UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





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.  Yesx    Noo





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 filero

Accelerated filero

Non-accelerated filero

Smaller reporting companyx





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





The aggregate market value of the voting common stock held by non-affiliates of the Registrant, based on the closing price of the Registrant’s common stock on December 31, 2009, as reported by The OTC Bulletin Board, was approximately $9,228,169.  For the purpose of this calculation only, shares owned by officers, directors (and their affiliates) and 5% or greater stockholders have been excluded. The Registrant does not have any non-voting stock issued or outstanding.





The Registrant has 11,977,807 shares of common stock outstanding as of October 12, 2010.










FRANKLIN WIRELESS CORP.


INDEX TO ANNUAL REPORT ON FORM 10-K


FOR THE FISCAL YEAR ENDED JUNE 30, 2010








PagePART IItem 1:
Business
4Item 1A:
Risk Factors
7Item 1B:
Unresolved Staff Comments
9Item 2:
Properties
9Item 3:
Legal Proceedings
9Item 4:
(Removed and Reserved)
10PART IIItem 5:
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
11Item 6:
Selected Financial Data
11Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11Item 7A:
Quantitative and Qualitative Disclosures About Market Risk
18Item 8:
Financial Statements and Supplementary Data
18Item 9:
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
18Item 9A:
Controls and Procedures
18Item 9B:
Other Information
19PART IIIItem 10:
Directors, Executive Officers and Corporate Governance
19Item 11:
Executive Compensation
21Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
24Item 13:
Certain Relationships and Related Transactions, and Director Independence
24Item 14:
Principal Accounting Fees and Services
25PART IVItem 15:
Exhibits, Financial Statement Schedules
26Signatures
S-1Index to Financial Statements
F-1











2











NOTE ON FORWARD LOOKING STATEMENTS





You should keep in mind the following points as you read this Report on Form 10-K:





o
the terms "we", "us", "our", “Franklin”, “Franklin Wireless”, or the "Company" refer to Franklin Wireless Corp.o
our fiscal year ends on June 30; references to fiscal 2010 and fiscal 2009 and similar constructions refer to the fiscal year ended on June 30 of the applicable year.





This Annual Report on Form 10-K contains statements which, to the extent they do not recite historical fact, constitute "forward looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements are used under the captions "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operation", and elsewhere in this Annual Report on Form 10-K. You can identify these statements by the use of words like "may," "will," "could," "should," "project," "believe," "anticipate," "expect," "plan," "estimate," "forecast," "potential," "intend," "continue," and variations of these words or comparable words. Forward looking statements do not guarantee future performance and involve risks and uncertainties. Actual results may differ substantially from the results that the forward looking statements suggest for various reasons, including those discussed under the caption "Risk Factors" These forward looking statements are made only as of the date of this Annual Report on Form 10-K. We do not undertake to update or revise the forward looking statements, whether as a result of new information, future events or otherwise.






































3


PART I





ITEM 1.  BUSINESS.








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 represents a growing market.





Our wireless products are based on Evolution Data Optimized technology ("EV-DO technology") of Code Division Multiple Access ("CDMA"), High-Speed Packet Access technology (“HSPA technology”) of Wideband Code Division Multiple Access (“WCDMA), Worldwide Interoperability for Microwave Access (“WiMAX”) based on the IEEE 802.16 standard and Long Term Evolution (LTE) which enable end users to send and receive email with large file attachments, play interactive games, receive, send and download high resolution pictures, videos and music content.





We market our products 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.





On October 1, 2009, we completed the acquisition of approximately 50.6% of the outstanding capital stock of Diffon Corporation, a South Korean corporation ("Diffon").  The purpose of the acquisition was to acquire a significant interest in a facility in South Korea that provides design, development and manufacturing services to the Company for high speed wireless data communication products including 3G and 4G wireless modules and modems.  Diffon performs research and development functions and outsources its manufacturing process to third parties. The acquisition involved two separate but related transactions.





