Franklin Towers Enterprises (FRTW) 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended September 30, 2009

¨ TRANSITION 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	20-4069588
(State of incorporation)	(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 o  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	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨
(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 ¨  No ¨

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, 2009

TABLE OF CONTENTS

PART I	3
Item 1.  Financial Statements	3
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.	4
Forward-Looking Statements	4
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	17
Item 4.  Controls and Procedures.	18
PART II  OTHER INFORMATION	18
Item 1.  Legal Proceedings.	18
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.	18
Item 3.  Defaults Upon Senior Securities.	19
Item 4.  Submission of Matters to a Vote of Security Holders.	19
Item 5.  Other Information.	19
Item 6.  Exhibits	19

2

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, 2009 (Unaudited) and December 31, 2008 (Restated)		F-1
Condensed Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)		F-2
Condensed Consolidated Statement of Stockholders’ Deficit For the Nine Months Ended September 30, 2009 (Unaudited) and the Year Ended December 31, 2008 (Restated)		F-3
Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2009 and 2008 (Unaudited)		F-4
Notes to Condensed Consolidated Financial Statements (Unaudited)		F-5 - F-20

3

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2009			December 31, 2008
	(Unaudited)			(Restated)
ASSETS
Current Assets:
Cash and cash equivalents	$	70,783		$	61,867
Accounts receivable - net of allowance for doubtful accounts of $20,911 and $2,362 as of September 30, 2009 and December 31, 2008, respectively		48,425			68,727
Inventories		1,706,485			2,847,009
Prepaid costs and expenses		1,405,753			772,314
Other receivables		4,298,998			-
Total Current Assets		7,530,444			3,749,917
Property and Equipment, net		824,882			887,693
Other Assets:
Deposits		996,200			483,681
Total Other Assets		996,200			483,681
TOTAL ASSETS	$	9,351,526		$	5,121,291
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Convertible notes payable - as of September 30, 2009 and December 31, 2008, respectively	$	2,792,175		$	2,792,175
Loans payable		3,012,995			1,866,294
Accounts payable and accrued expenses		3,193,386			1,931,556
Customer prepaid		939,313			-
Loans payable - related parties		1,484,391			19,391
Total Current Liabilities		11,422,260			6,609,416
TOTAL LIABILITIES		11,422,260			6,609,416
Stockholders' Deficit:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2009 and December 31, 2008		-			-
Common stock, $.0001 par value; 1,250,000,000 shares authorized, 123,484,043 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively		12,348			12,348
Additional paid-in capital		18,345,012			18,345,012
Accumulated deficit		(20,743,476	)		(20,161,779	)
Accumulated other comprehensive income		315,382			316,294
Total Stockholders' Deficit		(2,070,734	)		(1,488,125	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	9,351,526		$	5,121,291

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

F-1

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Net Sales	$	2,240,449		$	2,334,638		$	5,124,347		$	4,784,776
Cost of Sales		(1,647,072	)		(2,051,618	)		(4,298,110	)		(4,464,228	)
Gross Profit		593,377			283,020			826,237			320,548
Operating Expenses:
Selling, general and administrative expenses		233,068			338,687			515,474			892,451
Depreciation and amortization		8,725			-			28,438			-
Total Operating Expenses		241,793			338,687			543,912			892,451
Income (Loss) From Operations		351,584			(55,667	)		282,325			(571,903	)
Other Income (Expenses):
Subsidy income		-			-			706,122			-
Interest income		324			576			7,137			2,152
Interest expense		(521,263	)		(1,239,008	)		(1,577,281	)		(3,859,226	)
Total Other (Expense)		(520,939	)		(1,238,432	)		(864,022	)		(3,857,074	)
Loss Before Income Tax		(169,355	)		(1,294,099	)		(581,697	)		(4,428,977	)
Provision for Income Tax		-			-			-			-
Net Loss	$	(169,355	)	$	(1,294,099	)	$	(581,697	)	$	(4,428,977	)
Net Loss per Share - Basic and Diluted	$	(0.00	)	$	(0.01	)	$	(0.00	)	$	(0.04	)
Weighted Average Shares Outstanding - Basic and Diluted		123,484,043			123,484,043			123,484,043			107,741,181
Comprehensive Loss:
Net loss	$	(169,355	)	$	(1,294,099	)	$	(581,697	)	$	(4,428,977	)
Foreign currency translation adjustment		2,062			77,477			(912	)		222,521
Comprehensive Loss	$	(167,293	)	$	(1,216,622	)	$	(582,609	)	$	(4,206,456	)

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

F-2

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 2008 (RESTATED)

	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 (Restated)		-		-		-		-		-		3,415,349			-			-			3,415,349
Repayment of nonreciprocal funds transferred to shareholder		-		-		-		-		2,019,685		-			-			-			2,019,685
Net loss for the year ended December 31, 2008 (Restated)		-		-		-		-				-			(8,653,683	)		-			(8,653,683	)
Foreign currency translation adjustment		-		-		-		-		-		-			-			212,070			212,070
Balance - December 31, 2008 (Restated)		-		-		123,484,043		12,348		18,345,012		-			(20,161,779	)		316,294			(1,488,125	)
Unaudited:
Net loss for the period		-		-		-		-		-		-			(581,697	)		-			(581,697	)
Foreign currency translation adjustment		-		-		-		-		-		-			-			(912	)		(912	)
Balance - September 30, 2009		-	$	-		123,484,043	$	12,348	$	18,345,012	$	-		$	(20,743,476	)	$	315,382		$	(2,070,734	)

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

F-3

FRANKLIN TOWERS ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(UNAUDITED)

	2009			2008
Cash Flows from Operating Activities:
Net Loss	$	(581,697	)	$	(4,428,977	)
Adjustments to Reconcile Net Loss to Net
Cash Provided by (Used in) Operating Activities:
Depreciation expense		68,390			58,750
Bad debt expense		18,537			21,220
Amortization of deferred finance costs		-			199,378
Amortization of debt discount - fair value of warrants and beneficial conversion feature		-			1,277,520
Amortization of deferred finance costs - consulting		-			1,580,964
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:
Decrease (increase) in accounts receivable		1,753			(16,364	)
Decrease (increase) in inventories		1,140,524			(990,428	)
Increase in prepaid costs and expenses		(633,439	)		(676,827	)
Increase in accounts payable and accrued liabilities		1,261,830			296,103
Increase in customer prepaid		939,313			-
Net Cash Provided by (Used in) Operating Activities		2,215,211			(2,467,189	)
Cash Flows from Investing Activities:
Capital expenditures		(5,275	)		(33,606	)
Other receivables		(4,298,998	)		-
Acquisition deposits (paid) returned		(512,750	)		89,835
Net Cash (Used in) provided by Investing Activities		(4,817,023	)		56,229
Cash Flows from Financing Activities:
Proceeds from short term loans		1,146,701			148,712
Repayment of convertible notes payable		-			(13,875	)
Proceeds (repayment) from related parties		1,465,000			(1,190	)
Proceeds from repayment of nonreciprocal funds transferred to shareholder		-			1,663,249
Net Cash Provided by Financing Activities		2,611,701			1,796,896
Effect of Exchange Rate Changes on Cash and Cash Equivalents		(973	)		68,962
Net Increase (Decrease) in Cash and Cash Equivalents		8,916			(545,102	)
Cash and Cash Equivalents - Beginning of Period		61,867			1,311,939
Cash and Cash Equivalents - End of Period	$	70,783		$	766,837
Supplemental Cash Flow Information:
Interest paid	$	549,202		$	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:
Common stock issued for convertible notes principal payment	$	-		$	493,950
Common stock issued for convertible notes interest payment	$	-		$	174,912

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

F-4

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 13). 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 in the third quarter of 2007.

