Franklin Towers Enterprises (FRTW) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2008

oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 0-52150

FRANKLIN TOWERS ENTERPRISES, INC.

(Exact name of small business issuer as specified in its charter)

Nevada (State of incorporation) 20-4069588 (IRS Employer ID Number)

88 Julong Road

Lidu Economic Development Zone

Fulin, Chongqing, China

(Address of principal executive offices)

011-86-2372183330

(Issuer's telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 123,484,043 shares as of November 18, 2008

TABLE OF CONTENTS

Part I
Item 1.	Financial Statements	F-2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	2
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	8
Item 4.	Controls and Procedures.	8
PART II		8
OTHER INFORMATION		8
Item 1.	Legal Proceedings.	8
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	9
Item 3.	Defaults Upon Senior Securities.	9
Item 5.	Other Information.	9
Item 6.	Exhibits	9

PART I

Item 1. Financial Statements

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

INDEX TO FINANCIAL STATEMENTS

	Page
Condensed Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007	F-2
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (Unaudited)	F-3
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2008 (Unaudited)	F-4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (Unaudited)	F-5
Notes to Condensed Consolidated Financial Statements (Unaudited)	F-6 - F-18

F - 1

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	766,837		$	1,311,939
Accounts receivable - net of allowance of $30,030 and $2,146 as of September 30, 2008 and December 31, 2007, respectively		93,640			105,160
Inventories		1,729,927			739,499
Prepaid costs and expenses		691,929			15,102
Total Current Assets		3,282,333			2,171,700
Property and Equipment, net		875,757			517,632
Other Assets:
Deposits		486,024			545,289
Deferred finance costs - net of accumulated amortization of $281,780 and $82,402 as of September 30, 2008 and December 31, 2007, respectively		100,720			300,098
		586,744			845,387
TOTAL ASSETS	$	4,744,834		$	3,534,719
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Convertible notes payable - net of unamortized discounts of $1,482,301 and $1,680,939 as of September 30, 2008 and December 31, 2007, respectively	$	1,309,874		$	79,664
Loans payable		1,059,797			911,085
Accounts payable and accrued expenses		1,509,385			1,213,282
Loans payable - related parties		19,391			20,581
Total Current Liabilities		3,898,447			2,224,612
Long Term Liabilities:
Convertible notes payable - net of unamortized discounts of $0 and $1,078,882 as of September 30, 2008 and December 31, 2007, respectively		-			460,515
TOTAL LIABILITIES		3,898,447			2,685,127
Stockholders' Equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, 0 shares issued and outstanding as of Septembre 30, 2008 and December 31, 2007		-			-
Common stock, $.0001 par value; 1,250,000,000 shares authorized, 123,484,043 shares and 91,130,000 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively		12,348			9,113
Deferred finance costs		(1,834,385	)		(3,415,349	)
Additional paid-in capital		18,278,752			15,659,700
Accumulated deficit		(15,937,073	)		(11,508,096	)
Accumulated other comprehensive income		326,745			104,224
Total Stockholders' Equity		846,387			849,592
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	4,744,834		$	3,534,719

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-2

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Net Sales	$	2,334,638		$	346,947		$	4,784,776		$	346,947
Cost of Sales		2,051,618			324,066			4,464,228			324,066
Gross Profit		283,020			22,881			320,548			22,881
Selling, General and Administration Expenses		338,687			9,557,840			892,451			9,663,820
Loss From Operations		(55,667	)		(9,534,959	)		(571,903	)		(9,640,939	)
Other Income (Expenses):
Interest income		576			20			2,152			532
Interest Expense		(1,239,008	)		(204,073	)		(3,859,226	)		(204,169	)
Total Other Income (Expense)		(1,238,432	)		(204,053	)		(3,857,074	)		(203,637	)
Loss Before Income Tax		(1,294,099	)		(9,739,012	)		(4,428,977	)		(9,844,576	)
Provision for Income Tax		-			-			-			-
Net Loss	$	(1,294,099	)	$	(9,739,012	)	$	(4,428,977	)	$	(9,844,576	)
Net Loss per Share - Basic and Diluted	$	(0.01	)	$	(0.30	)	$	(0.04	)	$	(0.32	)
Weighted Average Shares Outstanding - Basic and Diluted		123,484,043			31,989,130			107,741,181			30,836,081
Comprehensive Loss:
Net loss	$	(1,294,099	)	$	(9,739,012	)	$	(4,428,977	)	$	(9,844,576	)
Other comprehensive income		77,477			14,582			222,521			41,729
Comprehensive Loss	$	(1,216,622	)	$	(9,724,430	)	$	(4,206,456	)	$	(9,802,847	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-3

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED)

	Preferred Stock				Common Stock				Additional Paid - in		Deferred			Accumulated			Accumulated Other Comprehensive
	Shares		Amount		Shares		Amount		Capital		Finance Costs			Deficit			Income		Total
Balance - December 31, 2007		-	$	-		91,130,000	$	9,113	$	15,659,700	$	(3,415,349	)	$	(11,508,096	)	$	104,224	$	849,592
Common stock issued for repayment of convertible notes and accrued interest		-		-		32,354,043		3,235		665,627		-			-			-		668,862
Amortization of deferred finance costs		-		-		-		-		-		1,580,964			-			-		1,580,964
Repayment of nonreciprocal funds transferred to shareholder		-		-		-		-		1,953,425		-			-			-		1,953,425
Net loss for the nine months ended September 30, 2008 (Unaudited)		-		-		-		-		-		-			(4,428,977	)		-		(4,428,977	)
Foreign currency translation adjustment		-		-		-		-		-		-			-			222,521		222,521
Balance - September 30, 2008 (Unaudited)		-	$	-		123,484,043	$	12,348	$	18,278,752	$	(1,834,385	)	$	(15,937,073	)	$	326,745	$	846,387

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-4

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(UNAUDITED)

	2008			2007
Cash Flows from Operating Activities:
Net Loss	$	(4,428,977	)	$	(9,844,576	)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Depreciation expense		58,750			14,483
Bad debt expense		21,220			-
Amortization of deferred finance costs		199,378			105,904
Amortization of debt discount - fair value of warrants and beneficial conversion feature		1,277,520			81,259
Amortization of deferred finance costs - consulting		1,580,964			-
Common stock issued for services		-			9,200,000
Common stock issued for accrued interest on convertible notes payable		174,913			-
Rent expense satisfied by reduction of nonreciprocal funds transferred balance		36,559			-
Changes in operating assets and liabilities
Increase in accounts receivable:		(16,364	)		-
Increase in inventories		(990,428	)		(620,734	)
Increase in prepaid costs and expenses		(676,827	)		(33,754	)
Increase in accounts payable and accrued liabilities		296,103			123,656
Net Cash Used in Operating Activities		(2,467,189	)		(973,762	)
Cash Flows from Investing Activities:
Capital expenditures		(33,606	)		(361,262	)
Acquisition deposit returned - net		89,835			-
Net Cash Provided by (Used in) Investing Activities		56,229			(361,262	)
Cash Flows from Financing Activities:
Proceeds from short term loan		148,712			-
Proceeds from issuance of convertible notes payable					3,300,000
Finance costs related to issuance of convertible notes					(382,500	)
Repayment of convertible notes payable		(13,875	)		-
(Repayment) proceeds from related party		(1,190	)		445,462
Proceeds from repayment of nonreciprocal funds transferred to shareholder		1,663,249			-
Proceeds from an additional investment charged to additional paid in capital		-			768,600
Net cash of business acquired		-			(2,552	)
Net Cash Provided by Financing Activities		1,796,896			4,129,010
Effect of Exchange Rate Changes on Cash and Cash Equivalents		68,962			41,729
Net (Decrease) Increase in Cash and Cash Equivalents		(545,103	)		2,835,715
Cash and Cash Equivalents - Beginning of Period		1,311,939			384,423
Cash and Cash Equivalents - End of Period	$	766,837		$	3,220,138
Supplemental Cash Flow Information:
Interest paid	$	12,500		$	-
Income taxes paid	$	-		$	-
Supplemental Disclosure of Non-Cash Investing Activities:
Fixed assets purchased from related party	$	253,617		$	-
Supplemental Disclosures of Non-Cash Financing Activities:
Preferred stock issued in connection with recapitalization	$	-		$	5,000
Common stock issued for convertible notes payable	$	493,950		$	-
Common stock issued for accrued interest on convertible notes payable	$	174,912		$	-
Common stock purchase warrants issued for deferred finance costs	$	-		$	3,977,236
Debt discount recorded in connection with issuance of convertible notes payable	$	-		$	3,300,000