In the first transaction, we entered into a Share Exchange Agreement, dated October 1, 2009, with two major shareholders of Diffon (the "Diffon Shareholders"). We issued the Diffon Shareholders an aggregate of 550,000 shares of the Company's Common Stock in exchange for 440,000 shares of capital stock of Diffon, representing approximately 20.1% of the outstanding capital stock of Diffon. Under the Agreement, the Diffon Shareholders, acting together, have an unconditional right of rescission for one year, so that they may elect to return the Company’s Common Stock received by them and receive the Diffon shares in return. On February 27, 2010, we announced the revocation of the right of rescission, which terminated the Diffon Shareholders’ right to return the Company’s Common Stock received by them for the Diffon shares in return.





In the second transaction, pursuant to a Common Stock Purchase Agreement dated October 1, 2009, we purchased 666,667 newly-issued shares of Diffon, representing approximately 30.5% of the outstanding capital stock of Diffon after giving effect to the issuance, for cash in the amount of $833,333. The Agreement provides that at the Closing the Board of Directors of Diffon will be fixed at five directors, including two directors to be designated by the Company. The Company, Diffon and the Diffon Shareholders entered into a Shareholders' Agreement concerning ownership of the Diffon shares and certain other matters.





We accounted for the acquisition under the purchase method of accounting in accordance with the provisions of ASC 805, “Business Combinations.”  Under this accounting method, the company recorded at fair value the acquired assets of Diffon less the liabilities assumed, with the excess of the purchase price over the estimated fair value of such net assets reflected as goodwill. Our consolidated statement of operations includes the operations of Diffon from the date of acquisition.





On October 15, 2009, we opened a branch office in Seoul, South Korea, through a wholly-owned subsidiary of Franklin Wireless. The office manages certain logistical and administrative efforts for the Company.





OUR STRUCTURE





We incorporated in 1982 in California and reincorporated in Nevada on January 2, 2008.  The reincorporation had no effect on the nature of our business or our management. Our headquarters office is located in San Diego, California. The office is principally composed of marketing, sales, operations, finance and administrative support. It is responsible for all customer-related activities, such as marketing communications, product planning, product management and customer support, along with sales and business development activities on a worldwide basis.


4








On October 1, 2009, we completed the acquisition of approximately 50.6% of the outstanding capital stock of Diffon Corporation, a South Korean corporation ("Diffon"). Diffon provides design, development and manufacturing services to the Company for certain of its high speed wireless data communications products including 3G and 4G wireless modems, routers and modules.





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. 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











OUR PRODUCTS





We were the world’s first supplier of both CDMA EVDO Rev A and dual-mode (CDMA Rev A/WiMAX) Universal Serial Bus (USB) modems. Our mobile broadband and data products include a variety of wireless USB modems as well as Wi-Fi “hotspot” routers (which operate over WiMAX or CDMA networks) and embedded modules. Our products provide consumers with an easy and convenient way in which to wirelessly connect to the Internet from laptop or desktop computers. These high-speed devices support the viewing of web pages, sending and receiving email with large file attachments, as well as downloading pictures, videos and music content.  Our products are based on widely deployed cellular technologies and operate across 3G and 4G networks including:





o
Code Division Multiple Access (“CDMA”) technology 1xEVDO – Evolution-Data Optimized technology in both Rev 0 and Rev A releases. Rev 0 modems have a download speed of up to 2.4 megabits per second (Mbps) and the Rev A products achieve broadband like speeds of 3.1 Mbps.


o
High Speed Packet Access (“HSPA”) based on the Universal Mobile Telecommunications System standard or sometimes referred to as Wideband Code Division Multiple Access (“WCDMA”) technology. This technology allows download speeds of up to 14.4 Mbps.


o
Worldwide Interoperability for Microwave Access (“WiMAX”) based on the IEEE 802.16 standard.


o
Long Term Evolution (LTE) is a 4G mobile broadband standard.





The following are representative selections of our current CDMA, HSPA, WiMax and LTE wireless data products:





USB MODEMS:





o
Dual-mode (3G and 4G) USB modems:  These devices, when plugged into the Universal Serial Bus (USB) port of laptop or desktop computers, provide an easy and convenient way for consumers to connect to 3G or 4G wireless broadband networks.