Principles of Consolidation

The accompanying 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.

Subsequent Events

The Company has evaluated subsequent events through the filing date of this Form 10-Q and has determined that there were no subsequent events to recognize or disclose in these financial statements.

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 $581,697 for the nine months ended September 30, 2009 and has an accumulated deficit of $20,743,476 at September 30, 2009.  Substantial portions of the losses are attributable to stock-based compensation, amortization of debt discount, deferred finance costs and beneficial conversion feature, and accrued interest and penalties in connection with the default of the Convertible Notes. The Company had a working capital deficiency of $3,891,816 and $2,859,499 as of September 30, 2009 and December 31, 2008, respectively.

F-5

Going Concern (Continued)

Furthermore, as of July 12, 2008, the Company was in default on its 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, 2009, the unpaid convertible notes payable balance is $2,792,175; unpaid accrued interest is $414,545; and unpaid accrued liquidated damages penalty and default penalty are $1,835,294. The Company is currently negotiating with investors and seeking ways to resolve the default issue with all investors.

These factors raise substantial doubt concerning the Company’s ability to continue as a going concern.

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, 2009, the Company received net proceeds of $1,146,701 from various short term loans and net proceeds of $1,465,000 from related parties.

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 neighboring 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 8), thereby helping the Company to reduce its raw material - cocoon cost. During the nine months ended September 30, 2009, the gross margin rate was 16.1%, as compared to 6.7% for the nine months ended September 30, 2008. However, there can be no assurance that the Company will be able to raise enough funds to complete the acquisition of “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 reclassifications have been made to prior year’s consolidated financial statements and notes thereto for comparative purposes to conform with current year’s presentation. These reclassifications have no effect on previously reported results of operations.

F-6

Basis of presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).

NOTE 2 – INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10 - - Q. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2009 and the results of operations and cash flows for the nine months ended September 30, 2009 and 2008. 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 nine month period ended September 30, 2009 is not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2009. The balance sheet at December 31, 2008 has been derived from the audited consolidated financial statements at that date, which have been restated as set forth in Note 20.

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 Securities and Exchange Commission’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, 2008 included in our Form 10 –K/A filed April 15, 2009.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with US GAAP 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, net, other receivables, accounts payable and accrued liabilities, short term loans and convertible notes, net.  The fair value of these financial instruments approximate their carrying amounts reported in the condensed consolidated balance sheets due to the short term maturity of these instruments or by comparison to other instruments with similar terms.

Foreign Currency Translation

The functional currency of Franklin is the United States dollar.  The functional currency of Qiluo is the Chinese Renminbi (“RMB”).  The reporting currency of the Company is the United States dollar.

The assets and liabilities of Qiluo were translated into United States dollars at period-end exchange rates.  The revenues and expenses were translated into United States dollars at average exchange rates for the period.  Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ deficit.

F-7

Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.  There is no material foreign currency transaction gain or loss for the three and nine months ended September 30, 2009 and 2008.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, cash on deposit with banks, and highly liquid debt investments with a maturity of three months or less when purchased.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market.

Property, Plant and Equipment, Net

Property, plant and equipment is stated at cost less accumulated depreciation.  Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets.

Revenue Recognition

Sales of products are recorded when title passes to the customer, which is generally at time of shipment.  The Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables.  The credit risk is controlled through credit approvals, limits and monitoring procedures.  The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors.  Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted.  The Company does not routinely permit customers to return product.

Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification (“ASC”) topic 718-10, Stock Compensation (formerly, SFAS 123(R), “Accounting for Stock-Based Compensation”). No stock options have been granted and none are outstanding.

Advertising

Advertising costs are expensed as incurred. The Company did not incur significant advertising costs for the three and nine months ended September 30, 2009 and 2008.

Shipping and Handling Costs

Shipping and handling costs, primarily related to outbound freight, are reported in the consolidated statements of operations as a component of selling, general and administrative expenses.

Research and Development

In accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”) (formerly, SFAS No. 2, “Accounting For Research and Development Costs”), the Company expenses all research and development costs as incurred.

Segment Information

ASC 280-10 (formerly, SFAS No. 131), “Disclosure About Segments of and Enterprise and Related Information”, requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

F-8

Income Taxes

The Company accounts for income taxes using the asset and liability method described in ASC 740-10, (formerly, SFAS No. 109, “Accounting For Income Taxes”), the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.  A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

No provision has been made for corporation income taxes due to the current loss. In addition, no future tax benefit has been calculated. According to the tax regulations of China, the amount of loss that will carry over to the next tax period should be assessed and approved by the tax regulation agency. The maximum carry over period is five years.

Net Loss Per Common Share

The Company has adopted ASC 260-10, (formerly, SFAS No. 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 computation.

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

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

Recently Issued Accounting Pronouncements

Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.

NOTE 4 - INVENTORIES

 Inventories consist of the following:

	September 30,		December 31,
	2009		2008
	(Unaudited)
Finished Goods	$	271,549	$	131,684
Processed cocoons		680,322		1,857,227
Raw Materials		92,600		255,971
Work in Process		662,014		602,127
Total	$	1,706,485	$	2,847,009

Finished goods consist of those silks and by products available for sale. There was no valuation allowance for inventory loss at September 30, 2009 and December 31, 2008.

F-9

NOTE 5 – PREPAID COSTS AND EXPENSES

Prepaid costs and expenses consist of:

	September 30, 2009		December 31, 2008
	(Unaudited)
Prepayment in connection with short term loan obtained in January 2009 (see Note 10)	$	-	$	439,710
Advances to cocoon station for purchase of cocoon		1,178,602		-
Advances to personnel for future overhead costs		112,657		7,423
Advances to vendors for future overhead costs		114,451		116,460
Value added tax credits		-		208,678
Other		43		43
Total	$	1,405,753	$	772,314

NOTE 6 – OTHER RECEIVABLES

During the nine months ended September 30, 2009, the Company advanced $4,298,998 to the following individuals, entities and related party.

