UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





AMENDMENT NO. 1 TO


FORM 10-K








x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For fiscal year ended June 30, 2010





OR





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from                          to                         .





Commission file number: 0-11616





FRANKLIN WIRELESS CORP.


(Exact name of Registrant as specified in its charter)


Nevada

(State or other jurisdiction of  incorporation or organization)

95-3733534

(I.R.S. Employer Identification Number)5440 Morehouse Drive, Suite 1000,

San Diego, California

(Address of principal executive offices)

92121

(Zip code)





Securities registered pursuant to Section 12(b) of the Act: None





Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share





Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ̈  No x





Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ̈  No x





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o





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





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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer  o

Accelerated filer  o

Non-accelerated filer  o

Smaller reporting company  x





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


















EXPLANATORY NOTE





On March 29, 2011 Registrant  received a letter from the Securities and Exchange Commission (the "SEC") regarding our Form 10-K for the year ended June 30, 2010. We have responded to the SEC's comments to our Form 10-K (the "Original Report") in this Amendment No. 1 (the "Amendment"). The purpose of the Amendment is to amend and restate Item 1A, Risk Factors, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, Item 9A, Controls and Procedures, Item 10, Directors, Executive Officers and Corporate Governance,  Item 11, Executive Compensation, and Item 13, Certain Relationships and Related Transactions, in their entirety.





The disclosures in this Amendment continue to speak as of the date of the Original Report, and do not reflect events occurring after the filing of the Original Report, except as specifically noted. Accordingly, this Amendment should be read in conjunction with our other filings made with the Securities and Exchange Commission subsequent to the filing of the Original Report, including any amendments to those filings. The filing of this Amendment shall not be deemed to be an admission that the Original Report, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading.






2





ITEM 1A:  RISK FACTORS.





The following risk factors do not purport to be a complete explanation of the risks involved in our business.





WE MAY NEED ADDITIONAL FINANCING DUE TO LIMITED RESOURCES.  Our financial resources are limited, and the amount of funding that is required to develop and commercialize our products and technologies is highly uncertain.  Adequate funds may not be available when needed or on terms satisfactory to us.  Lack of funds may cause us to delay, reduce and/or abandon certain or all aspects of our development and commercialization programs.  We may seek additional financing through the issuance of equity or convertible debt securities.  The percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, and such securities may have rights, preferences and privileges senior to those of our Common Stock.  There can be no assurance that additional financing will be available on terms favorable to us or at all.  If adequate funds are not available or are not available on acceptable terms, we may not be able to fund our expansion, take advantage of desirable acquisition opportunities, develop or enhance services or products or respond to competitive pressures.  Such inability could have a materially adverse effect on our business, results of operations and financial conditions.





WE MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.  The industry in which we operate has many participants that own, or claim to own, proprietary intellectual property. In the past we have received, and in the future may receive, claims from third parties alleging that we, and possibly our customers, violate their intellectual property rights. Rights to intellectual property can be difficult to verify and litigation may be necessary to establish whether or not we have infringed the intellectual property rights of others. In many cases, these third parties are companies with substantially greater resources than us, and they may be able to, and may choose to, pursue complex litigation to a greater degree than we could. Regardless of whether these infringement claims have merit or not, we may be subject to the following:





●
We may be liable for potentially substantial damages, liabilities and litigation costs, including attorneys’ fees;


●
We may be prohibited from further use of the intellectual property and may be required to cease selling our products that are subject to the claim;


●
We may have to license the third party intellectual property, incurring royalty fees that may or may not be on commercially reasonable terms. In addition, there is no assurance that we will be able to successfully negotiate and obtain such a license from the third party;


●
We may have to develop a non-infringing alternative, which could be costly and delay or result in the loss of sales. In addition, there is no assurance that we will be able to develop such a non-infringing alternative;


●
The diversion of management’s attention and resources;


●
Our relationships with customers may be adversely affected; and,


●
We may be required to indemnify our customers for certain costs and damages they incur in such a claim.





In the event of an unfavorable outcome in such a claim and our inability to either obtain a license from the third party or develop a non-infringing alternative, then our business, operating results and financial condition may be materially adversely affected and we may have to restructure our business.





Absent a specific claim for infringement of intellectual property, from time to time we have and expect to continue to license technology, intellectual property and software from third parties. There is no assurance that we will be able to maintain our third party licenses or obtain new licenses when required and this inability could materially adversely affect our business and operating results and the quality and functionality of our products. In addition, there is no assurance that third party licenses we execute will be on commercially reasonable terms.





Under purchase orders and contracts for the sale of our products we may provide indemnification to our customers for potential intellectual property infringement claims for which we may have no corresponding recourse against our third party licensors. This potential liability, if realized, could materially adversely affect our business, operating results and financial condition.





WE OPERATE IN AN INTENSIVELY COMPETITIVE MARKET. The wireless broadband data access market is highly competitive, and we may be unable to compete effectively. Many of our competitors or potential competitors have significantly greater financial, technical and marketing resources than we do. To survive and be competitive, we will need to continuously invest in research and development, sales and marketing, and customer support. Increased competition could result in price reduction and smaller customer orders. Our failure to compete effectively could seriously impair our business.





WE OPERATE IN THE HIGH-RISK TELECOM SECTOR. We are in a volatile industry.  In addition, our revenue model is evolving and relies substantially on the assumption that we will be able to successfully complete the development and sales of our products and services in the marketplace.  Our prospects must be considered in the light of the risk, uncertainties, expenses and difficulties frequently encountered by companies in the early stages of development and marketing.  In order to be successful in the market we must, among other things:




3





o
Complete development and introduction of functional and attractive products and services;


o
Attract and maintain customer loyalty;


o
Establish and increase awareness of our brand and develop customer loyalty;


o
Provide desirable products and services to customers at attractive prices;


o
Establish and maintain strategic relationships with strategic partners and affiliates;


o
Rapidly respond to competitive and technological developments;


o
Build operations and customer service infrastructure to support our business; and


o
Attract, retain, and motivate qualified personnel.





We cannot guarantee that we will be able to achieve these goals, and our failure to achieve them could adversely affect our business, results of operations, and financial condition.  We expect that revenues and operating results will fluctuate in the future.  There is no assurance that any or all of our efforts will produce a successful outcome.





