------ ------
Deferred tax asset............................................ $1,677 $2,122
====== ======

Temporary differences primarily represent non-deductible and financial
reporting allowances for uncollectibles and other non-deductible allowances.

The income tax provision consists of the following (in thousands):

MARCH 31,
-----------------------
1998 1997 1996
------- ------ ------

Current
Federal........................................... $(1,289) $3,978 $5,617
State............................................. (115) 369 838
Foreign........................................... 60 131 --
------- ------ ------
(1,344) 4,478 6,455
------- ------ ------
Deferred
Federal........................................... 321 (383) 157
State............................................. 28 (36) 24
Foreign........................................... 96 20 (282)
------- ------ ------
445 (399) (101)
------- ------ ------
Provision (benefit) for income taxes................ $ (899) $4,079 $6,354
======= ====== ======

33

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

13. INCOME TAXES--CONTINUED

Reconciliation of income taxes shown in the financial statements and amounts
computed by applying the Federal income tax rate of 35% for the years ended
March 31, 1998, 1997 and 1996 is as follows (in thousands):

MARCH 31,
------------------------
1998 1997 1996
------- ------- -------

Income before income taxes......................... $ 530 $10,734 $16,720
======= ======= =======
Computed expected tax.............................. $ 185 $ 3,757 $ 5,852
Reversal of income tax accruals.................... (1,100) -- --
State tax provision................................ 16 322 502
------- ------- -------
Provision (benefit) for income taxes............... $ (899) $ 4,079 $ 6,354
======= ======= =======

Effective April 1, 1997, the Company filed elections with the Internal
Revenue Service to treat most of its foreign subsidiaries as divisions of the
parent for U.S. income tax reporting.

14. OPERATIONS

The Company and its foreign operations have the same business environment
and operate primarily in one industry segment. Operating profit (loss) is net
revenue less operating costs and expenses pertaining to specific geographic
areas. Products sold by the U.S. company to the subsidiaries are accounted for
based on established sales prices between the related companies. Identifiable
assets are those assets used in the geographic area.

For the years ended March 31, 1998, 1997 and 1996, the Company's foreign
operations as conducted in Europe generated sales of $22,354,000, $24,963,000
and $22,074,000, and operating profits (losses) of ($1,508,000), $214,000 and
($971,000), respectively. Their identifiable assets were $18,312,000,
$16,833,000 and $15,270,000 as of March 31, 1998, 1997 and 1996, respectively.

Sales in the United States, including exports to non-affiliates, totaled
$73,588,000, $60,804,000 and $76,393,000, and operating profits of $901,000,
$10,505,000 and $17,049,000 for the years ended March 31, 1998, 1997 and 1996,
respectively. Their identifiable assets totaled $124,324,000, $121,554,000 and
$77,646,000 for the years ended March 31, 1998, 1997 and 1996, respectively.
The remaining sales, profits and assets represent other locations, none of
which is material.

For the fiscal years ended 1998, 1997 and 1996, no customer accounted for
more than 10% of the Company's revenues.

15. NON-RECURRING CHARGES

Earnings for the year ended March 31, 1998 are net of non-recurring charges
relating to the former Chairman and Chief Executive Officer's employment
contract, the costs of restructuring certain foreign operations, and costs
relating to the Company's evaluation of strategic alternatives. Charges
totaling $2,434,000 of the total charges of $3,327,000 were associated with
the Company's contractual obligation to the former Chairman and Chief
Executive Officer. The effect of the total charges was $2,063,000 net of
income taxes or $0.25 per share.

34

FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

16. SUBSEQUENT EVENT

During the year ended March 31, 1998, the Company made loans to and
investments in Voice Powered Technology International, Inc. ("VPTI"), a
publicly traded company, of approximately $2,000,000. In September 1997, VPTI
filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. In
May 1998, VPTI emerged from bankruptcy as an 82% subsidiary of the Company.
The Company expects to recover its loans to and investment in VPTI on the
basis of VPTI's continuing utilization of its technology and product lines and
utilization of VPTI's tax loss carryforward of approximately $27 million.

17. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

QUARTER ENDED
------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------------ ----------- --------

Fiscal 1998
- ------------------------------------
Net sales........................... $16,614 $25,782 $36,016 $21,828
Gross profit........................ 7,292 11,632 14,808 9,052
Net income (loss)................... (420) 1,507 1,209 (867)
Net income (loss) per share:
Earnings per common share*........ (0.05) 0.19 0.15 (0.11)
Earnings per common share--
assuming dilution*............... (0.05) 0.18 0.15 (0.11)
Fiscal 1997
- ------------------------------------
Net sales........................... $15,071 $24,231 $31,986 $17,362
Gross profit........................ 7,135 11,748 15,531 8,162
Net income.......................... 640 2,457 3,247 311
Net income per share:
Earnings per common share*........ 0.08 0.31 0.40 0.04
Earnings per common share--
assuming dilution*............... 0.08 0.30 0.40 0.04
Fiscal 1996
- ------------------------------------
Net sales........................... $18,619 $27,077 $34,451 $20,676
Gross profit........................ 8,261 12,468 16,702 9,726
Net income.......................... 1,408 3,246 4,168 1,544
Net income per share:
Earnings per common share*........ 0.18 0.42 0.53 0.20
Earnings per common share--
assuming dilution.*.............. 0.17 0.39 0.50 0.19

- --------
*Reflects the adoption of SFAS No. 128 including the restatement of prior
years.