	September 30,		December 31,
	2009		2008
	(Unaudited)
Receivables from individuals
Zhong, Songbai	$	278,350	$	-
Qin, Siwen		553,667		-
Du, Wenbing		68,855		-
Total receivables from individuals		900,872		-
Receivables from entities
Chongqing Qiao Da Investment, Ltd.		1,560,225		-
Chongqing First Capital Investment, Ltd.		286,271		-
Chongqing Aikekaer Paint Co., Ltd.		1,030,383		-
Total receivables from entities		2,876,879		-
Receivable from related parties
Xinshengxiang Industrial Development Co., Ltd.		22,935		-
Chongqing Guojing Silk Company, Ltd.		498,312		-
Total Other Receivables	$	4,298,998	$	-

 These receivables are interest free and due on demand. The advances may be deemed violations of various restrictive covenants contained in the various loan agreements.

F-10

NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

Description	Estimated Useful Life		September 30, 2009			December 31, 2008
			(Unaudited)
Production Equipment		10	$	726,161		$	726,508
Auxiliary Equipment		10		6,944			6,947
Office Equipment		3-5		26,891			23,006
Automobile		5		124,525			124,585
Furniture and Fixtures		5-7		36,606			36,624
Construction in progress				104,364			102,582
				1,025,491			1,020,252
Less: Accumulated Depreciation				(200,609	)		(132,559	)
			$	824,882		$	887,693

Depreciation expense was $68,390 and $58,750 for the nine months ended September 30, 2009 and 2008, respectively, of which $40,500 and $39,926, respectively, were included in cost of sales.

The Company changed its estimate of useful life for production equipment and auxiliary equipment to ten years in 2008 from five years used in 2007.  The change was based on the following: (1) the equipment at issue is traditional mechanical equipment which has a longer life than electronic equipment; (2) 10 years useful life for such equipment is used by similar companies in China and conforms to the estimated life used by the taxation authorities in China. The effect of this change in estimate for the nine months ended September 30, 2008 was to decrease depreciation expense, net loss, and net loss per share by $56,934, $56,934, and $0.00, respectively.

NOTE 8 - DEPOSITS

Deposits consist of:	September 30, 2009		December 31, 2008
	(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 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		7,329		7,329
Additional payments relating to acquisition of Zhengzhong assets		549,375		36,643
Foreign currency translation adjustment		28,226		28,439
Total	$	996,200	$	483,681

The Letter Agreement dated November 26, 2007 and subsequent amendments provided that the total purchase price of the Zhengzhong assets was 10,374,800 RMB ($1,519,908 translated at the September 30, 2009 exchange rate). If the Company is unable to pay the remaining 3,574,800 RMB ($523,708 translated at the September 30, 2009 exchange rate) due, the Company’s total payments of 6,800,000 RMB ($996,200 translated at the September 30, 2009 exchange rate) may be forfeited and not recovered (partially or in full). In February 2009, the due date of the remaining 3,574,800 RMB ($523,708 translated at the September 30, 2009 exchange rate) due was extended to September 2009.

F-11

NOTE 9 - LOANS PAYABLE

Loans payable consist of:	September 30, 2009			December 31, 2008
	(Unaudited)
Qiluo loan payable to Chongqing Aikekaer Paint Co., Ltd.
1,166,670 RMB,  interest at 6% per annum, due May 31, 2009	$	-		$	170,999
Qiluo loan payable to Chongqing Shi Bell Technology, Ltd.
430,000 RMB, interest at 6% per   annum, due on demand		62,995			63,025
Qiluo loans payable to Jin Cheng Small Loans Company, Ltd.
11,000,000 RMB, interest at 18% per annum, due March 23, 2009		-			1,612,270
5,000,000 RMB, interest at 19.44% per annum, due September 2009		732,500			-
Total Qiluo loans payable to Jin Cheng Small Loans Company, Ltd.		732,500			1,612,270
Qiluo loans payable to Chongqing Shan Xia Bank
30,000,000 RMB, interest at 10% per annum, due January 19, 2010		4,395,000			-
Less: used by Mr. Chen, Wensheng, 3,000,000 RMB		(439,500	)		-
Less: used by Mr. Zhong, Songbai, 2,000,000 RMB		(293,000	)		-
Less: used by Guojing Silk, 10,000,000 RMB		(1,465,000	)		-
Qiluo loans payable to Chongqing Shan Xia Bank, net		2,197,500			-
Franklin loans payable to two individuals
interest at 8% per annum, due April 24, 2008 (past due)		20,000			20,000
Total Loans Payable	$	3,012,995		$	1,866,294

On January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company, Ltd. (“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short term credit line in the amount of 30,000,000 RMB ($4,395,000 translated at the September 30, 2009 exchange rate) from Chongqing Shan Xia Bank. The loan is collateralized with the assets of Guojing Silk and real estate property of Mr. Wensheng Chen and Mr. Songbai Zhong. From this jointly acquired credit line, Qiluo received 15,000,000 RMB ($2,197,500), Guojing Silk received 10,000,000 RMB ($1,465,000), Mr. Chen received 3,000,000 RMB ($439,500), and Mr. Zhong received 2,000,000 RMB ($293,000). Guojing Silk is controlled by the brother-in-law of Mr. Kuang, indirect majority stockholder and chief executive officer of the Company.

The loans payable to Jin Cheng Small Loans Company, Ltd are past due. The Company is in negotiations with Jin Cheng to extend and refinance the loan.

As of September 30, 2009 and December 31, 2008, the accrued interest payable for short term loans totaled $21,359 and $29,581, respectively, which was included in accounts payable and accrued expenses.

NOTE 10 – LOANS PAYABLE – RELATED PARTIES

Loans payable – related parties consist of:	September 30, 2009		December 31, 2008
	(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		7,158
4,000,000 RMB loan payable to Xin Shengxiang		586,000		-
6,000,000 RMB loan payable to Dingliang Kuang		879,000		-
Total	$	1,484,391	$	19,391

F-12

On March 25, 2009, Xin Shengxiang Industrial Development Co., Ltd, (“Xinshengxiang”), a major shareholder of the Company borrowed 4,000,000 RMB from Jin Cheng Small Loans Company, Ltd. (Jincheng”) and advanced the funds to the Company. The short term loan is due by November 24, 2009 and bears interest at 21.24% per annum.

On September 29, 2009, Mr. Dingliang Kuang (“Mr. Kuang”), the Chief Executive Officer and a major shareholder of the Company, borrowed 6,000,000 RMB from Jincheng and advanced the funds to the Company. The short term loan is due by October 28, 2009 and bears interest at 19.44% per annum. This loan is past due as of the filing date of this Form 10-Q.

NOTE 11 - CONVERTIBLE NOTES PAYABLE

	September 30,			December 31,
Convertible notes payable, net consist of:	2009			2008
	(Unaudited)			(Restated)
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		3,300,000			3,300,000
Unamortized debt discounts		-			-
Repayment of convertible notes		(507,825	)		(507,825	)
Convertible notes payable, net	$	2,792,175		$	2,792,175

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.

F-13

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.

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 failed 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 18).

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 ASC 470-20-30 (formerly, 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 ASC 470-20-30, 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 an addition to paid-in capital.