5




o
Single mode USB modems:  Operate over a variety of networks including CDMA EVDO Rev A and HSPA.




STAND-ALONE MODEMS:





o
For Machine-to-Machine and other vertical markets with a need for an Internet connection, such as a kiosk or other remote location, where no cable or DSL service exists.





ROUTERS:





o
Hotspot Routers:  Embedded Wi-Fi hotspot routers that operate over CDMA EVDO Rev A or WiMAX Wave II networks.




MODULES:





o
Embedded Modules:  In general, these are single mode devices whose primary market is original equipment manufacturers (OEMs) who seek a reliable embedded module solution for their wireless data applications.








CUSTOMERS





Our global customer base is comprised of wireless operators, strategic partners and distributors who are located primarily in the United States, South America and the Caribbean regions.  The Company’s 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.





SALES AND MARKETING





We market and sell our products primarily to wireless operators located in the United States, South America and the Caribbean regions mainly through our internal, direct sales organization and to a lesser degree, indirectly through strategic partners and distributors.  The sales process is supported with a range of marketing activities including trade shows, product marketing and public relations.





All of our wireless devices must pass Federal Communications Commission (FCC) testing in order to be sold in United States markets. CDMA Development Group (“CDG”) test certifications are required in order to launch CDMA wireless data products with wireless operators in North America, the Caribbean and South America, and PCS Type Certification Review Board (“PTCRB”) test certifications are required for HSPA wireless data products.  Certifications are issued as being a qualifier of CDG1, CDG 2 and CDG 3 as well as PTCRB.





RESEARCH AND DEVELOPMENT





On October 1, 2009, we completed the acquisition of approximately 50.6% of the outstanding capital stock of Diffon Corporation, a South Korean corporation.  The purpose of the acquisition was to acquire a significant interest in a facility in South Korea that provides design, development and manufacturing services to us for high speed wireless data communication products including 3G and 4G wireless modules and modems.  Diffon performs research and development functions and outsources its manufacturing process to third parties.





PRODUCTION AND MANUFACTURING OPERATIONS





For the fiscal year ended June 30, 2010, the manufacturing of our products was contracted out to C-Motech Co. Ltd. (“C-Motech”), an electronics manufacturing company, located in South Korea and to other manufacturing companies located in various parts of Asia outsourced through Diffon.


6








In January 2005, we entered into a manufacturing and supply agreement with C-Motech for the manufacture of our products. On November 2, 2009, C-Motech provided a written notice to terminate the agreement effective January 5, 2010.  Following this date, C-Motech continues to supply the Company with certain products.





EMPLOYEES





As of June 30, 2010, we employed approximately 58 employees. We also use the services of consultants and contract workers from time to time.  Our employees are not represented by any collective bargaining organization, and we have never experienced a work stoppage.








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:





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


o
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;


o
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;


o
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;


o
The diversion of management’s attention and resources;


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


o
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.





7





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:





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, represented the substantial majority of our consolidated net sales. If this customer were to reduce its business with us, our revenues and profitability could decline, perhaps materially.





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.





8








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:





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


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


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


o
Language barriers; and


o
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.





ITEM 1B. UNRESOLVED STAFF COMMENTS.





None.





ITEM 2.  PROPERTIES.





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.





We own approximately 10,000 square feet of office space, consisting of land and building, in Korea, and we have the right to sell, rent, mortgage, or transfer the property.  The property 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.





ITEM 3.  LEGAL PROCEEDINGS.





We are from time to time involved in certain legal proceedings and claims arising in the ordinary course of business.  On June 18, 2009, MSTG, Inc. filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division against one of our customers as one of several defendants. The complaint alleges that certain wireless devices, including devices provided by the Company, infringe on U.S. Patent Nos. 5,920,551; 6,198,936 and 6,438,113. All of the Company provided devices were purchased by the Company from one of its suppliers. The supplier has been notified of the complaint and is evaluating this matter. As of June 30, 2010, this legal proceeding is pending, but we do not expect it to have a material adverse effect on our financial condition.