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

F-5

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – Description of Business and Basis of Presentation

Organization

Franklin Towers Enterprises, Inc. (“Franklin”) was incorporated on March 23, 2006 under the laws of the State of Nevada.

On June 19, 2007, Franklin entered into a Share Purchase Agreement with the shareholders of Chongqing Qiluo Textile Co. Ltd.(“Qiluo”), a limited liability company organized under the laws of the People’s Republic of China, whereby Franklin agreed to acquire 100% of the issued and outstanding registered capital of Qiluo for consideration of 5,000,000 shares of Franklin’s Series A Convertible Preferred Stock (convertible into 52,880,000 shares of common stock) (see Note 10). Upon consummation of such purchase, Qiluo became a wholly-owned subsidiary of Franklin.

The acquisition is accounted for as a “reverse acquisition”, since the stockholders of Qiluo owned a majority of Franklin’s common stock immediately following the transaction. The combination of the two companies is recorded as a recapitalization of Qiluo pursuant to which Qiluo is treated as the continuing entity although Franklin is the legal acquirer. Accordingly, the Company’s historical financial statements are those of Qiluo.

Qiluo was incorporated on December 15, 2006, named “Chongqing Qiluo Industry Ltd.” under the laws of the People’s Republic of China with the purpose of engaging in the manufacture and sale of silk and silk products. Qiluo renamed to “Chongqing Qiluo Textile Co., Ltd.” On May 30, 2008, Qiluo renamed to “Chongqing Fuling Qiluo Wintus Silk Co., Ltd”.

After the acquisition, Franklin focused on the production and sale of silk and silk products. The Company started its test production at the end of June 2007 and commenced operations from the third quarter of 2007.

All references to common stock, share and per share amounts have been retroactively restated to reflect the reverse acquisition as if the transaction had taken place as of the beginning of the earliest period presented.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Franklin (Parent) and its wholly owned subsidiary Qiluo. All significant intercompany accounts and transactions have been eliminated in consolidation.

Going Concern

The Company started its test production at the end of June 2007 and commenced its manufacturing operations during the third quarter of 2007. The Company has incurred a net loss of $1,294,099 and $4,428,977, which included the amortization of deferred finance costs and debt discounts of $983,483 and $3,057,862 for the three and nine months ended September 30, 2008, respectively. In addition, the Company had negative cash flow from operations since December 15, 2006 (date of inception) and has an accumulated deficit of $15,937,073 at September 30, 2008. Substantial portions of the losses are attributable to amortization, consulting and professional fees. Furthermore, the Company’s gross margin rate from its current operations was low. It was 12.1% and 6.7% for the three and nine months ended September 30, 2008, respectively. The Company had a working capital deficiency of $616,114 at September 30, 2008. These factors raise substantial doubt concerning the Company’s ability to continue as a going concern.

F - 6

Going Concern (Continued)

There can be no assurance that funds will be generated during the next twelve months or thereafter from the Company’s current operations, or that funds will be available from external sources such as debt or equity financings or other potential sources. The lack of additional capital could force the Company to curtail or cease operations and would, therefore, have a material adverse effect on its business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company's existing stockholders.

During the nine months ended September 30, 2008, the Company received proceeds from a significant shareholder in the amount of $1,663,249 as a repayment of nonreciprocal funds transferred to this shareholder during 2007.

The Company has undertaken further steps as part of a plan to improve operations and to address our lack of liquidity by raising additional funds, either in the form of debt or equity or some combination thereof. The Company is planning to reduce its cost of goods sold by purchasing its main raw material directly from farmers in the local neighbored area and to reduce its overhead cost by fully utilizing its current manufacture facilities. From the Spring of 2008, the Company began purchasing its main raw material directly from farmers through the planned acquisition of “Zhengzhong” (see Note 7), thereby helping the Company to reduce its raw material - cocoon cost by 14.5% directly and increase its operating gross margin rate to 12.1% during the quarter ended September 30, 2008. However, there can be no assurance that the Company will be able to acquire “Zhengzhong” and to accomplish these objectives, and it is uncertain whether the Company will achieve a profitable level of operations or be able to obtain additional financing.

There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all. In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.

The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. 

Reclassifications

Certain items in these unaudited condensed consolidated financial statements have been reclassified to conform to the current period’s presentation.

Recent Accounting Pronouncements

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements " ("SFAS No. 157" ) and SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115" ("SFAS No. 159"). In February 2008, the Financial Accounting Standards Board (the "FASB") issued FASB Staff Position ("FSP") 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2), which delayed the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. We have not yet determined the impact that the implementation of FSP 157-2 will have on our non-financial assets and liabilities which are not recognized on a recurring basis; however, we do not anticipate the adoption of this standard will have a material impact on our consolidated financial position, results of operations or cash flows. The partial adoption of SFAS No. 157 and the adoption of SFAS No. 159 did not have a material impact on the Company's condensed consolidated financial statements.

F - 7

Recent Accounting Pronouncements (Continued)

In December 2007, the FASB issued SFAS No. 141(R),"Business Combinations" ("SFAS No. 141(R)"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141(R) is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited and the Company is currently evaluating the effect, if any, that the adoption will have on its financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS No. 160"), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. SFAS No. 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited and the Company is currently evaluating the effect, if any, that the adoption will have on its financial position, results of operations or cash flows.

In December 2007, the FASB ratified the consensus in EITF Issue No. 07-1, "Accounting for Collaborative Arrangements" (EITF 07-1). EITF 07-1 defines collaborative arrangements and requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable authoritative accounting literature, and in the absence of other applicable authoritative literature, on a reasonable, rational and consistent accounting policy is to be elected. EITF 07-1 also provides for disclosures regarding the nature and purpose of the arrangement, the entity's rights and obligations, the accounting policy for the arrangement and the income statement classification and amounts arising from the agreement. EITF 07-1 will be effective for fiscal years beginning after December 15, 2008, and will be applied as a change in accounting principle retrospectively for all collaborative arrangements existing as of the effective date. The Company has not yet evaluated the potential impact of adopting EITF 07-1 on its financial position, results of operations or cash flows.