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 nine months ended September 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 six months ended December 31, 2008 due to its financing difficulties. The Company is in default to all eleven investors (see Note 19). Consequently, the Company wrote off the remaining $56,797 unamortized deferred finance costs, $1,078,882 unamortized debt discounts (warrants and beneficial conversion feature) and $1,335,144 unamortized deferred finance costs included in the equity section at December 31, 2008 and recognized additional interest expense of $2,470,823 (See Note 20).

F-14

NOTE 12 - STOCKHOLDERS’ EQUITY AND SHARE PURCHASE AGREEMENT

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), 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 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 and thus has voting, investment, and dispositive control over the shares of Franklin’s capital stock owned by Xinshengxiang. Accordingly, Mr. Kuang is also deemed to be the indirect beneficial owner of the shares of Franklin’s capital stock owned by Xinshengxiang. Mr. Kuang thus directly and indirectly (by Xinshengxiang) 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 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 12).  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 13 - 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-15

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 14 - 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, 2009 (Unaudited) and December 31, 2008			30,360,000	$	0.68

Warrants outstanding and exercisable by price range as of September 30, 2009 and December 31, 2008 are:

	Warrants Outstanding							Warrants Exercisable
	Price Range	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 from the effective date of the registration statement. The registration statement filed on December 26, 2007 is not effective as of the date of filing of this Form 10-Q.

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-16

NOTE 15 - RELATED PARTY TRANSACTIONS

During 2007, the Company received funds from and advanced funds to Xinshengxiang, one of its significant shareholders (see Note 12) 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 $1,722,656 in cash during the year ended December 31, 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 RMB), 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 year ended December 31, 2008, the Company and Xinshengxiang agreed to offset the Company’s $43,412 rent liability to Xinshengxiang and treat the $43,412 as a repayment of the nonreciprocal funds transferred in 2007. The Company recorded the $43,412 repayment as an increase in additional paid-in capital.

As of December 31, 2008, the unpaid balance of the nonreciprocal funds transferred to Xinshengxiang in 2007 is $0.

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

Chongqing Guojing Silk Company, Ltd. (“Guojing Silk”), is controlled by the brother-in-law of Mr. Kuang, indirect majority stockholder and chief executive officer of the Company. On January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company, Ltd. (“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short term credit line in the amount of 30,000,000 RMB ($4,395,000 translated at the September 30, 2009 exchange rate) from Chongqing Shan Xia Bank. The loan is collateralized with the assets of Guojing Silk and real estate property of Mr. Wensheng Chen and Mr. Songbai Zhong. From this jointly acquired credit line, Qiluo received 15,000,000 RMB ($2,197,500), Guojing Silk received 10,000,000 RMB ($1,465,000), Mr. Chen received 3,000,000 RMB ($439,500), and Mr. Zhong received 2,000,000 RMB ($293,000).

In March 2009, Qiluo borrowed 31,500,000 RMB ($4,611,600) from Chongqing Guojing Silk Company, Ltd.(“Guojing Silk”) and simultaneously delivered a bank acceptance (from Shan Xia Bank) for the same amount to Guojing Silk. Under the related agreement with Shan Xia Bank, use of the 31,500,000 RMB is not permitted while the bank acceptance is outstanding. Qiluo returned the 31,500,000 RMB in September 2009.

During the nine months ended September 30, 2008, the Company received funds from and advanced funds to Guojing Silk for working capital purposes. As of September 30, 2009, the excess advanced payments to Guojing Silk amounted to $498,312 (3,401,450 RMB), which was reported under the caption of “Other receivables” (Note 8).

On March 25, 2009, Xin Shengxiang Industrial Development Co., Ltd, (“Xinshengxiang”), a major shareholder of the Company borrowed 4,000,000 RMB from Jin Cheng Small Loans Company, Ltd. (Jincheng”) and advanced the funds to the Company. The short term loan is due by November 24, 2009 and bears interest at 21.24% per annum.

On September 29, 2009, Mr. Dingliang Kuang (“Mr. Kuang”), the Chief Executive Officer and a major shareholder of the Company, borrowed 6,000,000 RMB from Jincheng  and advanced the funds to the Company. The short term loan is due by October 28, 2009 and bears interest at 19.44% per annum. This loan is past due as of the filing date of this Form 10-Q.

F-17

NOTE 16 - CONCENTRATION OF CREDIT RISK

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

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 $70,783 and $61,867 as of September 30, 2009 and December 31, 2008, respectively.

NOTE 17 - COMMITMENTS AND CONTINGENCIES

Lease agreement

On January 28, 2007, Qiluo signed a twenty (20) years lease with Xinshengxiang, a related party (see Note 12), 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 ($29,300 translated at the September 30, 2009 exchange rate) plus other occupancy costs.

Future minimum rentals under this lease are as follows:

Twelve Months  Ending September 30, (Unaudited)	Future Minimum Rent Payments
2010	$	29,300
2011		29,300
2012		29,300
2013		29,300
2014		29,300
Thereafter		341,600
Total	$	488,100

Registration Rights Arrangement

In connection with the convertible notes payable (see Note 11), 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 $1,311,760 as of September 30, 2009, which has been recorded as interest expense and included in accounts payable and accrued expenses.

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.

F-18

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.

NOTE 18 – LEGAL PROCEEDING

On July 28, 2008, Professional Offshore Opportunity Fund Ltd. (the “Plaintiff”) obtained a 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 19 – DEFAULT ON CONVERTIBLE NOTES PAYABLE

As of June 12, 2008, the Company was in default to nine (6) Purchasers on convertible notes payments due June 12, 2008 and earlier. As of July 12, 2008, the Company was 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, 2009, the unpaid convertible notes payable balance is $2,792,175; unpaid accrued interest is $414,545; and unpaid accrued liquidated damages penalty and default penalty are $1,835,294. The Company is currently negotiating with investors and seeking ways to resolve the default issue with all investors.

NOTE 20 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

The Company plans to restate its consolidated financial statements at December 31, 2008 and for the year then ended (which were previously included in the Company’s Form 10-K filed with SEC on April 15, 2009) in order to correct an error relating to the accounting for the defaulted notes payable (see Notes 11 and 19).

In the Form 10-K filed April 15, 2009, the consolidated balance sheet at December 31, 2008 included unamortized deferred finance costs of $1,391,941 ($56,797 in assets, $1,335,144 as contra equity in stockholders’ deficit) and unamortized debt discounts of $1,078,882 (as a reduction of convertible notes payable in current liabilities) relating to these notes, which reflected amortization of these costs over the two year life of the notes. Since the Company had defaulted on the notes, thus making the obligations immediately due and payable on demand, the Company should have accelerated the amortization of the remaining unamortized deferred finance costs and debt discounts at such time. Accordingly, the consolidated balance sheet at December 31, 2008 included in this Form 10-Q has been restated to reflect such amortization.