9





ITEM 4.  (REMOVED AND RESERVED)








PART II








ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.








MARKET PRICE OF OUR COMMON STOCK





Share of our Common Stock are quoted and traded on the OTC Bulletin Board" under the trading symbol "FKWL.OB". The following table sets forth the range of high and low bid quotation per share for the Common Stock as reported during the years ending June 30, 2010 and 2009. The bid price reflects inter-dealer prices and does not include retail mark-up, markdown, or commission.








High

LowYear Ended June 30, 2010First Quarter

$1.01

$0.57Second Quarter

$2.50

$0.75Third Quarter

$2.20

$1.10Fourth Quarter

$2.45

$1.97Year Ended June 30, 2009First Quarter

$1.99

$1.40Second Quarter

$1.45

$0.34Third Quarter

$0.79

$0.35Fourth Quarter

$0.70

$0.33








We have one class of common stock.  As of June 30, 2010, we have approximately 788 shareholders of record. Since many of the shares of our common stock are held by brokers and other institutions on behalf of shareholders, it is impossible to estimate the total number of beneficial holders represented by these record holders.





DIVIDENDS





We have never declared or paid any dividends on our Common Stock.  We currently intend to retain all available funds for use in the operation and development of our business and, therefore, and do not expect to declare or pay any cash dividends in the foreseeable future.





ITEM 6.  SELECTED FINANCIAL DATA.





As a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, we are not required to respond to this item.





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.





10








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.





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:





11








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.


12








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.





13








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.








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.





14











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%








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.  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.  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.





15





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 Sates 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.





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.





16








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”), under which 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.





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.





17





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 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Not applicable





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.





The financial statements and the supplementary financial information required by this Item and included in this report are listed in the Index to Financial Statements beginning on page F-1.





ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.





None.





ITEM 9A. CONTROLS AND PROCEDURES.





We maintain  disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that  information  required to be disclosed in reports that we file or submit under the Securities  Exchange Act of 1934 is recorded,  processed,  summarized,  and reported  within the time periods specified in the Securities and Exchange  Commission's  rules and forms, and that such  information is accumulated  and  communicated  to our management, including our Chief Executive Officer and our principal  financial  officer,  as appropriate,  to allow timely decisions regarding the required  disclosures.  In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.





Our Chief Executive Officer and Acting Chief Financial officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2010, pursuant to Rule 13a-15(e) and 15d-15(e) of the Exchange Act, based upon theInternal Control — Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on such evaluation, the Chief Executive Officer and Acting Chief Financial officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective.





This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.


18








There has been no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal year 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





Limitations on the Effectiveness of Controls





Our management, including our Chief Executive Officer and Acting Chief Financial Officer, does not expect that our disclosure controls and internal controls will prevent all errors and all 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. Because of the inherent limitations in all control systems, no controls can provide absolute assurance that all control issues and instances of fraud, if any, within we have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.





The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.





ITEM 9B. OTHER INFORMATION.





None.





PART III








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.





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.


19








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.





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.





Yun J. (David) Lee has been our 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.





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




Annual Compensation
All Other Compensation
No. of Securities

Underlying Non

Qualified Stock

Options Granted
TotalName and
Salary
BonusPrincipal PositionGary Nelson
None
$10,000
None
None
$10,000Chairman of the Board and a Director




20




ITEM 11. EXECUTIVE COMPENSATION.





The following table sets 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").





Annual Compensation
All Other Compensation
No. of Securities

Underlying Stock

Options Granted
TotalName and

Principal Position
Fiscal Year
Salary
BonusOC Kim,

President and Acting  Chief Financial Officer
2009
$150,000
$32,000
None
97,500
$182,0002010
$160,000
$100,000
None
200,000
$260,000Yun J. (David) Lee,

Chief Operating Officer
2009
$120,000
$27,000
None
125,000
$147,0002010
$125,000
$80,000
None
100,000
$205,000








Stock Options GrantedName and

Principal Position
Fiscal Year
No. of Securities

Underlying Stock

Options Granted
No. of Vested

Securities Underlying

Stock Options

Granted
Total fair values

at the grant datesOC Kim,

President and Acting  Chief Financial Officer
2009
97,500
97,500
$5,2652010
200,000
None
$88,200Yun J. (David) Lee,

Chief Operating Officer
2009
125,000
125,000
$11,6132010
100,000
None
$44,100








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.