WE OPERATE IN A FIELD WITH RAPIDLY CHANGING TECHNOLOGY. Since our products and services are new, we cannot be certain that these products and services will function as anticipated or be desirable to our intended markets.  Our current or future products and services may fail to function properly, and if our products and services do not achieve and sustain market acceptance, our business, results of operations and profitability may suffer.  If we are unable to predict and comply with evolving wireless standards, our ability to introduce and sell new products will be adversely affected. If we fail to develop and introduce products on time, we may lose customers and potential product orders.





WE DEPEND ON THE DEMAND FOR WIRELESS NETWORK CAPACITY. The demand for our products is completely dependent on the demand for broadband wireless access to networks. If wireless operators do not deliver acceptable wireless service, our product sales may dramatically decline. Thus, if wireless operators experience financial or network difficulties, it will likely reduce demand for our products.





WE DEPEND ON COLLABORATIVE ARRANGEMENTS.  The development and commercialization of our products and services depend in large part upon our ability to selectively enter into and maintain collaborative arrangements with developers, distributors, service providers, network systems providers, core wireless communications technology providers and manufacturers, among others.





THE LOSS OF ANY OF OUR MATERIAL CUSTOMERS COULD ADVERSLY AFFECT OUR REVENUES AND PROFITABILITY, AND THEREFORE SHAREHOLDER VALUE.  We depend on a small number of customers for a significant portion of our revenues.  For the year ended June 30, 2010, net revenues from one customer, Sprint/United Management Company, represented the substantial majority of our consolidated net sales. We have a written agreement with this customer that governs the sale of products to it, but the agreement does not obligate it to purchase any quantity of products from us.  If this customer were to reduce its business with us, our revenues and profitability could materially decline.





OUR PRODUCT DELIVERIES ARE SUBJECT TO LONG LEAD TIMES. Due to our limited capital resources, we often experience long-lead times to ship products to our customers, often in excess of 45 days. This could cause us to lose customers, who may be able to secure faster delivery times from our competitors, and require us to maintain higher levels of working capital.





OUR PRODUCT-TO-MARKET CHALLENGE IS CRITICAL. Our success depends on our ability to quickly enter the market and establish an early mover advantage.  We must implement an aggressive sales and marketing campaign to solicit customers and strategic partners.  Any delay could seriously affect our ability to establish and exploit effectively an early-to-market-strategy.





AS OUR BUSINESS EXPANDS INTERNATIONALLY, WE WILL BE EXPOSED TO ADDITIONAL RISKS RELATING TO INTERNATIONAL OPERATIONS.  Our expansion into international operations exposes us to additional risks unique to such international markets, including the following:





●
Increased credit management risks and greater difficulties in collecting accounts receivable;


●
Unexpected changes in regulatory requirements, wireless communications standards, exchange rates, trading policies, tariffs and other barriers;


●
Uncertainties of laws and enforcement relating to the protection of intellectual property;


●
Language barriers; and


●
Potential adverse tax consequences.





Furthermore, if we are unable to further develop distribution channels in countries in North America, the Caribbean and South America, we may not be able to grow our international operations, and our ability to increase our revenue will be negatively impacted.





GOVERNMENT REGULATION COULD RESULT IN INCREASED COSTS AND INABILITY TO SELL OUR PRODUCTS.  Our products are subject to certain mandatory regulatory approvals in the United States and other regions in which we operate. In the United States, the Federal Communications Commission regulates many aspects of communications devices.  Although we have obtained all the necessary Federal Communications Commission and other required approvals for the products we currently sell, we may not obtain approvals for future products on a timely basis, or at all. In addition, regulatory requirements may change or we may not be able to obtain regulatory approvals from countries other than the United States in which we may desire to sell products in the future.





4





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





The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report.  This report contains certain forward-looking statements relating to future events or our future financial performance.  These statements are subject to risks and uncertainties which could cause actual results to differ materially from those discussed in this report.  You are cautioned not to place undue reliance on this information which speaks only as of the date of this report.  We are not obligated to publicly update this information, whether as a result of new information, future events or otherwise, except to the extent we are required to do so in connection with our obligation to file reports with the SEC. For a discussion of the important risks to our business and future operating performance, see the discussion under the caption “Item 1A. Risk Factors” and under the caption “Factors That May Influence Future Results of Operations” below.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.





BUSINESS OVERVIEW





We are engaged in the design, manufacture and sale of broadband high speed wireless data communication products such as third generation (“3G”) and fourth generation (“4G”) wireless modules and modems. We focus primarily on wireless broadband Universal Serial Bus (“USB”) modems, which provide a flexible way for consumers to connect to wireless broadband networks from laptop or desktop computers. Our broadband wireless data communication products are positioned at the convergence of wireless communications, mobile computing and the Internet, each of which we believe represent a growing market.





We market and sell our products through two channels: Directly to wireless operators, and indirectly through strategic partners and distributors.  Our global customer base extends primarily from the United States to South American and Caribbean countries.  Our USB modems are certified by Sprint, Comcast Cable, Cox, Clearwire, Time Warner Cable and other wireless operators located in the United States and also by wireless operators located in other Caribbean and South American countries.








FACTORS THAT MAY INFLUENCE FUTURE RESULTS OF OPERATIONS





We believe that our revenue growth will be influenced largely by (1) the successful maintenance of our existing customers, (2) the rate of increase in demand for wireless data products, (3) customer acceptance for our new products, (4) new customer relationships and contracts, and  (4) our ability to meet customers’ demands.





We have entered into and expect to continue to enter into new customer relationships and contracts for the supply of our products, and this may require significant demands on our resources, resulting in increased operating, selling, and marketing expenses associated with such new customers.








SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of Consolidation





The consolidated financial statements include the accounts of the Company, a wholly-owned subsidiary, and a subsidiary with a majority voting interest of 50.6% (49.4% is owned by non-controlling interests). In the preparation of consolidated financial statements of the Company, all intercompany balances and transactions have been eliminated.