The effect of the restatement adjustments on the consolidated balance sheet at December 31, 2008 follows:

F-19

	As Previously
	Reported			Adjustments			As Restated
ASSETS
Current assets	$	3,749,917		$	-		$	3,749,917
Property and equipment, net		887,693			-			887,693
Deposits		483,681			-			483,681
Deferred finance costs		56,797			(56,797	)		-
Total Assets	$	5,178,088		$	(56,797	)	$	5,121,291
LIABILITIES AND STOCKHOLDERS' DEFICIT
Convertible notes payable	$	1,713,293		$	1,078,882		$	2,792,175
Other current liabilities		3,817,241			-			3,817,241
Total Current Liabilities		5,530,534			1,078,882			6,609,416
Common stock		12,348			-			12,348
Additional paid-in capital		18,345,012			-			18,345,012
Deferred finance costs		(1,335,144	)		1,335,144			-
Accumulated deficit		(17,690,956	)		(2,470,823	)		(20,161,779	)
Accumulated other comprehensive income		316,294			-			316,294
Total Stockholders' (Deficit)		(352,446	)		(1,135,679	)		(1,488,125	)
Total Liabilities and Stockholders' deficit	$	5,178,088		$	(56,797	)	$	5,121,291

The effect of the restatement adjustments on the consolidated statement of operations for the year ended December 31, 2008 follows:

	As Previously
	Reported			Adjustments			As Restated
Loss from operations	$	(751,854	)	$	-		$	(751,854	)
Interest income		2,564			-			2,564
Interest expense		(5,433,570	)		(2,470,823	)		(7,904,393	)
Net Loss	$	(6,182,860	)	$	(2,470,823	)	$	(8,653,683	)
Net Losss per Share - Basic and Diluted	$	(0.06	)	$	(0.02	)	$	(0.08	)

F-20

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”) and Form 10-K/A filed on April 15, 2009. Although Qiluo is a subsidiary of Franklin, the acquisition of Qiluo by Franklin that was consummated on June 19, 2007 has been treated as a reverse merger of Qiluo. This means that Qiluo is the continuing entity for financial reporting purposes.

 We and our representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in our filings with the United States Securities and Exchange Commission and in our reports to shareholders. Generally, the inclusion of the words “believe”, “expect”, “intend”, “estimate”, “anticipate”, “will”, and similar expressions or the converse thereof, identify statements that constitute “forward-looking statements”.

These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements as a result of a number of risks and uncertainties including: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, and (d) whether we are able to successfully fulfill our primary requirements for cash.

Plan of Operation

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 Letter Agreement dated November 26, 2007 and subsequent amendments provided that the total purchase price of the Zhengzhong assets was 10,374,800 RMB ($1,519,908 translated at the September 30, 2009 exchange rate). If the Company is unable to pay the remaining 3,574,800 RMB ($523,708 translated at the September 30, 2009 exchange rate) due, the Company’s total payments of 6,800,000 RMB ($996,200 translated at the September 30, 2009 exchange rate) may be forfeited and not recovered (partially or in full). In February 2009, the due date of the remaining 3,574,800 RMB ($523,708 translated at the September 30, 2009 exchange rate) due was extended to September 2009.

The acquisition of certain assets of Zhengzhong Silkworm Industrial Development Co., Ltd. from Fuling Municipal Government will not be consummated until the Company has made the full payment. Nevertheless, the Company started to use those cocoon stations and to purchase cocoon directly from local farmers commenced on the second quarter of 2008. However, there is no assurance that the Company will raise enough fund to complete this acquisition.

4

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 the date of this filing, the Company has not taken 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.

Results of Operations

Comparison of Sales for the Three Months Ended September 30, 2009 and 2008

	Three Months Ended
	September 30,
Sales in US dollars	2009		2008
Silk	$	1,235,169	$	786,308
Cocoons		593,338		1,083,621
By products and others		411,942		464,709
Total sales	$	2,240,449	$	2,334,638

Net Sales

Our net sales were $2,240,449 for the three months ended September 30, 2009, decreased by $94,189, or 4%, as compared to $2,334,638 for the three months ended September 30, 2008.

The Company sold 51.24 tons of silk during the three months ended September 30, 2009, an increase of 17.24 tons, or 51% as compared to 34.00 tons during the three months ended September 30, 2008. The revenue from sale of silk was $1,235,169 during the three months ended September 30, 2009, an increase of $448,861, or 57% as compared to $786,308 for the same period of 2008.

The cocoon is a raw material for production of silk. The sales of cocoon were 100.26 tons for the three months ended September 30, 2009, decreased by 105.32 tons, or 52% as compared to 202.58 tons sold in the same period of 2008. The revenue from sale of cocoon was $593,338 for the three months ended September 30, 2009, decreased by $490,283, or 45%, as compared to $1,083,621 for the three months ended September 30, 2008.

5

Gross Profit

Comparison of Gross Profit for the Three Months Ended September 30, 2009 and 2008

	Three Months Ended
	September 30,
	2009			2008
Net sales	$	2,240,449		$	2,334,638
Cost of sales		(1,647,072	)		(2,051,618	)
Gross profit	$	593,377		$	283,020
Gross profit margin rate		26.48	%		12.12	%

Gross profit for the three months end September 30, 2009 and 2008 was $593,377 and $283,020, respectively. The gross profit margin rate for the three months ended September 30, 2009 increased 14.36 percentage points from 12.12% during the three months ended September 30, 2008 to 26.48% for the three months ended September 30, 2009. This improvement reflects the improvement of silk market condition and is also the result of our acquisition of Zhengzhong (see Plan of Operation). The Company started to use its exclusive right through acquired assets of Zhengzhong to purchase cocoons directly from local farmers commencing in the spring cocoon season of 2008. As a result, the Company had better quality and lower cost cocoons.

Income (Loss) from Operations

Comparison of Income (Loss) from Operations for the Three Months Ended September 30, 2009 and 2008

	Three Months Ended
	September 30,
	2009		2008
Gross profit	$	593,377	$	283,020
Professional fees		14,018		15,454
Depreciation and amortization		8,725		8,332
Selling expenses		19,251		24,490
Other general and administrative expenses		199,799		290,411
Income (Loss) from operations	$	351,584	$	(55,667	)

Income from operations for the three months ended September 30, 2009 were $351,584, an improvement of $407,251, as compared to loss from operations of $55,667 for the three months ended September 30, 2008.

Total operating expenses was $241,793, decreased by $96,894, or 29%, as compared to $338,687 for the nine months ended September 30, 2008. Other general and administrative expenses consist of expenses relating to our back office and general and administrative expenses relating to our cocoon stations. Other general and administrative expenses decreased $90,612 from $290,411 for the three months ended September 30, 2008 to $199,799 for the three months ended September 30, 2009. The decrease of other general and administrative expenses was primarily due to the decrease in expenses on new acquired cocoon stations. The expenses in connection with cocoon stations decreased $98,179 from $115,807 for the three months ended September 30, 2008 to $17,628 for the three months ended September 30, 2009.