In March 2008, the FASB" issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment to FASB Statement No. 133" ("SFAS No. 161"). SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The Company has not yet evaluated the potential impact of adopting SFAS No. 161 on its financial position, results of operations or cash flows.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future consolidated financial statements.

F - 8

NOTE 2 – Interim Financial Statements

The unaudited condensed consolidated financial statements as of September 30, 2008 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Securities and Exchange Commission (“SEC”) Form 10-Q. In the opinion of management, the unaudited condensed financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2008 and the results of operations and cash flows for the periods ended September 30, 2008 and 2007. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The results for the three and nine month period ended September 30, 2008 is not necessarily indicative of the results to be expected for any subsequent quarter and/or the entire year ending December 31, 2008.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the SEC’s rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2007, included in the Company’s Annual Report on Form 10K filed on April 15, 2008 with the SEC.

NOTE 3 - Net Loss Per Common Share

The Company has adopted Financial Accounting Standards Board (“FASB”) Statement Number 128, “Earnings per Share,” (“EPS”) which requires presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.

Diluted net loss per share is computed similarly to basic net loss per share except that it includes the potential dilution that could occur if dilutive securities were converted. Diluted net loss per common share is the same as basic net loss per share for the periods presented, as the effect of potentially dilutive securities (convertible notes payable and warrants) are anti-dilutive.

NOTE 4 - Inventories

 Inventories consist of the following:

	September 30,		December 31,
	2008		2007
	(Unaudited)
Finished Goods	$	134,535	$	544,327
Processed cocoons		963,889		-
Raw Materials		345,975		182,335
Work in Process		285,528		12,837
Total	$	1,729,927	$	739,499

Finished goods consist of those silks and by products available for sale. There was no valuation allowance for inventory loss at September 30, 2008 and December 31, 2007.

F - 9

NOTE 5 – Prepaid Costs and Expenses

Prepaid costs and expenses consist of:

	September 30, 2008		December 31, 2007
	(Unaudited)
Advances to farmers and others for future deliveries of silk cocoons and other inventory	$	481,972	$	-
Cash advances to personnel operating silk cocoon purchase stations for future overhead costs		16,420		-
Advances to vendors for future overhead costs		89,360		-
Value added tax credits		91,425		-
Other		12,752		15,102
Total	$	691,929	$	15,102

NOTE 6 - Property and Equipment

Property and equipment is summarized as follows:

Fixed Assets	Estimated Useful Life		September 30, 2008		December 31, 2007
			(Unaudited)
Production Equipment		10	$	730,027	$	516,381
Auxiliary Equipment		10		6,981		7,878
Office Equipment		3-5		22,271		15,991
Automobile		5		125,188		-
Furniture and Fixtures		5-7		29,707		25,872
Construction in progress				72,814		-
				986,988		566,122
Less: Accumulated Depreciation				111,231		48,490
			$	875,757	$	517,632

Depreciation expense was $58,750 for the nine months ended September 30, 2008, of which $39,926 was included in the cost of sales. Depreciation expense was $14,483 for the nine months ended September 30, 2007.

During the first quarter of 2008, management reviewed the useful lives and residual value of the Company’s machinery and equipment and compared to industry standards. Management has determined the production equipment acquired in 2007, which were originally estimated to have 5-7 years useful lives should be increased to 10-years useful lives and with a residual value of 5% of their original cost. Accordingly, effective January 1, 2008, the Company has changed the depreciation lives for the production equipment and auxiliary equipment to 10 years.

F - 10

NOTE 7 - Deposits

Deposits consist of:

	September 30, 2008		December 31, 2007
	(Unaudited)
Down payment in connection with Letter Agreement dated November 26, 2007 to acquire cocoon purchase stations, warehouse, and certain other assets from Zhengzhong Silkworm Industrial Development Co. Ltd., a state owned entity ("Zhengzhong")	$	411,270	$	411,270
Deposit for purchase of silkworm seeds		-		134,019
Deposit paid in connection with agreement dated March 19, 2008 to use cocoon purchase stations and warehouse at no cost from March 19, 2008 to March 18, 2009		7,364		-
Payment on August 15, 2008 in connection with the purchase		36,820		-
Foreign currency translation adjustment		30,570		-
Total	$	486,024	$	545,289

The Letter Agreement dated November 26, 2007 and subsequent amendments provided that the total purchase price of the Zhengzhong assets was 10,374,800 Renminbi ($1,528,000 translated at the September 30, 2008 exchange rate). If the Company is unable to pay the remaining 7,124,800 Renminbi ($1,049,340 translated at the September 30, 2008 exchange rate) due, the Company’s total payment of 3,250,000 Renminbi ($478,660 translated at the September 30, 2008 exchange rate) may be forfeited and not recovered (partially or in full).

NOTE 8 - Loans Payable – Short Term

Loans payable consist of:	September 30, 2008		December 31, 2007
	(Unaudited)
Qiluo loan payable to Chongqing Aikekaer Paint Co., Ltd. under 10,000,000 Renminbi ($1,458,000) credit line, interest at 6% per annum, due May 31, 2009	$	976,467	$	-
Qiluo loans payable to one individual, interest at 6% per annum, due on demand		63,330		-
Franklin loans payable to two individuals, interest at 8% per annum, due April 24, 2008 (past due)		20,000		20,000
Qiluo loan payable to Shanghai Pudong Development Bank, interest at 6.57% per annum, due January 29, 2008 (repaid in full)		-		891,085
Total	$	1,059,797	$	911,085

Loans payable – related parties consist of:	September 30, 2008		December 31, 2007
	(Unaudited)
Franklin loan payable to former chief executive officer, interest at 8% per annum, due on demand	$	12,233	$	12,233
Franklin loan payable to former chief executive officer, non-interest bearing, due on demand		7,158		8,348
Total	$	19,391	$	20,581

F - 11

NOTE 9 - Convertible Notes Payable

	September 30,			December 31,
Convertible notes payable, net consist of:	2008			2007
	(Unaudited)
Convertible notes - initial face amount	$	3,300,000		$	3,300,000
Less unamortized debt discounts:
Discount on relative fair value of warrants		(2,903,247	)		(2,903,247	)
Discount on beneficial conversion feature		(396,753	)		(396,753	)
Less accumulated amortization		1,817,699			540,179
Unamortized debt discounts		(1,482,301	)		(2,759,821	)
Repayment of convertible notes		(507,825	)		-
Convertible notes payable, net	$	1,309,874		$	540,179
Current portion	$	1,309,874		$	79,664
Long term portion	$	-		$	460,515

On September 12 and September 20, 2007, the Company entered into Subscription Agreements (the "Subscription Agreements") with 11 investors ("Purchasers"), for the purchase and sale of $3,300,000 of Secured Convertible Promissory Notes of the Company (the “Notes”) for the aggregate purchase price of $3,300,000 (the “Note Financing”). The Company received net proceeds from the issuance of the Notes of $2,622,425 after finance costs of $382,500 and other expenses of $295,075. Pursuant to the terms of the Subscription Agreements, the Company also issued to the Purchasers warrants to purchase up to 26,400,000 shares of common stock of the Company, subject to adjustments for certain issuances and transactions.