35

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE--NONE

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information called for by Item 10 is set forth under the heading "Election
of Directors" in the Company's Proxy Statement for its 1998 annual meeting of
stockholders (the "1998 Proxy Statement"), which is incorporated herein by
this reference.

ITEM 11. EXECUTIVE COMPENSATION

Information called for by Item 11 is set forth under the heading "Executive
Compensation" in the 1998 Proxy Statement, which is incorporated herein by
this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information called for by Item 12 is set forth under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the 1998 Proxy
Statement, which is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information called for by Item 13 is set forth under the heading "Certain
Relationships and Related Transactions" in the 1998 Proxy Statement, which is
incorporated herein by this reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The Company did not file any reports on Form 8-K during the fourth quarter
of the fiscal year ended March 31, 1998.

Financial statements and schedules filed as a part of this report are listed
on the "Index to Financial Statements" at page 21 herein. All other schedules
are omitted because (i) they are not required under the instructions, (ii)
they are inapplicable or (iii) the information is included in the financial
statements.

36

EXHIBITS

EXHIBIT NO.
-----------

3.01 --Certificate of Incorporation of Franklin (Incorporated by
reference to Exhibit 3.01 to the Company's Registration Statement
on Form S-1, File No. 3-6612 (the "Company's 1986 S-1
Registration Statement"))
3.02 --Articles of Amendment to the Certificate of Incorporation of
Franklin (Incorporated by reference to Exhibit 3.02 to the
Company's 1990 report on Form 10-K for the year ended March 31,
1990 (the "Company's 1990 10-K")
3.03 --By-laws of Franklin (Incorporated by reference to Exhibit 3.02
to the Company's 1986 S-1 Registration Statement)
3.04 --Amendment to By-laws of Franklin (Incorporated by reference to
Exhibit A to the Company's Proxy Statement relating to the 1987
Annual Meeting of Shareholders)
3.05 --Amendment to By-laws of Franklin (Incorporated by reference to
Exhibit 3.05 to the Company's 1990 10-K)
10.01** --Letter Agreement dated as of March 25, 1998 between the Company
and H. Andrew Cross
10.02** --Franklin Restricted Stock Plan, as amended (Incorporated by
reference to Exhibit 10.13 to the Company's report on Form 10-K
for the year ended March 31, 1987)
10.03** --Franklin Stock Option Plan as Amended and Restated effective as
of July 24, 1996 (Incorporated by reference to the Company's
Proxy Statement relating to the 1996 Annual Meeting of
Shareholders)
11 --Statement regarding computation of per share earnings
21 --Subsidiaries of the Registrant
23 --Consent of independent auditors

- --------
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 14(c) of this report.

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

FRANKLIN ELECTRONIC PUBLISHERS,
INCORPORATED

/s/ H. Andrew Cross
Dated: June 15, 1998 By ___________________________________
H. Andrew Cross, Chief Executive
Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE AND TITLE DATE

/s/ Edward H. Cohen June 24, 1998
____________________________________
Edward H. Cohen, Director

/s/ H. Andrew Cross June 15, 1998
____________________________________
H. Andrew Cross, Director

/s/ Bernard Goldstein June 15, 1998
____________________________________
Bernard Goldstein, Director

/s/ Barry J. Lipsky June 24, 1998
____________________________________
Barry J. Lipsky, Director

/s/ Leonard M. Lodish June 10, 1998
____________________________________
Leonard M. Lodish, Director

/s/ James Meister June 10, 1998
____________________________________
James Meister, Director

/s/ Howard L. Morgan June 24, 1998
____________________________________
Howard L. Morgan, Director

/s/ Jerry R. Schubel June 10, 1998
____________________________________
Jerry R. Schubel, Director

/s/ James H. Simons June 11, 1998
____________________________________
James H. Simons, Director

/s/ Michael R. Strange June 24, 1998
____________________________________
Michael R. Strange, Director

/s/ William H. Turner June 11, 1998
____________________________________
William H. Turner, Director

/s/ Kenneth H. Lind June 24, 1998
____________________________________
Kenneth H. Lind, Senior Vice
President, (Principal Financial and
Accounting Officer)