As consolidated financial statements are based on the assumption that they represent the financial position and operating results of a single economic entity, the retained earnings or deficit of a subsidiary at the date of acquisition, October 1, 2009, by the parent are excluded from consolidated retained earnings. When a subsidiary is consolidated during the twelve months ended June 30, 2010, the consolidated financial statements include the subsidiary’s revenues, expenses, gains, and losses only from the date the subsidiary is initially consolidated, and the noncontrolling interest is reported in the consolidated statement of financial position within equity, separately from the parent’s equity. That amount is clearly identified and labeled.  There are no shares of the Company held by the subsidiaries as of June 30, 2010.





Segment Reporting





ASC 280, “Segment Reporting,” requires public companies to report financial and descriptive information about their reportable operating segments.  We identify our operating segments based on how management internally evaluates separate financial information, business activities and management responsibility.  We have one reportable segment, consisting of the sale of wireless access products.




5





We generate revenues from three geographic areas which consist of the United States, the Caribbean and South America and Asia. The following enterprise wide disclosure is prepared on a basis consistent with the preparation of the consolidated financial statements.  The following table contains certain financial information by geographic area:




Fiscal Year Ended June 30,Net sales:

2010


2009United States

$
98,404,968


$
14,334,956Caribbean and South America


2,858,225



9,665,548Asia


634,926



–Totals

$
101,898,119


$
24,000,504
   Long-lived assets, net:

June 30, 2010


June 30, 2009United States

$
110,913


$
89,807Asia


3,733,292



–Totals

$
3,844,205


$
89,807





Fair Value of Financial Instruments





We are required to disclose the estimated fair value of certain assets and liabilities in accordance with ASC-825-10, “financial instruments”. As of June 30, 2010, management believes that the carrying value of cash and cash equivalents approximates fair value, due to the short maturity of theses financial instruments. (See “Note 3”).





Estimates





The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.







Allowance for Doubtful Accounts




We do not maintain an  allowance for doubtful accounts based upon our review of our collection history associated with all significant outstanding invoices.





Revenue Recognition





We recognize revenue in accordance with ASC 605, “Revenue Recognition,” when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered.  Accordingly, we recognize revenues from product sales upon shipment of the product to the customers or when the products are received by the customers in accordance with shipping or delivery terms. We provide a factory warranty for one year, which is covered by our vendors under the purchase agreements.





Capitalized Product Development





Capitalized product development includes payroll, employee benefits, and other headcount-related expenses associated with product development. Once technological feasibility is reached, which is generally shortly before the products are released to manufacturing, such costs are capitalized and amortized over the estimated lives of the products. For the year ended June 30, 2010, capitalized product development was $1,087,684, and is included in intangible assets in our consolidated balance sheet.





Inventories





Our inventories are made up of finished goods and are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. We assess the inventory carrying value and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. Our customer demand is highly unpredictable, and can fluctuate significantly caused by factors beyond the control of the Company. We do not maintain an allowance for inventories for potential excess or obsolete inventories or inventories that are carried at costs that are higher than their estimated net realizable values.




6





Property and Equipment





Property and equipment are recorded at cost. Significant additions or improvements extending useful lives of assets are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives as follows:





Building
40 yearsMachinery
6 yearsOffice equipment
5 yearsMolds
3 yearsVehicles
5 yearsComputers and software
5 yearsFurniture and fixtures
7 yearsFacilities
5 yearsConstruction-in-progress
Capitalized





Goodwill and Intangible Assets





Goodwill and intangible assets are recorded in connection with the Diffon acquisition and are accounted for in accordance with ASC 805, “Business Combinations.”  Goodwill represents excess of the purchase price over the fair value of the tangible and intangible net assets acquired.  Intangible assets are recorded at their fair value at the date of acquisition. Goodwill and other intangible assets are accounted for in accordance with ASC 350, “Goodwill and Other Intangible Assets.”  Goodwill is tested for impairment at least annually and any related impairment losses are recognized in earnings when identified.





Long-lived Assets





In accordance with ASC 360, “Property, Plant, and Equipment,” we review for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of assets may not be recoverable.  We consider the carrying value of assets may not be recoverable based upon its review of the following events or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in the Company’s strategic business objectives and utilization of the asset; or significant negative industry or economic trends.  An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset is less than its carrying amount.





Income Taxes





Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. We have evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income, and have determined it is more likely than not that the assets will be fully realized and no valuation allowance is necessary at June 30, 2010. As of June 30, 2010, we have federal and state net operating loss carryforwards of approximately $5.2 million and $1.7 million, which expire through 2024 and 2015, respectively. The utilization of net operating loss carryforwards is subject to limitations under provision of the Internal Revenue Code Section 382 and similar state provisions.





We adopted the provision of ASC 740 related to accounting for uncertain tax positions effective July 1, 2007, which prescribes a recognition threshold and measurement process for recording in the financial statements, uncertain tax positions taken or expected to be taken in a tax return.  Under this provision, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. Tax benefits of an uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained based on technical merits.





Earnings Per Share





We report earnings per share in accordance with ASC 260, “Earnings Per Share.”  Basic earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Diluted earnings per share represent basic earnings per share adjusted to include the potentially dilutive effect of outstanding stock options.








7





RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





In June 2009, the FASB Accounting Standards Codification (Codification) was issued. The Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of this standard is not expected to have a material impact to our consolidated financial statements.





In May 2009, the FASB issued ASC 855, “Subsequent Events.” ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The standard, which includes a new required disclosure through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009.





In September 2009, the FASB issued new accounting guidance related to the revenue recognition for multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative selling price method. The accounting guidance will be applied prospectively and will become effective during the first quarter of 2011. Early adoption is allowed. We do not believe the adoption of this guidance will have a material impact to our consolidated financial statements.





In January 2010, the FASB issued new accounting guidance related to the disclosure requirements for fair value measurements and provides clarification for existing disclosures requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This guidance clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosure are effective for fiscal years beginning after December 15, 2009, except for the disclosure requirements related to the purchases, sales, issuances and settlements in the rollforward activity of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years ending after December 31, 2010. We do not believe the adoption of this guidance will have a material impact to our consolidated financial statements.