The Notes bear interest at the rate of 10% per annum, payable in either (a) cash or (b) absent an event of default, in shares of the Company’s common stock at the lesser of (i) $0.25 per share or (ii) 75% of the average of the closing bid prices of the Company’s common stock for the 5 trading days preceding the payment date. Said payments commence on March 12, 2008 and all accrued but unpaid interest and any other amounts due thereon is due and payable on September 12, 2009, or earlier upon acceleration following an event of default, as defined in the Notes.

All principal and accrued interest on the Notes is convertible into shares of the Company’s common stock at the election of the Purchasers at any time at the conversion price of $0.25 per share, subject to adjustment for certain issuances, transactions or events that would result in “full ratchet” protection to the holders.

The Notes contain default events which, if triggered and not timely cured (if curable), will result in a default interest rate of 15% per annum. The Notes also contain full ratchet antidilution provisions with respect to certain securities issuances, including the issuances of stock for less than $.25 per share. In addition, the Company has to pay the Purchasers an additional amount of principal plus accrued interest if the Company is no longer listed on the Bulletin Board or sells substantially all of its assets.

As part of the financing, the Company also issued to the Purchasers an aggregate of 13,200,000 Class A Common Stock Purchase Warrants and 13,200,000 Class B Common Stock Purchase Warrants. The Class A Warrants are exercisable at a price of $0.50 per share at any time until the fifth anniversary from the date the Registration Statement is declared effective by the Securities and Exchange Commission (“the Expiration Date”) and the Class B Warrants are exercisable at a price of $1.00 per share at any time until the Expiration Date. The warrants include a cashless exercise provision which is triggered after March 12, 2008 as well as “full ratchet” antidilution provisions with respect to certain securities issuances.

F - 12

NOTE 9 - Convertible Notes Payable (Continued)

Absent a waiver from a Purchaser, conversion of the Notes, or exercise of the Warrants, is subject to the restriction that such conversion or exercise does not result in the Purchaser beneficially owning at any one time more than 4.99% of the Company’s outstanding shares of common stock.

Payment of the Notes along with the Company’s other obligations to the Purchasers is secured by all the assets of the Company and of its wholly-owned subsidiary, Qiluo. Such obligations are also secured by a guaranty and pledge of the 17,100,000 shares of the Company’s common stock held by Xinshengxiang Industrial Development Co., Ltd., a significant shareholder of the Company. In connection with the transaction, the Company agreed to prepare and file with the Securities and Exchange Commission within 60 days following the closing a registration statement on Form SB-2 for the purpose of registering for resale all of the shares of common stock underlying the Notes. If the Company fails to file such registration statement within such time, or if the registration statement is not declared effective within 120 days from September 12, 2007, the Company must pay monthly liquidated damages in cash equal to 2% of the principal amount of the Notes. The Purchasers were also granted standard piggyback registration rights along with certain demand registration rights. The Company filed a registration statement on December 26, 2007. The registration statement has not yet been declared effective (see Note 15).

In connection with the convertible debt, the Company recorded deferred finance costs of $4,466,334 of which $382,500 was recorded as an asset and $4,083,834 was recorded as a component of stockholders’ equity. Such deferred finance costs are being amortized over the life of the related debt. The Company also recorded a deferred debt discount in the amount of $3,300,000 to reflect the beneficial conversion feature of the convertible debt and the fair value of the warrants. The beneficial conversion feature was recorded pursuant to Emerging Issues Task Force (“EITF”) 00-27: “Application of EITF No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, to Certain Convertible Instruments”. In accordance with EITF 00-27, the Company evaluated the value of the beneficial conversion feature and recorded the amount of $396,753 as a reduction to the carrying amount of the convertible debt and as an addition to paid-in capital. Additionally, the relative fair value of the warrants of $2,903,247 was calculated and recorded as a further reduction to the carrying amount of the convertible debt and as addition to paid-in capital. The amortization of these deferred finance costs and debt discounts are reported as a component of the interest expense. The amortization of deferred finance costs and debt discounts for the nine months ended September 30, 2008 were $1,580,964 and $1,277,520, respectively. Such amortizations have been included as interest expense.

The Company commenced the repayment of the convertible notes and interest on March 12, 2008 and paid $26,375 in cash to three of the Purchasers, which represented accrued interest of $12,500 and repayment of principal of $13,875 due on the convertible promissory notes. Also, the Company issued a total of 32,354,043 shares to seven of the Purchasers during the six months ended June 30, 2008, which represented accrued interest of $174,912 and repayment of principal of $493,950. The Company did not make any repayments during the three months ended September 30, 2008 due to its financing difficulties. The Company is in default to all eleven investors. (See Note 17)

NOTE 10 - Stockholders’ Equity and Share Purchase Agreement

Effective on April 23, 2007, the Company amended its articles of incorporation for the purpose of effecting a 2.5 for 1 forward stock split of its common stock. In addition, the authorized common stock of the Company was increased from 500,000,000 shares, $.001 par value to 1,250,000,000 shares, $.0001 par value. All share and per share data have been given retroactive effect to reflect this recapitalization.

F - 13

NOTE 10 - Stockholders’ Equity and Share Purchase Agreement (Continued)

On June 19, 2007, Franklin entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with the following persons: Chongqing Qiluo Textile Co. Ltd., a limited liability company organized under the laws of the People’s Republic of China (“Qiluo”); Xinshengxiang Industrial Development Co., Ltd., a limited liability company organized under the laws of the People’s Republic of China (“Xinshengxiang”); Mr. Dingliang Kuang (“Dingliang”); and Ms. Yue Kuang (“Yue,” and together with Xinshengxiang and Dingliang, the "Qiluo Shareholders"). Pursuant to the Share Purchase Agreement, Franklin agreed to acquire Qiluo at a closing held simultaneously therewith by purchasing from the Qiluo Shareholders all of their respective shares of Qiluo’s registered capital, which represent 100% of the issued and outstanding registered capital stock of Qiluo. Upon the consummation of such purchase, Qiluo became a wholly-owned subsidiary of Franklin. In consideration therefor, Franklin agreed to issue to the Qiluo Shareholders an aggregate of 5,000,000 shares of Franklin’s Series A Convertible Preferred Stock (convertible into 52,880,000 shares of common stock, see Note 11), which were allocated between the Qiluo Shareholders as follows: 4,750,000 shares to Xinshengxiang; 125,000 shares to Dingliang; and 125,000 shares to Yue. Each share of Series A Convertible Preferred Stock was convertible, at the option of the holder thereof, into 10.576 shares of Franklin's common stock.

In connection with the foregoing transaction, on June 19, 2007, Kelly Fan, the former President, Chief Executive Officer, Treasurer, and Director of Franklin, transferred without consideration to the Qiluo Shareholders 18,000,000 shares of the common stock of Franklin which were issued and outstanding and held by Ms. Fan. Such shares were allocated between the Qiluo Shareholders as follows: 17,100,000 shares to Xinshengxiang Industrial Development Co., Ltd.; 450,000 shares to Dingliang Kuang; and 450,000 shares to Yue Kuang.