6

Other Expenses, Net

Comparison of Other Expenses, net for the Three Months Ended September 30, 2009 and 2008

	Three Months Ended
	September 30,
	2009			2008
Subsidy income	$	-		$	-
Interest income		324			576
Interest expense		(521,263	)		(1,239,008	)
Other Expenses, net	$	(520,939	)	$	(1,238,432	)

Total other expenses, net was $520,939 for the three months ended September 30, 2009, a decrease of $717,493 as compared to $1,238,432 for the three months ended September 30, 2008.

Interest expenses consist of interest paid for short term loans and amortization of deferred financing cost and debt discount in connection with the convertible debt issuances in September 2007. Interest paid to various loans was $178,570 and $0 for the three months ended September 30, 2009 and 2008, respectively. Interest paid and accrued to convertible notes was $69,804 and $69,804 for the three months ended September 30, 2009 and 2008, respectively. We have incurred and recorded $0 and $983,483 amortization expenses of deferred finance costs and debt discount and cash discount for the three months ended September 30, 2009 and 2008, respectively.  In addition, we also recorded accrued interest expense and penalties in connection with the default of convertible notes. Such expenses totaled $272,238 and $167,531 for the three months ended September 30, 2009 and 2008, respectively.

Comparison of Sales for the Nine Months Ended September 30, 2009 and 2008

	Nine Months Ended
	September 30,
Sales in US dollars	2009		2008
Silk	$	3,004,709	$	2,104,648
Cocoons		1,350,853		1,926,241
By products and others		768,785		753,887
Total sales	$	5,124,347	$	4,784,776

Net Sales

Our net sales were $5,124,347 for the nine months ended September 30, 2009, an increase of $339,571, or 7%, as compared to $4,784,776 for the nine months ended September 30, 2008.  The increase of our sales was primarily attributable to the improvement of the commodity market and increased demand.

The Company sold 136.49 tons of silk during the nine months ended September 30, 2009, an increase of 42.72 tons, or 46% as compared to 93.77 tons during the nine months ended September 30, 2008. The revenue from sale of silk was $3,004,709 during the nine months ended September 30, 2009, an increase of $900,061, or 43% as compared to $2,104,648 for the same period of 2008.

The cocoon is a raw material for production of silk. The sales of cocoon were 253.43 tons for the nine months ended September 30, 2009, decreased by 76.73 tons, or 23% as compared to 330.16 tons sold in the same period of 2008. The revenue from sale of cocoon was $1,350,853 for nine months ended September 30, 2009, a decrease of $575,388, or 30%, as compared to $1,926,241 for the nine months ended September 30, 2008.

7

Gross Profit

Comparison of Gross Profit for the Nine Months Ended September 30, 2009 and 2008

	Nine Months Ended
	September 30,
	2009			2008
Net sales	$	5,124,347		$	4,784,776
Cost of sales		(4,298,110	)		(4,464,228	)
Gross profit	$	826,237		$	320,548
Gross profit margin rate		16.12	%		6.70	%

Gross profit for the nine months end September 30, 2009 and 2008 was $826,237 and $320,548, respectively. The gross profit margin rate for the nine months ended September 30, 2009 increased 9.42 percentage points from 6.70% during the nine months ended September 30, 2008 to 16.12% for the nine months ended September 30, 2009. This improvement is mainly the result of our acquisition of Zhengzhong (see Plan of Operation). The Company started to use its exclusive right through acquired assets of Zhengzhong to purchase cocoons directly from local farmers commencing in the spring cocoon season of 2008. As a result, the Company had better quality and lower cost cocoons.

Loss from Operations

Comparison of Loss from Operations for the Nine Months Ended September 30, 2009 and 2008

	Nine Months Ended
	September 30,
	2009		2008
Gross profit	$	826,237	$	320,548
Professional fees		48,012		222,422
Depreciation and amortization		28,438		18,824
Selling expenses		49,546		53,254
Other general and administrative expenses		417,916		597,951
Loss from operations	$	282,325	$	(571,903	)

Income from operations for the nine months ended September 30, 2009 were $282,325, an improvement of $854,228, as compared to loss from operations of $571,903 for the nine months ended September 30, 2008. Total operating expenses was $543,912, decreased by $348,539, or 39%, as compared to $892,451 for the nine months ended September 30, 2008. The decrease of operating expenses was primarily due to the decrease of professional fees. Professional fees totaled $48,012 for the nine months ended September 30, 2009, a decrease of $174,410, or 78%, as compared to professional fees of $222,422 for the nine months ended September 30, 2008. We incurred significant cost in connection with professional services associated with the legal and accounting reporting obligations of being a public company in 2008.

8

Other general and administrative expenses consist of expenses relating to our back office and general and administrative expenses relating to our cocoon stations. Other general and administrative expenses decreased $180,035 from $597,951 for the nine months ended September 30, 2008 to $417,916 for the nine months ended September 30, 2009. The decrease of other general and administrative expenses was primarily due to the decrease in expenses on new acquired cocoon stations. The expenses in connection with cocoon stations decreased $191,441 from $235,826 for the nine months ended September 30, 2008 and to $44,385 for the nine months ended September 30, 2009.

Other Expenses, Net

Comparison of Other Expenses, net for the Nine Months Ended September 30, 2009 and 2008

	Nine Months Ended
	September 30,
	2009			2008
Subsidy income	$	706,122		$	-
Interest income		7,137			2,152
Interest expense		(1,577,281	)		(3,859,226	)
Other Expenses, net	$	(864,022	)	$	(3,857,074	)

Total other expenses, net was $864,022 for the nine months ended September 30, 2009, decreased by $2,993,052 as compared to $3,857,074 for the nine months ended September 30, 2008. The Company received subsidy of $706,122 from various Chinese government during the nine months ended September 30, 2009. These government subsidies were in connection with the purchase of cocoon and incentive of technology innovation. Part of these subsidies will pass through to the farmers who produced the cocoons when we purchase the cocoons from farmers.

Interest expenses consist of interest paid for short term loans and amortization of deferred financing cost and debt discount in connection with the convertible debt issuances in September 2007. Interest paid to various loans was $549,202 and $0 for the nine months ended September 30, 2009 and 2008, respectively. Interest paid and accrued to convertible notes was $209,412 and $223,968 for the nine months ended September 30, 2009 and 2008, respectively. We have incurred and recorded $0 and $3,057,862 amortization expenses of deferred finance costs and debt discount and cash discount for the nine months ended September 30, 2009 and 2008, respectively.  In addition, we also recorded accrued interest expense and penalties in connection with the default of convertible notes. Such expenses totaled $816,714 and $542,637 for the nine months ended September 30, 2009 and 2008, respectively.

Liquidity and Capital Resources

As of September 30, 2009 and December 31, 2008, we had $70,783 and $61,867 in cash, respectively. We believe that such funds will not be sufficient to effectuate our plans with respect to the business over the next twelve months. We will need to seek additional capital for our operations.

The major sources of Company’s liquidity for the nine months ended September 30, 2009 and 2008 were cash generated from operations and short term loans from banks and other entities.