RESULT OF OPERATIONS





The following table sets forth, for the years ended June 30, 2010, 2009 and 2008 our statements of operations including data expressed as a percentage of sales:








Year Ended June 30,2010

(Consolidated)


2009


2008(as a percentage of sales)Net Sales


100.0
%


100.0
%


100.0
%Cost of goods sold


86.2
%


78.4
%


77.8
%Gross profit


13.8
%


21.6
%


22.2
%Selling, general and administrative expenses


6.2
%


11.9
%


9.5
%Income from operations


7.6
%


9.7
%


12.7
%Other (loss) income, net


(0.1
% )


0.4
%


0.3
%Net income before income taxes


7.5
%


10.1
%


13.0
%Income tax provision (benefit)


2.9
%


(5.1
%)


1.7
%Net income before non-controlling interest


4.6
%


15.2
%


11.3
%Non-controlling interest in net loss of subsidiary


0.1
%


–



–Net income


4.7
%


15.2
%


11.3
%







8





YEAR ENDED JUNE 30, 2010 COMPARED TO YEAR ENDED JUNE 30, 2009





NET SALES - Net sales increased by $77,897,615, or 324.6%, to $101,898,119 for the year ended June 30, 2010 from $24,000,504 for the corresponding period of 2009.  For the year ended June 30, 2010, the mix of net sales by geographic region consisted primarily of South America and Caribbean, the United States, and Asia, amounted to $2,858,225 (2.8% of the net sales), $98,404,968 (96.6% of the net sales), and $634,926 (0.6% of the net sales), respectively.





The overall increase in net sales was primarily due to increased demand for our dual-mode (3G and 4G) wireless USB modems resulting mainly from the rollout, by our major customer, of its 4G (WiMAX) network, much of which took place during the year ended June 30, 2010.  The Company also benefited from being the only supplier of dual-mode (CDMA Rev A/WiMAX) USB modems in North America up until approximately June, 2010 at which time a competitor entered the market. Net sales in the South America and Caribbean regions decreased by $6,807,323, or 70.4%, to $2,858,225 for the year ended June 30, 2010 from $9,665,548 for the corresponding period of 2009.   The decrease was due to increased market competition, the decline in purchasing power of consumers, as well as the general nature of sales in these regions which often fluctuate significantly from year to year due to timing of orders placed by a relatively small number of customers.  Net sales in the United States increased by $84,070,012, or 586.5%, to $98,404,968 for the year ended June 30, 2010 from $14,334,956 for the corresponding period of 2009. The increase in net sales was primarily due to increased demand for our dual-mode (3G and 4G) wireless USB modems resulting mainly from the rollout, by our major customer, of its 4G (WiMAX) network, much of which took place during the year ended June 30, 2010.  The Company also benefited from being the only supplier of dual-mode (CDMA Rev A/WiMAX) USB modems in North America up until approximately June, 2010 at which time a competitor entered the market.  Net sales in the Asia region increased by $634,926, to $634,926, for the year ended June 30, 2010 from $0 for the corresponding period of 2009.  The increase is due to including $634,926 of research and development service revenue in net sales generated from Diffon.  Beginning with the three months ended December 31, 2009, Diffon’s financial results were consolidated with those of the Company, following the Company’s acquisition of approximately 50.6% of Diffon’s outstanding capital stock on October 1, 2009.  Because of this, the fiscal year ended June 30, 2009 did not include any net sales from Diffon.





GROSS PROFIT – Gross profit increased by $8,848,229, or 170.9%, to $14,024,723 for the year ended June 30, 2010 from $5,176,494 for the corresponding period of 2009.  The increase was primarily due to the change in net sales as discussed above.  The gross profit in terms of net sales percentage was 13.8% for the year ended June 30, 2010 compared to 21.6% for the corresponding period of 2009.  The gross profit decrease in terms of net sales percentage was primarily due to the significant increase in sales to carrier customers in the United States, whose gross profit in terms of net sales percentage was approximately 12.2% and accounted for 96.6% of total net sales for the year ended June 30, 2010. The decrease in sales in the South America and Caribbean regions also negatively affected the gross profit in terms of net sales percentage.  The carrier customers in the United States generally purchase greater quantities of products than those in South America and the Caribbean, which is why the gross profit in terms of net sales percentage is lower.  The sales from the Asia region were primarily made up of engineering service revenues, which positively affected the gross profit in terms of net sales percentage for the year ended June 30, 2010.





SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative expenses increased by $3,498,924, or 122.4%, to $6,358,631 for the year ended June 30, 2010 from $2,859,707 for the corresponding period of 2009.  The increase was primarily due to the consolidation of the Diffon expenses, which accounted for $1,632,348 of the increase. The remainder of the change is due to higher payroll expense (due to headcount growth) and related expenditures.





OTHER INCOME (EXPENSE), NET - The net of other income (expense) decreased by $185,079 to ($85,024) for the year ended June 30, 2010 from $100,055 for the corresponding period of 2009. The decrease was primarily due to the loss on the disposal of fixed assets of $123,109.





YEAR ENDED JUNE 30, 2009 COMPARED TO YEAR ENDED JUNE 30, 2008





NET SALES - Net sales decreased by $10,722,795, or 30.9%, to $24,000,504 for the year ended June 30, 2009 from $34,723,299 for the corresponding period of 2008.  For the year ended June 30, 2009, the mix of net sales by geographic region consisted primarily of Caribbean and South American countries and the United States, amounted to $9,665,548, (40.3% of net sales), and $14,334,956, (59.7% of net sales), respectively. The overall decrease in sales was primarily due to a mix of decrease in sales and sales price for our EVDO technology products in Caribbean and South American countries, caused by a decline in purchasing power of customers and their currencies. Net sales in Caribbean and South American countries decreased by $15,683,284, or 61.9%, to $9,665,548 for the year ended June 30, 2009 from $25,348,832, compared to the corresponding period of 2008.   This decrease was offset by an increase in sales in the United States by approximately $4,960,489, or 52.9%, to $14,334,956 from $9,374,467 as a result of the increase in demand for our new EVDO technology product, CMU-300 WIMAX plus CDMA USB Modem, which was launched in the first half of fiscal year 2009.  Net sales in the United States represented 59.7% of the net sales for the year ended June 30, 2009, compared to 27.0% for the corresponding period of 2008, while CMU-300 net sales represented approximately 54.9% of the net sales in the United States for the year ended June 30, 2009, compared to 0.0% for the corresponding period of 2008.