As a result of the foregoing transactions: (a), Xinshengxiang Industrial Development Co., Ltd. held approximately 81% of the total combined voting power of all classes of Franklin’s capital stock entitled to vote; (b) Diangliang Kuang is the principal owner and manager of Xinshengxiang Industrial Development Co., Ltd. and thus has voting, investment, and dispositive control over the shares of Franklin’s capital stock owned by Xinshengxiang Industrial Development Co., Ltd. Accordingly, Mr. Kuang is also deemed to be the indirect beneficial owner of the shares of Franklin’s capital stock owned by Xinshengxiang Industrial Development Co., Ltd. Mr. Kuang thus directly and indirectly (by Xinshengxiang Industrial Development Co., Ltd.) held approximately 83% of the total combined voting power of all classes of Franklin’s capital stock entitled to vote; and (c) Yue Kuang, who is the sister of Diangliang Kuang, directly held approximately 2% of the total combined voting power of all classes of Franklin’s capital stock who is entitled to vote.

In September 2007, the Company agreed to issue an aggregate of 8,000,000 shares of its common stock valued at $9,200,000 to Bonsai Venture Partner, Ltd., a British Virgin Islands Limited company in consideration for the consulting services rendered. These issuances were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act and the Rule 506 promulgated thereunder. The shares issued in consideration for services rendered were valued at $9,200,000, based on the price of our stock on the date of issuance.

The Company issued a total of 32,354,043 shares to seven of the Purchasers as repayment of loan and loan interest during the nine months ended September 30, 2008, pursuant to the terms of the Notes (see Note 9). The issuing price was calculated at 75% of the average of the closing bid prices of the Company’s common stock for the 5 days preceding the payment date.

NOTE 11 - Preferred Stock

On June 18, 2007, the Company designated a series of Preferred Stock known as the “Series A Convertible Preferred Stock” (the “Series A Preferred Stock”) by filing a Certificate of Designation with the Secretary of State of Nevada. The number of shares constituting such Series A Preferred Stock was designated to be 5,000,000 shares, par value $0.001 per share. Pursuant to the Certificate of Designation, the principal rights, preferences, powers, limitations and restrictions of the Series A Preferred Stock are as follows:

F - 14

NOTE 11 - Preferred Stock (Continued)

Each share of Series A Preferred Stock is convertible, at the option of the holder thereof, without payment of additional consideration, into 10.576 shares of the Company’s common stock. Holders of Series A Preferred Stock shall be entitled to vote, together with holders of common stock as a single class, on all matters upon which stockholders of the Company are entitled to vote, with each share of Series A Preferred Stock having one vote. The Series A Preferred Stock shall rank senior to the common stock. In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the common stock of the Company and any other issue of stock, should there be any, by reason of their ownership thereof, an amount per share equal to $0.001 per each share of Series A Preferred Stock owned by such shareholder plus any declared and unpaid dividends on the Series A Preferred Stock.

On December 10, 2007, the Company issued an aggregate of 52,880,000 shares of common stock to complete the conversion of the 5,000,000 shares of Series A Preferred Stock then outstanding.

NOTE 12 - Warrants

A summary of the status of the Company’s warrants is presented below:

	Date of Issuance		Number of  Warrants		Weighted Average Exercise Price
Outstanding - January 1, 2007				-	$	-
Issued, Class A Warrants		9/12/2007		13,200,000		0.50
Issued, Class B Warrants		9/12/2007		13,200,000		1.00
Issued, Finder's Fees Warrants		9/12/2007		3,960,000		0.25
Outstanding - September 30, 2008 (Unaudited) and December 31, 2007				30,360,000	$	0.68

Warrants outstanding and exercisable by price range as of September 30, 2008 are:

Warrants Outstanding								Warrants Exercisable
Range of		Number Outstanding		Weighted Average Remaining Contractual Life in Years *		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	0.25		3,960,000		5.00	$	0.25		3,960,000	$	0.25
$	0.50		13,200,000		5.00		0.50		13,200,000		0.50
$	1.00		13,200,000		5.00		1.00		13,200,000		1.00
			30,360,000			$	0.68		30,360,000	$	0.68

*Warrants expire 5 years after effective date of registration statement. The registration statement filed on December 26, 2007 is not effective as of November 15, 2008.

The significant assumptions used to determine the fair values of the warrants, using a Black-Scholes option pricing model, were as follows:

Significant assumptions:
Risk-free interest rate at grant date	4.11	%
Expected stock price volatility	93.95	%
Expected dividend payout	-
Expected option life-years	5

F - 15

NOTE 13 - Related Party Transaction

During 2007, the Company received funds from and advanced funds to Xinshengxiang, one of its significant shareholders (see Note 10) for working capital purposes. As of December 31, 2007, the excess advanced payments to Xinshengxiang amounted to $2,019,685. The Company has accounted for this excess as a nonreciprocal transfer in 2007 and recorded the overpayment as a direct reduction of additional paid-in capital. Xinshengxiang repaid $1,663,249 in cash during the nine months ended September 30, 2008 and the Company recorded the repayments as an increase in additional paid-in capital.

During the three months ended March 31, 2008, the Company acquired four silk reeling machines and an automobile from Xinshengxiang valued at a total of $253,617 (1,850,000 Renminbi), which the parties agreed to be treated as a repayment of the nonreciprocal funds transferred in 2007. The Company recorded the $253,617 repayment as an increase in additional paid-in capital.

During the nine months ended September 30, 2008, the Company and Xinshengxiang agreed to offset the Company’s $36,559 rent liability to Xinshengxiang and treat the $36,559 as a repayment of the nonreciprocal funds transferred in 2007. The Company recorded the $36,559 repayment as an increase in additional paid-in capital.

At September 30, 2008, the unpaid balance of the nonreciprocal funds transferred to Xinshengxiang in 2007 is $66,260.

During the three months ended March 31, 2008, the Company purchased approximately 42.3 tons raw material–cocoon for $301,455 (2,198,960 Renminbi) at market price from Xinshengxiang.

NOTE 14 - Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable.

Qiluo maintains cash balances in various banks in the People’s Republic of China. Currently, no deposit insurance system has been set up in the People’s Republic of China. Therefore, the Company will bear a risk if any of these banks become insolvent. Qiluo’s uninsured cash balance was $766,837 as of September 30, 2008.

F - 16

NOTE 15 - Commitments and Contingencies

Lease agreement

On January 28, 2007, Qiluo signed a twenty (20) years lease with Xinshengxiang, a related party (see Note 10), for the use of a factory building located in Fulin, Chongqing. The lease commenced on March 1, 2007 and provides for annual rental payments of 200,000 Renminbi ($29,456 translated at the September 30, 2008 exchange rate) plus other occupancy costs.

Future minimum rentals under this lease are as follows:

Year Ending September 30,	Future Minimum Rent Payments
2009	$	29,456
2010		29,456
2011		29,456
2012		29,456
2013		29,456
Thereafter		395,201
Total	$	542,481

Registration Rights Arrangement

In connection with the convertible notes payable (see Note 9), the Company agreed to prepare and file with the Securities and Exchange Commission within 60 days following the closing a registration statement for the purpose of registering for resale all of the shares of common stock underlying the Notes. If the Company fails to file such registration statement within such time, or if the registration statement is not declared effective within 120 days from September 12, 2007, the Company is to pay monthly liquidated damages in cash equal to 2% of the principal amount of the Notes. The Company filed a registration statement on December 26, 2007; the registration statement has not yet been declared effective. Accordingly, the Company has accrued liquidated damages of $542,636 at September 30, 2008, which has been included in interest expense for the nine months ended September 30, 2008 and accounts payable and accrued expenses at September 30, 2008.