21








On September 21, 2009, we entered into a renewable three-year employment agreement with our President. The annual salary 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.





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.





22








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.





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.




























23


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.





The following table sets forth certain information regarding the beneficial ownership of our Common Stock as of June 30, 2010 by each director and executive officer of the Company, each person known to us to be the beneficial owner of more than 5% of the outstanding Common Stock, and all directors and executive officers of the Company as a group. Except as otherwise indicated below, each person has sole voting and investment power with respect to the shares owned, subject to applicable community property laws.





Shares Beneficially OwnedName and Address

Number

PercentOC Kim

5440 Morehouse Drive, Suite 1000, San Diego, CA 92121

1,499,195

10.88%Gary Nelson

5440 Morehouse Drive, Suite 1000, San Diego, CA 92121

269,562

1.96%Kwang Sun Han

5440 Morehouse Drive, Suite 1000, San Diego, CA 92121

3,370,356
(1)
24.46%Joon Won Jyoung

5440 Morehouse Drive, Suite 1000, San Diego, CA 92121

540,169

3.92%Johnathan Chee

5440 Morehouse Drive, Suite 1000, San Diego, CA 92121

7,324

0.05%All directors and executive officers of the Company as a group (5 persons)

5,686,606

41.27%





(1)
Consists of shares owned by C-Motech Co. Ltd., of which Kwang Sun Han is an officer and designee. 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. 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.








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.  C-Motech owns 3,370,356 shares, or 24.5%, of our Common Stock and Jaeman Lee, Chief Executive Officer of C-Motech Co. Ltd., has 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. The remaining 1,566,672 shares are to be repurchased by Registrant 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.


24


ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.





The aggregate fees billed for the two most recently completed fiscal periods for the audit of our annual financial statements and services normally provided by the independent accountant for this fiscal period were as follows:





FY 2010


FY 2009Audit Fees

$
73,000


$
38,000
*Audit-Related Fees


3,000



-Tax Fees


5,000



-Total Fees

$
81,000


$
38,000





In the above table, "audit fees" are fees billed by our external auditor for services provided in auditing our company's annual financial statements for the subject year.   The fees set forth on the foregoing table for the year ended June 30, 2010 relate to the audit as of and for the year ended June 30, 2010 and 2009, performed by BDO USA, LLP.  All of the services described above were approved in advance by the Board of Directors.





*- This does not include $13,500 for quarterly review fees for fiscal year ending June 30, 2009 which was performed by the previous accounting firm, Choi, Kim, & Park, LLP.






































25





PART IV





ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.





(a)
1.  Index to  financial statements





(b)
Exhibits





The following Exhibits are files as part of, or incorporated by reference into, this Report on Form 10-K:




Exhibit No.

Description2.1

Articles of Merger and Agreement and Plan of Reorganization, filed January 2, 2008 with the Nevada Secretary of State (1)3.1

Restated Articles of Incorporation of Franklin Wireless Corp. (1)3.2

Amended and Restated Bylaws of Franklin Wireless Corp. (2)10.2

Lease, dated May 1, 2008, between the Company and RDLFA, LLC, a California Limited Liability Company (3)10.3

Employment Agreement, dated September 21, 2009, between Franklin Wireless Corp. and OC Kim10.4

Change of Control Agreement, dated September 21, 2009, between Franklin Wireless Corp. and OC Kim (2)10.5

Change of Control Agreement, dated September 21, 2009, between Franklin Wireless Corp. and David Lee (2)10.6

Common Stock Repurchase Agreement between Franklin Wireless Corp. and C-Motech Co., dated July 27, 2010 *14.1

Code of Ethics (3)31

Certificate of Chief Executive Officer 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