9





GROSS PROFIT – Gross profit decreased by $2,517,789, or 32.7%, to $5,176,495, or 21.6% of net sales, for the year ended June 30, 2009 from $7,694,284, or 22.2% of net sales, for the corresponding period of 2008. The decrease was primarily due to a decrease in net sales by $10,722,795, or 30.9%.  The decrease in gross profit margin was primarily due to higher sales of the lower margin EV-DO technology product, CMU-300, for the year ended June 30, 2009, compared to the corresponding period of 2008.





SELLING, GENERAL, AND ADMINISTRATIVE - Selling, general, and administrative expenses decreased by $440,364, or 13.3%, to $2,859,707 for the year ended June 30, 2009 from $3,300,071 for the corresponding period of 2008.  The decrease was primarily due to a $773,423 decrease in sales commission expenses due to the decrease in sales and $276,367 increase in salaries and related expenditures due to the increase in our sales force.





OTHER INCOME (EXPENSE), NET - The net of other income (expense) decreased by $12,093, or 10.8%, to $100,055 for the year ended June 30, 2009 from $112,149 for the corresponding period of 2008.  The decrease was primarily due to the net effect of the decrease of $50,249 in interest income, the decrease of $4,544 in other income, the increase of $11,125 in other expenses, and the decrease of $53,825 in loss on disposal of assets.







LIQUIDITY AND CAPITAL RESOURCES





Our principal liquidity requirements are for working capital and capital expenditures. We fund our liquidity requirements with cash on hand and cash flow from operations.





OPERATING ACTIVITIES – Net cash provided by operating activities for the years ended June 30, 2010, 2009, and 2008 was $11,109,872, $443,393 and $3,835,893, respectively.  The $11,109,872 in net cash provided by operating activities for the year ended June 30, 2010 was primarily due to our consolidated net income of $4,777,784, the decrease in inventory of $2,420,714, and increases in trade accounts payable, marketing funds payable and income taxes payable which were $1,515,944, $1,244,694 and $929,538 respectively. The $443,393 in net cash provided by operating activities for the year ended  June 30, 2009 was primarily due to net income of $3,639,166 and a decrease in accounts receivable $1,718,747 which were partially offset by increases in inventory and deferred tax assets of $2,546,182 and $2,049,812 respectively.  Net cash provided by operating activities for the year ended June 30, 2008 was primarily due to our net income of $3,916,913.





INVESTING ACTIVITIES – Net cash used in investing activities for the years ended June 30, 2010, 2009, and 2008 was $1,125,394, $61,833 and $52,312 respectively.  The $1,125,394 in net cash used in investing activities for the year ended June 30, 2010 was primarily due to purchases of fixed assets of $161,878 and research and development cost of $1,087,684 that were capitalized, offset by the sales of fixed assets of $123,936.  The $61,833 and $52,312 in net cash used in investing activities for the years ended June 30, 2009 and 2008 were primarily due to our capital expenditures to purchase long lived assets.





FINANCING ACTIVITIES – Net cash used in financing activities for the years ended June 30, 2010 was $117,908, primarily consisting of repayment of short-term and long-term borrowings of $291,419, offset by the proceeds of short-term borrowings from bank of $173,511. Net cash used in financing activities for the years ended June 30, 2009 and 2008 was $300,600 and $88,605, respectively, primarily consisting of repayment of our long-term liabilities.







CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS





The following table summarizes our contractual obligations and commitments as of June 30, 2010, and the effect such obligations could have on our liquidity and cash flow in future periods:





Payments Due by June 30,Lease

2011


2012


2013


2014


TotalAdministrative office facility

$
117,418


$
19,696


$
-


$
-


$
137,114Corporate housing facility


7,220



-



-



-



7,220Total Obligation

$
124,638


$
19,696


$
-


$
-


$
144,334





On July 27, 2010, we entered into a Common Stock Repurchase Agreement with C-Motech (the “Agreement”), and under which the Agreement, we agreed to repurchase 3,370,356 shares of our Common Stock from C-Motech for $3,500,000.





On September 14, 2010, we completed the repurchase and transfer of 1,803,684 shares of our common stock from C-Motech in exchange for non-cash consideration in the amount of $1,873,065. The remaining 1,566,672 shares are to be repurchased by Registrant upon payment of the balance, $1,626,935, on or before December 31, 2010. Pursuant to the Agreement, Kwang Sun Han, a director of the Company and the designee of C-Motech on the Company’s Board of Directors, resigned from the Board of Directors.





10





LEASES





We lease approximately 6,070 square feet of office space in San Diego, California, at a monthly rent of $9,469, and the lease expires on August 31, 2011. In addition to monthly rent, the lease provides for periodic cost of living increases in the base rent and payment of common area costs. Our facility is covered by an appropriate level of insurance and we believe it to be suitable for our respective use and adequate for our present needs. Rent expense related to the operating lease was $107,704, $107,704, and $62,848 for the years ended June 30, 2010, 2009, and 2008, respectively.





We lease a corporate housing facility for our vendors under a non-cancelable operating lease that expires in November, 2010.  Rent expense related to the operating lease was $15,769, $18,194, and $17,829 for the years ended June 30, 2010, 2009, and 2008, respectively.





We lease one automobile under an operating lease that expires on July 4, 2012. The related lease expense was $8,000, $6,467, and $6,452 for the years ended June 30, 2010, 2009, and 2008, respectively.








OFF-BALANCE SHEET ARRANGEMENTS





None.








FUTURE LIQUIDITY AND CAPITAL REQUIREMENTS





For the next twelve months, we may incur in excess of $4.0 million for capital expenditures, the acquisition of additional certifications and non-cash acquisitions.





We believe we will be able to fund our future cash requirements for operations from our cash available, operating cash flows, bank lines of credit and issuance of equity securities.  We believe these sources of funds will be sufficient to continue our operations and planned capital expenditures.  However, we will be required to refinance or restructure our indebtedness or raise additional debt or equity capital if we are unable to generate sufficient cash flow from operation to fund the continued expansion of our sales and to satisfy the related working capital requirements for next twelve months.  Our ability to satisfy such obligations also depends upon our future performance, which in turn is subject to general economic conditions and regional risks, and to financial, business and other factors affecting our operations, including factors beyond our control.  See Item 1A, “Risk Factors” included in this report.