Lack of Insurance

The Company currently has no insurance in force for its office facilities and operations and it cannot be certain that it can cover the risks associated with such lack of insurance or that it will be able to obtain and/or maintain insurance to cover these risks at economically feasible premiums.

Country Risk

As the Company's principal operations are conducted in the People’s Republic of China (the “PRC”), the Company is subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These risks include, among others, risks associated with the political, economic and legal environments and foreign currency exchange limitations encountered in the PRC. The Company's results of operations may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, among other things.

In addition, all of the Company's transactions undertaken in the PRC are denominated in Renminbi, which must be converted into other currencies before remittance out of the PRC may be considered. Both the conversion of Renminbi into foreign currencies and the remittance of foreign currencies abroad require the approval of the PRC government.

F - 17

NOTE 16 – Legal Proceeding

On June 30, 2008, Professional Offshore Opportunity Fund Ltd. (the “Plaintiff”) filed a motion for default judgment against the Company. On April 21, 2008, the Plaintiff initiated the action in the United States District Court Southern District of New York, on a claim of breach of contract and non payment on a promissory note dated September 12, 2007, made by the Company in favor of the Plaintiff, in the principal amount of $500,000. The Plaintiff claimed approximately $671,000 in total relief, which amount includes a 15% principal charge of $75,000, accrued interest of $48,125, and liquidated damages of $37,000.

NOTE 17 – Default on Convertible Notes Payable

As of June 12, 2008, the Company was in default to six (6) Purchasers on convertible notes payments due June 12, 2008 and earlier. As of July 12, 2008, the Company is in default to all eleven (11) Purchasers on convertible notes payments due July 12, 2008. The Notes provide that, at the option of the holder, an event of default shall make all sums of principal and interest then remaining unpaid and all other amounts payable immediately due and payable upon demand. As of September 30, 2008, the unpaid convertible notes payable balance is $2,792,175; unpaid accrued interest is $135,329; and unpaid accrued liquidated damages are $641,636. The Company is seeking ways to resolve the default issue with all investors.

F - 18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The following discussion should be read in conjunction with our financial statements, which are included elsewhere in this Form 10-Q (the “Report”). This Report contains forward-looking statements which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

For a description of such risks and uncertainties refer to our Registration Statement on Form S-1/A, and Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 7, 2008 and April 15, 2008, respectively. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

2

Business Overview

Our History

Franklin Towers Enterprises, Inc. (“Franklin”) was incorporated on March 23, 2006 under the laws of the State of Nevada.

On June 19, 2007, Franklin entered into a Share Purchase Agreement with the shareholders of Chongqing Qiluo Textile Co. Ltd.(“Qiluo”), a limited liability company organized under the laws of the People’s Republic of China, whereby Franklin agreed to acquire 100% of the issued and outstanding registered capital of Qiluo for consideration of 5,000,000 shares of Franklin’s Series A Convertible Preferred Stock (convertible into 52,880,000 shares of common stock) (see Company’s Current Report on Form 8-K filed with the SEC on June 20, 2007). Upon consummation of such purchase, Qiluo became a wholly-owned subsidiary of Franklin.

The acquisition was accounted for as a “reverse acquisition,” because the stockholders of Qiluo owned a majority of Franklin’s common stock immediately following the transaction. The combination of the two companies is recorded as a recapitalization of Qiluo pursuant to which Qiluo is treated as the continuing entity although Franklin is the legal acquirer. Accordingly, the Company’s historical financial statements are those of Qiluo.

Qiluo was incorporated on December 15, 2006, named “Chongqing Qiluo Industry Ltd.” under the laws of the People’s Republic of China with the purpose of engaging in the manufacture and sale of silk and silk products. Qiluo was renamed to “Chongqing Qiluo Textile Co., Ltd.” On May 30, 2008, Qiluo changed its name to “Chongqing Fuling Qiluo Wintus Silk Co., Ltd”.

Our Business

Through our subsidiary, Qiluo, we are engaged in the manufacture and sale of raw silk in China. Qiluo’s executive offices and principal place of business is located in the Fulin District of Chongqing Municipality, China. The primary goal of Qiluo is to be the leader in silk manufacturing in the local area of Fulin, Chongqing, China.

On January 28, 2007, the Company signed a twenty (20) year lease effective as of March 1, 2007 with Xinshengxiang, the holder of approximately 17.8% of our common stock at the time, for the use of a factory building located in Fulin, Chongqing. The lease commenced on March 1, 2007 and calls for annual base rent of 500,000 Renminbi ($29,456 translated at September 30, 2008 exchange rate) plus other occupancy costs. The leased factory building is new and includes housing facilities.

As of September 30, 2008 the Company spent approximately $737,000 on manufacturing equipment and facilities. The Company planned to build twelve silk reeling production lines; each production line has the maximum production capacity of 2.5 to 3 tons of silk per month. Eleven of these lines have been completed and the other one has been in the process of installation. Currently, eight of these production lines are in use. The Company started its test production at the end of June 2007 and commenced operations from the third quarter of 2007.

In an effort to obtain a stable raw material supply and to maximize both output and quality of our silk production through Qiluo, we are contemplating the acquisition of various other silk worm farms. On November 26, 2007, we entered into a letter of intent with Chongqing Fulin Municipal Government to acquire certain assets from Zhengzhong Silkworm Industrial Development Co., Ltd., a state owned entity, pursuant to which we intend to acquire the assets of cocoon purchase stations from Zhengzhong and exclusive right of those purchase stations to purchase cocoons produced from approximately 15,000 acres of mulberry farms in the local area. The total purchase price is 10,374,800 Renminbi ($1,528,000 translated at September 30, 2008 exchange rate)

3

On December 28, 2007, the Company paid 3,000,000 Renminbi ($441,840 translated at the September 30, 2008 foreign exchange rate) as a down payment to Chongqing Fulin Municipal Government in order to execute the acquisition plan. On August 15, 2008, the Company paid additional 250,000 Renminbi ($36,820 translated at September 30, 2008 foreign exchange rate). If the Company is unable to pay the remaining 7,124,800 Renmibi ($1,049,340 translated at the September 30, 2008 exchange rate) due, the Company’s total payment of 3,250,000 Renminbi ($478,660 translated at the September 30, 2008 exchange rate) may be forfeited and not recovered (partially or in full).

As part of acquisition plan, on March 19, 2008, the Company signed a contract with Chongqing Fulin State Owned Assets Investment and Management Company to rent and use state owned cocoon purchase station and warehouse at no cost from March 19, 2008 to March 18, 2009. The Company paid a deposit of 50,000 Renminbi ($7,364 translated at the September 30, 2008 foreign exchange rate) to Chongqing Fulin State Owned Assets Investment and Management Co. as required by the rent contract.