9

Net cash provided by operating activities during the nine months ended September 30, 2009 was $2,215,211, compared to -$2,467,189 net cash used for the nine months ended September 30, 2008. This was mainly due to that the Company commenced its operation after third quarter of 2007, which required more upfront payments during 2008.  The Company also received $939,313 in advance from customers during the nine months ended September 30, 2009, as compared to $0 during the same period of 2008.

Net cash used in investing activities was $4,817,023 during nine months ended September 30, 2009, as compared to net cash provided by investing activities of $56,229 during the nine months ended September 30, 2008. It was the results of paid additional acquisition deposit of $512,750 and lent $4,298,998 to various entities and individuals (see Note 8 to Financial Statements).

Net cash provided by financing activities was $2,611,701 and $1,796,896 for the nine months ended September 30, 2009 and 2008, respectively. During nine months ended September 30, 2009, the company received net proceeds of $1,146,701 from various short term loans and $1,465,000 from related parties. For the nine months ended September 30, 2008, the Company received net proceeds from various short term loans of $148,712, and received net proceeds of $1,662,059 from related parties.

Loans Payable to various Banks and Entities

	September 30,			December 31,
Loans payable consist of:	2009			2008
	(Unaudited)
Qiluo loan payable to Chongqing Aikekaer Paint Co., Ltd.
1,166,670 RMB, interest at 6% per annum, due May 31, 2009	$	-		$	170,999
Qiluo loan payable to Chongqing Shi Bell Technology, Ltd.
430,000 RMB, interest at 6% per annum, due on demand		62,995			63,025
Qiluo loans payable to Jin Cheng Small Loans Company, Ltd.
11,000,000 RMB, interest at 18% per annum, due March 23, 2009		-			1,612,270
5,000,000 RMB, interest at 19.44% per annum, due September 2009		732,500			-
Total Qiluo loans payable to Jin Cheng Small Loans Company, Ltd.		732,500			1,612,270
Qiluo loans payable to Chongqing Shan Xia Bank
30,000,000 RMB, interest at 10% per annum, due January 19, 2010		4,395,000			-
Less: used by Mr. Chen, Wensheng, 3,000,000 RMB		(439,500	)		-
Less: used by Mr. Zhong, Songbai, 2,000,000 RMB		(293,000	)		-
Less: used by Guojing Silk, 10,000,000 RMB		(1,465,000	)		-
Qiluo loans payable to Chongqing Shan Xia Bank, net		2,197,500			-
Franklin loans payable to two individuals
interest at 8% per annum, due April 24, 2008 (past due)		20,000			20,000
Total Loans Payable	$	3,012,995		$	1,866,294

On January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company, Ltd. (“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short term credit line in the amount of 30,000,000 RMB ($4,395,000 translated at the September 30, 2009 exchange rate) from Chongqing Shan Xia Bank. The loan is collateralized with the assets of Guojing Silk and real estate property of Mr. Wensheng Chen and Mr. Songbai Zhong. From this jointly acquired credit line, Qiluo received 15,000,000 RMB ($2,197,500), Guojing Silk received 10,000,000 RMB ($1,465,000), Mr. Chen received 3,000,000 RMB ($439,500), and Mr. Zhong received 2,000,000 RMB ($293,000). Guojing Silk is controlled by the brother-in-law of Mr. Kuang, indirect majority stockholder and chief executive officer of the Company.

The loans payable to Jin Cheng Small Loans Company, Ltd are past due. The Company is in negotiations with Jin Cheng to extend and refinance the loan.

10

Loans Payable to Related Parties

	September 30,		December 31,
Loans payable – related parties consist of:	2009		2008
	(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		7,158
4,000,000 RMB loan payable to Xin Shengxiang		586,000		-
6,000,000 RMB loan payable to Dingliang Kuang		879,000		-
Total	$	1,484,391	$	19,391

On March 25, 2009, Xin Shengxiang Industrial Development Co., Ltd, (“Xinshengxiang”), a major shareholder of the Company borrowed 4,000,000 RMB from Jin Cheng Small Loans Company, Ltd. (Jincheng”) and advanced the funds to the Company. The short term loan is due by November 24, 2009 and bears interest at 21.24% per annum.

On September 29, 2009, Mr. Dingliang Kuang (“Mr. Kuang”), the Chief Executive Officer and a major shareholder of the Company borrowed 6,000,000 RMB from Jincheng and advanced the funds to the Company. The short term loan is due by October 28, 2009 and bears interest at 19.44% per annum. This loan is past due as of the filing date of this Form 10-Q.

Convertible Notes Payable

	September 30,			December 31,
Convertible notes payable, net consist of:	2009			2008
	(Unaudited)			(Restated)
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		3,300,000			3,300,000
Unamortized debt discounts		-			-
Repayment of convertible notes		(507,825	)		(507,825	)
Convertible notes payable, net	$	2,792,175		$	2,792,175

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.

11

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.

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 failed 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 18).

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 ASC 470-20-30 (formerly, 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 ASC 470-20-30, 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 an addition to paid-in capital.

12

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 nine months ended September 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 six months ended December 31, 2008 due to its financing difficulties. The Company is in default to all eleven investors (see Note 19). Consequently, the Company wrote off the remaining $56,797 unamortized deferred finance costs, $1,078,882 unamortized debt discounts (warrants and beneficial conversion feature) and $1,335,144 unamortized deferred finance costs included in the equity section at December 31, 2008 and recognized additional interest of $2,470,823. (See Note 20)

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 $581,697 for the nine months ended September 30, 2009 and has an accumulated deficit of $20,743,476 at September 30, 2009.  Substantial portions of the losses are attributable to stock-based compensation, amortization of debt discount, deferred finance costs and beneficial conversion feature, and accrued interest and penalties in connection with the default of the Convertible Notes. The Company had a working capital deficiency of $3,891,816 and $2,859,499 as of September 30, 2009 and December 31, 2008, respectively.

Furthermore, as of July 12, 2008, the Company was in default on its 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, 2009, the unpaid convertible notes payable balance is $2,792,175; unpaid accrued interest is $414,545; and unpaid accrued liquidated damages penalty and default penalty are $1,835,294. The Company is currently negotiating with investors and seeking ways to resolve the default issue with all investors.

These factors raise substantial doubt concerning the Company’s ability to continue as a going concern.

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, 2009, the Company received net proceeds of $1,146,701 from various short term loans and net proceeds of $1,465,000 from related parties.

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 neighboring 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 8 of consolidated financial statements), thereby helping the Company to reduce its raw material - cocoon cost. During the nine months ended September 30, 2009, the gross margin rate was 16.1%, as compared to 6.7% for the nine months ended September 30, 2008. However, there can be no assurance that the Company will be able to raise enough funds to complete the acquisition of “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.

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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.