If we are unable to generate sufficient cash flow from operations to meet our obligations and commitments, we will be required to refinance or restructure our indebtedness or raise additional debt or equity capital. Additionally, we may be required to sell material assets or operations or delay or forego expansion opportunities. We might not be able to affect these alternative strategies on satisfactory terms, if at all.








ITEM 9A. CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of  Franklin’s management, including our Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) 15d-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, with one exception, were effective in enabling the Company to record, process, summarize and report information required to be included in the Company’s periodic SEC filings within the required time period. The exception is that in the original filing of our Annual Report on Form 10-K for the year ended June 30, 2010, our Report on Internal Control over Financial Reporting was defective in that it did not include several required items, including (i) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting, (ii) an identification of the framework used by management to evaluate the effectiveness of internal control over financial reporting, (iii) an assessment by management of the effectiveness of internal control over financial reporting,  and (iv) a statement concerning the lack of an attestation report from Franklin’s independent certified public accountants.





Management’s Report on Internal Control over Financial Reporting





11




Management is responsible for establishing and maintaining adequate internal control over financial reporting for Franklin. Franklin’s internal control system was designed to provide reasonable assurance to its management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States (GAAP).





Management recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and corporate conduct.





The Company's internal control over financial reporting includes those policies and procedures that:





●

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;





●

provide reasonable assurance that transactions are recorded properly to allow for the preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the Board of Directors of the Company;





●

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements; and





●

provide reasonable assurance as to the detection of fraud.





Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial reporting may vary over time. The Company's processes contain self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.





Management has assessed the effectiveness of Franklin’s internal control over financial reporting as of June 30, 2010, based on the criteria for effective internal control described in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company's internal control over financial reporting was effective as of  June 30, 2010.





This annual report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting pursuant to rules of the SEC that permit the Company to provide only management's report.





Changes in Internal Control over Financial Reporting





There were no changes in Franklin’s internal controls over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.








ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.





Set forth below are the names, ages, titles and present and past positions of our directors and executive officers.





Name

Age

PositionOC Kim

47

President, Acting Chief Financial Officer, Secretary and a DirectorGary Nelson

69

Chairman of the Board and a DirectorJoon Won Jyoung

68

DirectorJohnathan Chee

48

DirectorYun J. (David) Lee

48

Chief Operating Officer








OC Kim has been our President, Acting Chief Financial Officer, Secretary and a director since September 2003. Prior to joining us, Mr. Kim was the Chief Operating Officer of Axesstel Inc., a pioneering developer of CDMA Wireless Local Loop Products. Before joining Axesstel, he was the president of U.S. sales office for Kolon Data Communications Co., Ltd., one of Korea's most prominent technology conglomerates. He began his career at Lucky Goldstar (LG) Electronics. He has more than 18 years of experience in sales, marketing, and operations management in the telecommunications and information systems industries. He earned a B.A. from Sogang University in Korea.




12





We believe Mr. Kim’s qualifications to serve as a director of the Company include his extensive business, operational and management experience in the wireless industry, including his current position as the Company’s President. In addition, his knowledge of the Company’s business, products, strategic relationships and future opportunities is of great value to the Company.





Gary Nelson has been a director since April 2001. He is also the co-founder and current President of Churchill Mortgage Corporation, an income property mortgage banking firm based in Los Angeles, California, which is the loan correspondent for the general and real estate separate accounts of major life insurance companies and their pension fund sources. The Churchill portfolio consists of approximately $4.5 billion in loans. In addition, Mr. Nelson is the Chairman of the Board of Directors for Churchill Mortgage of Arizona, Inc., and Churchill Real Estate, Inc. Prior experiences include computer marketing to the aerospace industry with Control Data Corporation and design engineering on the Apollo Project with North American Aviation.  He holds a B.S. in Mechanical Engineering from Kansas State University and an MBA from the University of Southern California.





We believe that Mr. Nelson’s qualifications to serve as a director of the Company include his many years of business, operational and management experience including his current position as President of Churchill Mortgage Corporation.  In addition, Mr. Nelson has served as a director of the Company for ten years, and brings a valuable historical perspective on the development of the Company’s business and its leadership.




Joon Won Jyoung has been a director since September 2009.  He has owned several private companies in South Korea since 1997.  Between 1992 and 1996, he served as the President of Sneakers Classic Ltd., and between 1987 and 1991, he was the Chairman of Empire State Bank in New York.  Between 1972 and 1982, he was the Chairman of Downtown Mart, a distribution company in New York and Virginia. He holds a B.S. in Mathematics from Seoul National University and an M.S. in Statistics from the University of Connecticut.




We believe Mr. Jyoung’s qualifications to serve as a director of the Company include his extensive management experience in a diverse range of industries as well as his broad experience in international business matters.  Mr. Jyoung’s background and experience allow him to provide the Company’s Board of Directors with valuable knowledge and insight.




Johnathan Chee has been a director since September 2009.  He is an attorney and has owned the Law Offices of Johnathan Chee, in Niles, Illinois, since August 2007. Between 1998 and 2007, he served as an attorney with the C&S Law Group, P.C., in Glenview, Illinois. He holds a B.A. from the University of Illinois-Chicago and a J.D. from IIT Chicago-Kent College of Law. He is a member of the Illinois Bar Association.




We believe Mr. Chee’s qualifications to serve as a director of the Company include his experience as a business attorney that allow him to provide the Company’s Board of Directors with valuable knowledge of legal matters that may affect the Company.




Yun J. (David) Lee has been the Chief Operating Officer since September 2008. Mr. Lee has seventeen years of upper level management experience in telecommunications, including experience in the cellular telephone business in the U.S. and South America. Prior to joining the Company, he was President of Ace Electronics, and served as Chief Financial Officer and Director of Sales and Marketing for RMG Wireless. Prior to that, he served as Controller and Director of International Sales for Focus Wireless in Chicago.








COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT





Section 16(a) of the Securities Exchange Act of 1934 requires officers and directors, and persons who own more than ten percent of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission"). Officers, directors and greater than regulations to furnish us with copies of all forms they file pursuant to Section 16(a). Based solely on our review of the copies of such forms it received and written representations from reporting persons required to file reports under Section 16(a), to our knowledge all of the Section 16(a) filing requirements applicable to such persons with respect to fiscal 2009 were complied with.








CODE OF ETHICS





The Board of Directors has adopted a Code of Ethics, which is applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.   The Code of Ethics covers all areas of professional conduct, including honest and ethical conduct, conflicts of interest, compliance with laws, disclosure obligation, and accountability for adherence to this Code.





13





CORPORATE GOVERANCE





During fiscal 2010, the Board of Directors held three meetings. Each director except Jaeman Lee attended at least 75% of such meetings. The Board of Directors has no committees.





ITEM 11. EXECUTIVE COMPENSATION.





The following table sets forth all compensation paid or accrued by us for the years ended June 30, 2010 and 2009 to our Chief Executive Officer and Acting Chief Financial Officer and our Chief Operating Officer (The "Named Executive Officers").








Summary Compensation TableName and

Principal Position
Fiscal Year

Salary

($)


Bonus

($)


Option Awards

($) (1)


All Other Compensation

($)


Total

($)OC Kim,

President and Acting  Chief Financial Officer
2009

$
150,000


$
32,000


$
5,265



-


$
187,2652010

$
160,000


$
100,000


$
88,200



-


$
348,200Yun J. (David) Lee,

Chief Operating Officer
2009

$
120,000


$
27,000


$
11,613



-


$
158,6132010

$
125,000


$
80,000


$
44,100



-


$
249,100





(1)  Represents the dollar amount recognized for financial statement report purposes with respect to the fiscal year in accordance with ASC 718.  Please see "NOTE 11. LONG-TERM INCENTIVE PLAN AWARDS," to our financial statements included in this report for the relevant assumptions used to determine the valuation of our option awards.





Outstanding Equity Awards at Fiscal Year-End





The following table presents the outstanding equity awards held by each of the Named Executive Officers as of the June 30, 2010.  The only outstanding equity awards are stock options.  All options we granted to our Named Executive Officers during our fiscal year ended June 30, 2010, vest over a one year period and have ten-year terms, subject to earlier termination on the occurrence of certain events related to termination of employment.  In addition, the full vesting of options is accelerated if there is a change in control of the Company.





Options AwardsName
Number of

Securities

Underlying

Unexercised

Options

(#)

Option Exercise Price

($)
Option

Expiration

Date
Number of

Shares that

have not

Vested

(#)
Market Value

of Shares that

have not

Vested

($)OC Kim
200,000
(1)
$2.07
04/19/2020
200,000
$420,00097,500
(2)
$0.495
06/11/2013
-
-Yun J. (David) Lee
100,000
(1)
$2.07
04/19/2020
100,000
$210,000100,000
(3)
$0.45
06/11/2014
50,000
$105,00025,000
(4)
$0.45
06/11/2014
-
-





(1)           The options vest and are exercisable in full on the first anniversary of the date of grant and have a ten-year term.





(2)           The options vest and are exercisable in full on the first  anniversary of the date of grant and have a four-year term.





(3)           The options vest and are exercisable over two years as follows, and have a five-year term:




14





i.
50% of the shares underlying the option on the first anniversary of the date of grant.


ii.
25% of the shares underlying the option eighteen months following the date of the grant.


iii.
25% of the shares underlying the option on the second anniversary of the date of the grant.





(4)           The options vest and are exercisable in full on the first anniversary of the date of grant and have a five-year term.





Director Compensation





Our Directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors. The Chairman of our Board of Directors received a $10,000 discretionary bonus for serving in this capacity, and all of our other non-employee directors did not receive any compensation for serving on our Board.  There is no established policy for the payment of fees or other compensation to any of the members of our Board of Directors.





The following table provides director compensation information for the year ended June 30, 2010.





Director CompensationName
Fees

Earned or

Paid in

Cash

($)
Option

Awards

($)
All Other

Compensation

($)
Total

($)Gary Nelson
$10,000
-
-
$10,000Joon Won Jyoung
-
-
-
-Johnathan Chee
-
-
-
-Jaeman Lee
-
-
-
-Kwang Sun Han
-
-
-
-








EMPLOYMENT CONTRACTS





On September 21, 2009 we entered into Change of Control Agreements with OC Kim, our President and Acting Chief Financial Officer, Yun J. (David) Lee, our Chief Operating Officer, and Yong Bae Won, our Vice President, Engineering. Each Change of Control Agreement provides for a lump sum payment to the officer in case of a change of control of the Company. The term includes the acquisition of Common Stock of the Company resulting in one person or company owning more than 50% of the outstanding shares, a significant change in the composition of the Board of Directors of the Company during any 12-month period, a reorganization, merger, consolidation or similar transaction resulting in the transfer of ownership of more than fifty percent (50%) of the Company's outstanding Common Stock, or a liquidation or dissolution of the Company or sale of substantially all of the Company's assets.





The Change of Control Agreement with Mr. Kim is for three years and calls for a payment of $5 million upon a change of control; the agreement with Mr. Lee is for two years and calls for a payment of $2 million upon a change of control; and the agreement with Mr. Won is for two years and calls for a payment of $1 million upon a change of control.





On September 21, 2009, we entered into a renewable three-year employment agreement with our President. The annual salary for the officer is $170,000.





LONG-TERM INCENTIVE PLAN AWARDS





As we adopted the 2009 Stock Incentive Plan (“2009 Plan”), we provided for the grant of incentive stock options and non-qualified stock options to our employees and directors on June 11, 2009. The options granted in 2009 generally vest and become exercisable at the rate of between 50% and 100% per year with a life between four and five years.





We issued additional options in 2010 under the 2009 Plan.  The options granted in 2010 generally vest and become exercisable at the rate of 33% per year with a life of ten years.





We adopted ASC 718, “Compensation – Stock Compensation,” using a modified prospective application, and the Black-Scholes model. Under this application, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Compensation cost will be recognized over the period that an employee provides service in exchange for the award.