The acquisition of certain assets of Zhengzhong Silkworm Industrial Development Co., Ltd. from Fuling Municipal Government has not been consummated as the Company failed to make the full payment. Nevertheless, the Company started to use these cocoon stations and to purchase cocoon directly from local farmers in the second quarter of 2008.

Furthermore, in an effort to expand silk production and subsequent processing ability, on November 28, 2007, we entered into a binding letter agreement with Chongqing Wintus, pursuant to which we intend to acquire certain assets of Wintus, including the stock of their seven wholly owned Chinese subsidiaries. The business of Wintus is focused on the production of raw silk and the subsequent processing and sales of various silk products. As consideration for the assets, we agreed to pay a combination of cash and stock, in amounts to be mutually agreed upon after we have completed our due diligence investigation of Wintus’ and its assets. As of November 15, 2008, the Company did not take any further steps for this planned acquisition. We will not be able to complete this acquisition until we secure additional funds.

Should our initiatives to maximize both output and quality of silk production move forward, additional funds may be required. However, there can be no assurance that additional capital will be available to us. Although we may seek to raise additional funds, we have no specific plans, understandings or agreements with respect to such an offering, and we have given no contemplation with respect to the securities to be offered or any other issue with respect to any offering. We may have to issue debt or equity or enter into a strategic arrangement with a third party. We currently have no agreements, arrangements or understandings with any person to obtain funds through bank loans, lines of credit or any other sources.

The current market condition – financial crisis will have a negative impact on our operations in the coming quarters. The market is lack of demand for our products. The silk price has decreased 12% and cocoon price decreased 3%, compared average prices in the third quarter of 2008. Chinese authorities announced plans to spend $586 billion over the next two years in order to stimulate the economy. However, there can be no assurance that this plan will have a positive effect on our industry in a short run.

Results of Operations

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net sales	$	2,334,638		$	346,947		$	4,784,776		$	346,947
Cost of sales		2,051,618			324,066			4,464,228			324,066
Gross profit		283,020			22,881			320,548			22,881
Selling, general and administrative expenses		338,687			9,557,840			892,451			9,663,820
Loss from operations		(55,667	)		(9,534,959	)		(571,903	)		(9,640,939	)
Other expense		(1,238,432	)		(204,053	)		(3,857,074	)		(203,637	)
Net loss	$	(1,294,099	)	$	(9,739,012	)	$	(4,428,977	)	$	(9,844,576	)

4

Three months ended September 30, 2008 vs. three months ended September 30, 2007.

Revenue for the three months ended September 30, 2008 was $2,334,638, an increase of $1,987,691, as compared to the revenue of $346,947 for the three months ended September 30, 2007. The increase is primarily attributable to the following factors: (i) the Company only commenced its operation in the third quarter of 2007 and thus was not in full operations during the third quarter of 2007; (ii) commence in spring cocoon season of 2008, the Company started to use its exclusive right to purchase cocoons directly from local farmers through acquired Zhengzhong assets (see Business), the Company sold excess processed cocoons which are not suitable by our facilities, approximately 203 tons to other manufacturers and realized revenue of $1.09 million (7.4 million Renminbi).

Our total operating expenses for the three months ended September 30, 2008 were $338,687, a decrease of $9,219,153 as compared to $9,557,840 for the three months ended September 30, 2007. The decrease was primarily due to the common stocks issued for services, which was valued at $9,200,000 and recorded as consulting fee during the three months ended September 30, 2007.

Nine months ended September 30, 2008 vs. nine months ended September 30, 2007.

The net sales for the nine months ended September 30, 2008 totaled $4,784,776, an increase of $4,437,829 as compared to the sales of $346,947 for the nine months ended September 30, 2007. This is due to the fact that the Company only commenced its operation in the third quarter of 2007. Of the net sales for the nine months ended September 30, 2008, approximately 43.3% was generated from the sale of raw silk, which represented the sale of approximately 93.8 tons of silk ; 12.2% was generated from the sale of by products, which are residual substances and materials from the processing of cocoons; 39.6% was generated from the resale of 330.2 tons of excessive processed cocoons and certain cocoons which were not suitable for our facilities; and 4.8% was other sales and income.

Our total operating expenses for the nine months ended September 30, 2008 were $892,451, as compared to $9,663,820 for the nine months ended September 30, 2007. The decrease was primarily due to the common stock issued for services, which was valued at $9,200,000 and recorded as consulting fee during the third quarter of 2007. Absenting consulting expense, the operating expenses were increased $428,631, or increased 92%, compared to the comparable period of 2007. Due to that Company started its operation from the third quarter of 2007.

Liquidity and Capital Resources

The gross margin rate during the third quarter of 2008 increased to 12.1% from 2.4% during the second quarter of 2008. This improvement is mainly the result of our acquisition of Zhengzhong (see Business). The Company start to use its exclusive right through acquired assets of Zhengzhong to purchase cocoon directly from local farmers commence on spring cocoon season of 2008. As a result, the cost of our main raw material – cocoon decreased 27%, the average cost (excluding tax) purchased directly from farmers is $4,620 (31,350 Renminbi) per ton, compared to $6,350 (43,140 Renminbi) per ton, the average cost purchased from other vendors.

As of September 30, 2008, we had $766,837 in cash and cash equivalents. The Company had negative working capital of $616,114 at September 30, 2008.

During the nine months ended September 30, 2008, the Company received $1,663,249 in cash from its major shareholder as a repayment of funds that were advanced to the shareholder in 2007 and borrowed $148,712 from third parties to cover operational needs.

On September 12 and September 20, 2007, the Company entered into Subscription Agreements (the "Subscription Agreements") with 11 investors ("Purchasers"), for the purchase and sale of $3,300,000 of Secured Convertible Promissory Notes of the Company (the “Notes”) for the aggregate purchase price of $3,300,000 (the “Note Financing”). The Company received net proceeds from the issuance of the Notes of $2,622,425 after finance costs of $382,500 and other expenses of $295,075. Pursuant to the terms of the Subscription Agreement, the Company also issued to the Purchasers warrants to purchase up to 26,400,000 shares of common stock of the Company, subject to adjustments for certain issuances and transactions.

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The Notes bear interest at the rate of 10% per annum, payable in either (a) cash equal to 115% of 5.55% of the initial principal amount or (b) absent any event of default, in shares of the Company’s common stock at the lesser of (i) $0.25 per share or (ii) 75% of the average of the closing bid prices of the Company’s common stock for the 5 trading days preceding the payment date. Said payments commence on March 12, 2008 and all accrued but unpaid interest and any other amounts due thereon is due and payable on September 12, 2009, or earlier upon acceleration following an event of default, as defined in the Notes.

All principal and accrued interest on the Notes is convertible into shares of the Company’s common stock at the election of the Purchasers at any time at the conversion price of $0.25 per share, subject to adjustment for certain issuances, transactions or events that would result in “full ratchet” protection to the holders.

The Company commenced the repayment of convertible notes and interest on March 12, 2008 and paid $26,375 in cash to three private investors, which represents accrued interest of $12,500 to three private investors and repayment of principal in the amount of $13,875 due on the convertible promissory notes. The Company issued total of 32,354,043 shares to seven private investors during the six months ended June 30, 2008, which represents the repayment of loan principal of $493,950 and loan interest of $174,913. The Company did not make any repayment during the three months ended September 30, 2008 due to its financing difficulties.