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 $2,192,698 for the nine months ended September 30, 2009 and has an accumulated deficit of $19,883,654 at September 30, 2009.  Substantial portions of the losses are attributable to the common stock issued for consulting service, amortization of debt discount, deferred finance costs and beneficial conversion feature, and accrued interest and penalties in connection with the default of the Convertible Notes. The Company had a working capital deficiency of $3,440,745 and $1,780,617 as of September 30, 2009 and December 31, 2008, respectively. In addition, the Company’s gross margin rate from its current operations was low.  It was 8% for the nine months ended September 30, 2009 and 5.2% for the year ended December 31, 2008.

Furthermore, as of July 12, 2008, the Company was in default on its 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, 2009, the unpaid convertible notes payable balance is $2,792,175; unpaid accrued interest is $344,741; and unpaid accrued liquidated damages penalty and default penalty are $1,563,056. The Company is currently negotiating with investors and seeking ways to resolve the default issue with all investors.

These factors raise substantial doubt concerning the Company’s ability to continue as a going concern.

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, 2009, the Company received net proceeds of $2,023,058 from various short term loans.

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. During the nine months ended September 30, 2009, the gross margin rate was 8%, as compared to 1.5% for the nine months ended September 30, 2008. However, there can be no assurance that the Company will be able to raise enough funds to complete the acquisition of “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.

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Critical Accounting Policies and Estimates

General

The Company’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Board of Directors. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.

Basis of Presentation

The condensed consolidated financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. If we were not to continue as a going concern, we would likely not be able to realize on our assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements. There can be no assurances that we will be successful in generating additional cash from equity or other sources to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

Foreign Currency Translation

The functional currency of Franklin is the United States dollar.  The functional currency of Qiluo is the Chinese Renminbi (“RMB”).  The reporting currency of the Company is the United States dollar.

The assets and liabilities of Qiluo were translated into United States dollars at period-end exchange rates The revenues and expenses were translated into United States dollars at average exchange rates for the period.  Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.

Intangible and Other Long-Lived Assets

Intangible and other long-lived assets are stated at cost, less accumulated amortization and impairments.

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable.  When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition.  If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets.

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Revenue Recognition

Sales of products are recorded when title passes to the customer, which is generally at time of shipment.  The Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables.  The credit risk is controlled through credit approvals, limits and monitoring procedures.  The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors.  Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted.  The Company does not routinely permit customers to return product.

Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification (“ASC”) topic 718-10, Stock Compensation (formerly, SFAS 123(R), “Accounting for Stock-Based Compensation”). No stock options have been granted and none are outstanding.

Income Taxes

The Company accounts for income taxes using the asset and liability method described in ASC 740-10, (formerly, SFAS No. 109, “Accounting For Income Taxes”), the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.  A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

No provision has been made for corporation income taxes due to the current loss. In addition, no future tax benefit has been calculated. According to the tax regulations of China, the amount of loss that will carry over to the next tax period should be assessed and approved by the tax regulation agency. The maximum carry over period is five years.

Segment Information

ASC 280-10 (formerly, SFAS No. 131), “Disclosure About Segments of and Enterprise and Related Information”, requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.

Recently Issued Accounting Pronouncements

Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.

The Company has restated its consolidated financial statement at December 31, 2008 and for the year then ended (which were previously included in the Company’s Form 10-K filed with SEC on April 15, 2009) in order to correct an error relating to the accounting for a defaulted notes payable (see Note 19).

Restatement of Previously Issued Financial Statements

The Company plans to restate its consolidated financial statements at December 31, 2008 and for the year then ended (which were previously included in the Company’s Form 10-K filed with SEC on April 15, 2009) in order to correct an error relating to the accounting for the defaulted notes payable (see Note 11 and 19).

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In the form 10-K filed April 15, 2009, the consolidated balance sheet at December 31, 2008 included unamortized deferred finance costs of $1,391,941 ($56,797 in assets, $1,335,144 as contra equity in stockholders’ deficit) and unamortized debt discounts of $1,078,882 (as a reduction of convertible notes payable in current liabilities) relating to these notes, which reflected amortization of these costs over the two year life of the notes. Since the Company had defaulted on the notes, thus making the obligations immediately due and payable on demand, the Company should have accelerated the amortization of the remaining unamortized deferred finance costs and debt discounts at such time. Accordingly, the consolidated balance sheet at December 31, 2008 included in this Form 10-Q has been restated to reflect such amortization.

The effect of the restatement adjustments on the consolidated balance sheet at December 31, 2008 follows:

	As Previously
	Reported			Adjustments			As Restated
ASSETS
Current assets	$	3,749,917		$	-		$	3,749,917
Property and equipment, net		887,693			-			887,693
Deposits		483,681			-			483,681
Deferred finance costs		56,797			(56,797	)		-
Total Assets	$	5,178,088		$	(56,797	)	$	5,121,291
LIABILITIES AND STOCKHOLDERS' DEFICIT
Convertible notes payable	$	1,713,293		$	1,078,882		$	2,792,175
Other current liabilities		3,817,241			-			3,817,241
Total Current Liabilities		5,530,534			1,078,882			6,609,416
Common stock		12,348			-			12,348
Additional paid-in capital		18,345,012			-			18,345,012
Deferred finance costs		(1,335,144	)		1,335,144			-
Accumulated deficit		(17,690,956	)		(2,470,823	)		(20,161,779	)
Accumulated other comprehensive income		316,294			-			316,294
Total Stockholders' (Deficit)		(352,446	)		(1,135,679	)		(1,488,125	)
Total Liabilities and Stockholders' deficit	$	5,178,088		$	(56,797	)	$	5,121,291

The effect of the restatement adjustments on the consolidated statement of operations for the year ended December 31, 2008 follows:

	As Previously
	Reported			Adjustments			As Restated
Loss from operations	$	(751,854	)	$	-		$	(751,854	)
Interest income		2,564			-			2,564
Interest expense		(5,433,570	)		(2,470,823	)		(7,904,393	)
Net Loss	$	(6,182,860	)	$	(2,470,823	)	$	(8,653,683	)
Net Losss per Share - Basic and Diluted	$	(0.06	)	$	(0.02	)	$	(0.08	)

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act (defined below)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud.  A control system, no matter how well conceived and   operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the last fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II  OTHER INFORMATION

Item 1.  Legal Proceedings.

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 July 12, 2008, the Company was in default on its Convertible Notes payments due July 12, 2008. As of June 30, 2009, the unpaid convertible notes payable balance is $2,792,175; unpaid accrued interest is $344,741; and unpaid accrued liquidated damages penalty and default penalty are $1,563,056. The Company is currently negotiating with investors and 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.

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

Unregistered Sales of Equity Securities

None

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Purchases of equity securities by the issuer and affiliated purchasers

None.

Use of Proceeds

None

Item 3.  Defaults Upon Senior Securities.

See Part II – Item 1. above.

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, 2009.

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, 2009	By:	/s/  Dingliang Kuang
	Name:	Dingliang Kuang
	Title:	President, Chief Executive Officer, Treasurer and Director
		(Principal Executive, Financial and Accounting Officer)

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