The estimated forfeiture rate considers historical turnover rates stratified into employee pools in comparison with an overall employee turnover rate, as well as expectations about the future. We periodically revise the estimated forfeiture rate in subsequent periods if actual forfeitures differ from those estimates. Compensation expense recorded under this method for the year ended June 30, 2010 was $59,783 and reduced operating income and income before income taxes by the same amount by increasing compensation expense recognized in selling and administrative expense. The recognized tax benefit related to the compensation expense for the year ended June 30, 2010 was $0.





15




The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected term of the option; the expected term represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and using the simplified method; the expected volatility is based upon historical volatilities of the Company’s common stock; and the expected dividend yield is based upon the Company’s current dividend rate and future expectations.





A summary of the status of our stock options is presented below:





Weighted-AverageWeighted-


RemainingAverage


Contractual


AggregateExercise


Life


IntrinsicOptions

Shares


Price


(In Years)


ValueOutstanding at June 30, 2009


447,500


$
0.48



-



-Granted


700,000



1.86



-



-Exercised


-



-



-



-Forfeited or Expired


(51,500)



(0.61)



-



-Outstanding at June 30, 2010


1,096,000


$
1.36



8.1


$
812,863Exercisable at June 30, 2010


285,000


$
0.48



-


$
-Vested and Expected to Vest at June 30, 2010


285,000


$
0.48



-


$
-




The weighted-average grant-date fair value of stock options granted for the year ended June 30, 2010 was $0.30 per share. The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $2.10 as of June 30, 2010, which would have been received by the option holders had all option holders exercised their options as of that date.





As of June 30, 2010, there was $268,916 of total unrecognized compensation cost related to non-vested stock options granted. That cost is expected to be recognized over a weighted-average period of 2.0 years.






COMPENSATION DISCUSSION AND ANALYSIS





GENERAL PHILOSOPHY - We compensate our executive officers through a mix of base salary, bonus and stock options. Our compensation policies are designed to be competitive with comparable employers and to align management’s incentives with both near term and long-term interests of our stockholders. We use informal methods of benchmarking our executive compensation, based on the experience of our directors or, in some cases, studies of industry standards. Our compensation is negotiated on a case by case basis, with attention being given to the amount of compensation necessary to make a competitive offer and the relative compensation among our executive officers.





BASE SALARIES - We want to provide our senior management with a level of cash compensation in the form of base salary that facilitates an appropriate lifestyle given their professional status and accomplishments.





INCENTIVE COMPENSATION - Our practice is to award cash bonuses based upon performance objectives set by the Board of Directors. We maintain a bonus plan which provides our executive officers and non-executive officers the ability to earn cash bonuses based on the achievement of performance targets. The performance targets are set annually by the Board of Directors, and bonuses are awarded to executive officers and non-executive officers on a quarterly basis. The actual amounts of cash bonuses to executive officers and non-executive officers are in the sole discretion of the Board of Directors For fiscal 2010, the performance targets were based on achieving revenue and operating income targets.






16





SEVERANCE BENEFITS - We are generally an at will employer, and have no employment agreements with severance benefits; however, we have entered into Change of Control Agreements with our executive officers, and one other employee that provide them with lump sum payments in the event off a change in control of the Company.





RETIREMENT PLANS - We do not maintain any retirement plans.








ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.





We purchased wireless data products in the amount of $ 82,631,324 from C-Motech, for the year ended June 30, 2010 and had related accounts payable of $5,371,153 as of June 30, 2010.  As of June 30, 2010, C-Motech owned 3,370,356 shares, or 24.5%, of our Common Stock and Jaeman Lee, Chief Executive Officer of C-Motech Co. Ltd., served as a director of the Company since September 2006.  On May 27, 2010, the Board of Directors appointed Kwang Sun Han to the Board of Directors to fill a vacancy upon the resignation of Jaeman Lee.





On July 27, 2010, we entered into a Common Stock Repurchase Agreement with C-Motech (the “Agreement”), and under the Agreement, we agreed to repurchase 3,370,356 shares of our Common Stock from C-Motech  for $3,500,000. A total of 1,803,684 shares were repurchased on the date of the Agreement in exchange for non-cash consideration in the amount of $1,873,065, which represented amounts owed to the Company by C-Motech for certain marketing funds as well as the settlement of a price dispute for products previously purchased by the Company from C-Motech. Under the Agreement, the remaining 1,566,672 shares were to be repurchased by us upon payment of the balance, $1,626,935, on orbefore December 31, 2010. Pursuant to the Agreement, Kwang Sun Han, a director of the Company and the designee of C-Motech on the Company’s Board of Directors, resigned from the Board of Directors. The repurchase of our Common Stock from C-Motech does not impact our relationship with C-Motech as our primary supplier of products.





On January 28, 2011 (the “Amendment Date”) the Agreement was amended to reflect (1) a change in the date the 1,566,672 shares are to be repurchased from C-Motech from December 31, 2010 to March 31, 2011, and (2) a change to the non-cash consideration of $1,873,065. In exchange for the 1,803,684 shares, we are to pay cash to C-Motech (in the same amount) for the shares, by March 31, 2011. In addition, in a separate agreement dated January 28, 2011, C-Motech agreed to pay us $1,873,065, for amounts owed, by March 31, 2011.  The purpose of these revisions was to more clearly differentiate each party’s payment obligations to the other with respect to this transaction. Following the Amendment Date, we paid C-Motech $1,873,065 in exchange for the 1,803,684 shares previously transferred to us by C-Motech, and C-Motech paid us $1,873,065 for amounts owed. The repurchase of the remaining 1,566,672 shares has not been completed.




17




ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES








31
Certificate of Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
Certificate of Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002













SIGNATURES





In accordance with Section 13 of 15(d) of the Exchange Act, the registrant caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized.





Franklin Wireless Corp.By:
/s/ OC KIMOC Kim, PresidentDated: April 20, 2011








Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Signature

Title

Date(1) Principal Executive, Financial and Accounting Officer/s/ OC KIM

President, Acting Chief Financial Officer

April 20, 2011OC Kim

and a Director(3) Directors/s/ GARY NELSON

Chairman of the Board of Directors

April 20, 2011Gary Nelson/s/ JOON WON JYOUNG

Director

April 20, 2011Joon Won Jyoung/s/ JOHNATHAN CHEE

Director

April 20, 2011Johnathan Chee















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