(1) Incorporated by reference from Report on Form 10-QSB for the quarterly period ended March 31, 2008, filed on May 14, 2008





(2) Incorporated by reference from Annual Report on Form 10-K for the year ended June 30, 2009, filed on October 13, 2009





(2) Incorporated by reference from Annual Report on Form 10-KSB for the year ended June 30, 2005, filed on May 23, 2006





(3) Incorporated by reference from Annual Report on Form 10-KSB for the year ended June 30, 2008, filed on September 26. 2008





* Portions of this exhibit have been omitted pending a determination by the Securities and Exchange Commission as to whether these portions should be granted confidential treatment.





(c)
Supplementary Information



None.









26


SIGNATURES





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





Franklin Wireless Corp.By:
/s/ OC KimOC Kim, PresidentDated: October 12, 2010








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





Signature

Title

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

President, Acting Chief Financial Officer and a Director

October 12, 2010OC Kim(3) Directors/s/ GARY NELSON

Chairman of the Board of Directors

October 12, 2010Gary Nelson/s/ JOON WON JYOUNG

Director

October 12, 2010Joon Won Jyoung/s/ JOHNATHAN CHEE

Director

October 12, 2010Johnathan Chee














S-1














FRANKLIN WIRELESS CORP.


INDEX TO FINANCIAL STATEMENTS ON FORM 10-K


FOR THE YEAR PERIOD ENDED JUNE 30, 2010




















Page No.Index to Financial Statements
F–1Report of Independent Registered Public Accounting Firm
F–2Consolidated Balance Sheets at June 30, 2010 and June 30, 2009
F–3Consolidated Statements of Income for the Years ended June 30, 2010 and 2009
F–4Consolidated Statements of Stockholders' Equity (Deficit) for the Years ended

June 30, 2010 and 2009
F–5Consolidated Statements of Cash Flows for the Years ended June 30, 2010 and 2009
F–6Notes to Financial Statements
F–7














F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the Board of Directors and Stockholders


Franklin Wireless Corp.


San Diego, California





We have audited the accompanying consolidated balance sheets of Franklin Wireless Corp. and subsidiaries (the “Company”) as of June 30, 2010 and 2009 and the related statements of income, stockholders’ equity, and cash flows for each of the two years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Franklin Wireless Corp. at June 30, 2010 and 2009, and the results of its consolidated operations and its cash flows for each of the two years then ended, in conformity with accounting principles generally accepted in the United States of America.












BDO USA, LLP


Los Angeles, California


October 12, 2010





F-2





FRANKLIN WIRELESS CORP.


Consolidated Balance Sheets


Fiscal Years Ended June 30,2010


2009(Consolidated)ASSETSCurrent assets:Cash and cash equivalents

$
16,107,501


$
6,253,529Accounts receivable


3,118,754



2,812,607Inventories


197,630



2,618,344Prepaid expenses and other current assets


35,453



4,107Prepaid income taxes


–



18,503Deferred tax assets, current


372,190



169,731Advanced payment to vendor


458,034



–Total current assets


20,289,562



11,876,821Property and equipment, net


985,303



89,807Intangible assets, net


2,858,902



–Deferred tax assets, non-current


1,299,746



1,880,081Goodwill


273,285



–Other assets


188,281



11,016TOTAL ASSETS

$
25,895,079


$
13,857,725LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesTrade accounts payable

$
1,046,602


$
45,112Trade accounts payable – related party


5,371,153



4,466,741Advanced payments from customers


309,000



970Income taxes payable


929,538



–Accrued liabilities


732,165



76,202Marketing funds payable


1,277,319



32,625Short-term borrowings


173,511



–Long-term borrowings, current-portion


68,165



–Total current liabilities


9,907,453



4,621,650Long-term borrowings


163,596



–Other long-term liabilities


154,806Total liabilities


10,225,855



4,621,650Stockholders’ equity:Preferred stock, par value $0.001 per share, authorized 10,000,000 shares; No preferred stock issued  and  outstanding as of June 30, 2010 and June 30, 2009


–



–Common stock, par value $0.001 per share, authorized 50,000,000 shares; 13,781,491 and 13,231,491shares issued and outstanding as of June 30, 2010 and  June 30, 2009, respectively


13,711



13,232Additional paid-in capital


5,556,525



5,018,721Retained earnings


8,981,906



4,204,122Non-controlling interests


1,129,680



–Accumulated other comprehensive income (loss)


(12,598)



–Total stockholders’ equity


15,669,224



9,236,075TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
25,895,079


$
13,857,725


See accompanying notes to financial statements.