As of June 12, 2008, the Company was in default to six (6) Purchasers on convertible notes payments due June 12, 2008 and earlier. As of July 12, 2008, the Company is in default to all eleven (11) Purchasers on convertible notes payments due July 12, 2008. The Notes provide that, at the option of the holder, an event of default shall make all sums of principal and interest then remaining unpaid and all other amounts payable immediately due and payable upon demand. As of September 30, 2008, the unpaid convertible notes payable balance is $2,792,175; unpaid accrued interest is $135,329; and unpaid accrued liquidated damages is $641,636. The Company is seeking ways to resolve the default issue with all investors.

On June 30, 2008, Professional Offshore Opportunity Fund Ltd. (the “Plaintiff”) filed a motion for default judgment against the Company. On April 21, 2008, the Plaintiff initiated the action in the United States District Court Southern District of New York, on a claim of breach of contract and non payment on a promissory note dated September 12, 2007, made by the Company in favor of the Plaintiff, in the principal amount of $500,000. The Plaintiff claimed approximately $671,000 in total to relief. The Company is in the process of retaining an attorney to defend this litigation. Any adverse outcome of this litigation could materially harm the financial condition of the Company and could cause it to cease operations.

The Company is in talks with a bank to acquire a short term loan to support its operating needs. However, there can be no assurance that the Company can successfully get a loan from the bank or secure financing from any other source.

Going Concern Consideration

The Company started its test production at the end of June 2007 and commenced its manufacturing operations during the third quarter of 2007. The Company has incurred a net loss of $1,294,099 and $4,428,977, which included the amortization of deferred finance costs and debt discounts of $983,483 and $3,057,862 for the three and nine months ended September 30, 2008, respectively. In addition, the Company had negative cash flow from operations since December 15, 2006 (date of inception) and has an accumulated deficit of $15,937,073 at September 30, 2008. Substantial portions of the losses are attributable to amortization, consulting and professional fees. Furthermore, the Company’s gross margin rate from its current operations was low. It was 12.1% and 6.7% for the three and nine months ended September 30, 2008, respectively. The Company had a working capital deficiency of $616,114 at September 30, 2008. These factors raise substantial doubt concerning the Company’s ability to continue as a going concern.

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There can be no assurance that funds will be generated during the next twelve months or thereafter from the Company’s current operations, or that funds will be available from external sources such as debt or equity financings or other potential sources. The lack of additional capital could force the Company to curtail or cease operations and would, therefore, have a material adverse effect on its business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company's existing stockholders.

During the nine months ended September 30, 2008, the Company received proceeds from a significant shareholder in the amount of $1,663,249 as a repayment of the funds advanced to this shareholder during 2007.

The Company has undertaken further steps as part of a plan to improve operations and to address our lack of liquidity by raising additional funds, either in the form of debt or equity or some combination thereof. The Company is planning to reduce its cost of goods sold by purchasing its main raw material directly from farmers in the local neighbored area and to reduce its overhead cost by fully utilizing its current manufacture facilities. From the Spring of 2008, the Company started to purchase its main raw material directly from farmers through the acquisition of Zhengzhong. It helped the Company to reduce its raw material - cocoon cost by 14.5% directly and increased its operating gross margin rate to 12.1% consequently during the quarter ended September 30, 2008. However, the acquisition has not been consummated as the Company failed to make a full payment. There can be no assurance that the Company can raise enough funds to accomplish successfully this acquisition and to accomplish these steps and/or business plans, and it is uncertain whether the Company will achieve a profitable level of operations.

There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all. In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.

Critical Accounting Policies and Estimates

Recent Accounting Pronouncements

For a summary of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2007 filed with SEC on April 15, 2008 and Note 1 of Notes to Condensed Consolidated Financial Statements under the caption “Recent Accounting Pronouncements” included in Part I, Item 1, Financial Statements of this Form 10-Q.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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Commitments and Contingencies

Registration Rights Arrangement

In connection with the convertible debt, the Company agreed to prepare and file with the Securities and Exchange Commission within 60 days following the closing of a registration statement on Form SB-2 for the purpose of registering for resale all of the shares of common stock underlying the Notes, If the Company fails to file such registration statement within such time, or if the registration statement is not declared effective within 120 days from September 12, 2007, the Company must pay monthly liquidated damages in cash equal to 2% of the principal amount of the Notes and purchase price of the Warrants. The Company filed a registration statement on December 26, 2007. The registration statement has not yet been declared effective. Accordingly, the Company has accrued liquidated damages of $542,636 at September 30, 2008, which has been included in interest expense for the nine months ended September 30, 2008 and accounts payable and accrued expenses at September 30, 2008.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Smaller reporting companies are not required to provide the information required by Item 305.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2008, under the direction of our Chief Executive Officer/Chief Financial Officer, we evaluated our disclosure controls and procedures as of September 30, 2008 and concluded that our disclosure controls and procedures were ineffective as of September 30, 2008 due to the following: A material weakness related the conclusion by our Chief Executive Officer/Chief Financial Officer that all prior evaluations of the effectiveness of our internal disclosure controls and procedures previously conducted may have been insufficient. Management has committed to undertake a reevaluation of such disclosure controls and procedures.

There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

As of June 12, 2008, the Company was in default to six (6) Purchasers on convertible notes payments due June 12, 2008 and earlier. As of July 12, 2008, the Company is in default to all eleven (11) Purchasers on convertible notes payments due July 12, 2008. The Notes provide that, at the option of the holder, an event of default shall make all sums of principal and interest then remaining unpaid and all other amounts payable immediately due and payable upon demand. As of September 30, 2008, the unpaid convertible notes payable balance is $2,792,175; unpaid accrued interest is $135,329; and unpaid accrued liquidated damages is $641,636. The Company is seeking ways to resolve the default issue with all investors.

On June 30, 2008, Professional Offshore Opportunity Fund Ltd. (the “Plaintiff”) filed a motion for default judgment against the Company. On April 21, 2008, the Plaintiff initiated the action in the United States District Court Southern District of New York, on a claim of breach of contract and non payment on a promissory note dated September 12, 2007, made by the Company in favor of the Plaintiff, in the principal amount of $500,000. The Plaintiff claimed approximately $671,000 in total to relief. The Company is in the process of retaining an attorney to defend this litigation. Any adverse outcome of this litigation could materially harm the financial condition of the Company and could cause it to cease operations.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

None

Purchases of equity securities by the issuer and affiliated purchasers

None.

Use of Proceeds

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

There was no matter submitted to a vote of security holders during the fiscal quarter ended September 30, 2008.

Item 5. Other Information.

None

Item 6. Exhibits

Exhibit No.	Description
31.1	Rule 13a-14(a)/15d14(a) Certifications of Dingliang Kuang, the President, Chief Executive Officer, Treasurer and Director (Attached Hereto)
32.1	Section 1350 Certifications of Dingliang Kuang, the President, Chief Executive Officer, Treasurer and Director (Attached Hereto)

SIGNATURES

In accordance with to requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FRANKLIN TOWERS ENTERPRISES, INC.
Dated: November 18, 2008	By:	/s/
	Name:	Dingliang Kuang
	Title:	President, Chief Executive Officer, Treasurer and Director
		(Principal Executive, Financial and Accounting Officer)

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