F-3




FRANKLIN WIRELESS CORP.


Consolidated Statements of Operations


Fiscal Years Ended June 30,2010

2009(Consolidated)Net sales

$
101,898,119


$
24,000,504Cost of goods sold


87,873,396



18,824,010Gross profit


14,024,723



5,176,494Operating expenses:Selling, general, and administrative


6,358,631



2,859,707Total operating expenses


6,358,631



2,859,707Income from operations


7,666,092



2,316,787Other (loss) income, net:Interest income


79,005



84,845Loss on disposal of property and equipment


(123,109
)


(19,346)Other income, net


(40,920
)


34,556Total other (loss) income, net


(85,024
)


100,055Net income before provision (benefit) for income taxes


7,581,068



2,416,842Income tax provision (benefit)


2,954,326



(1,222,324)Net income before non-controlling interests


4,626,742



3,639,166Non-controlling interests in net loss of subsidiary


151,042



–Net income

$
4,777,784



3,639,166Basic earnings per share

$
0.35


$
0.28Diluted earnings per share

$
0.35


$
0.27Weighted average common shares outstanding – basic


13,583,551



13,231,491Weighted average common shares outstanding – diluted


13,740,582



13,250,417


Comprehensive incomeNet income including non-controlling interest

$
4,626,742


$
–Translation adjustments


(12,598
)


–Comprehensive income


4,614,144



–Comprehensive loss attributable to non-controlling interest


151,042



–Comprehensive income attributable to controlling interest

$
4,765,186


$
–





See accompanying notes to financial statements.




F-4


FRANKLIN WIRELESS CORP.


Consolidated Statements of Stockholders' Equity


Common Stock


Additional

Paid-in


Retained


Accumulated

Other Comprehensive


Non-controlling


Total

Stockholders’Shares


Amount


Capital


Earnings


(Loss) Income


Interest


EquityBalance – June 30, 2008


13,231,491


$
13,232


$
5,016,161


$
564,956


$
–


$
–


$
5,594,349Net income


–



–



–



3,639,166



–



–



3,639,166Share-based compensation


–



–



2,560



–



–



–



2,560Balance – June 30, 2009


13,231,491



13,232



5,018,721



4,204,122



–



–



9,236,075Net income


–



–



–



4,777,784



–



–



4,777,784Foreign exchange translation


–



–



–



–



(12,598
)


–



(12,598
)Total comprehensive income


























4,765,186Non-controlling interests on acquisition date, October 1, 2009


–



–



–



–



–



1,280,722



1,280,722Change in non-controlling interests


–



–



–



–



–



(151,042
)


(151,042
)Share-based compensation


–



–



59,783



–



–



–



59,783Issuance of stock related to acquisition


550,000



479



478,021



–



–



–



478,500Balance – June 30, 2010


13,781,491


$
13,711


$
5,556,525


$
8,981,906


$
(12,598
)

$
1,129,680


$
15,669,224














F-5


FRANKLIN WIRELESS CORP.


Consolidated Statements of Cash Flows





Fiscal Years Ended June 30,2010


2009(Consolidated)CASH FLOWS FROM OPERATIONS ACTIVITIES:Net income

$
4,777,784


$
3,639,166Adjustments to reconcile net income to net cash provided by (used in) operating activities:Non-controlling interests


(151,042)Loss on disposal of property and equipment


123,109



19,346Depreciation


63,502



20,692Amortization of intangible assets


269,781



–Write off of uncollectible accounts receivable


6,000



2,715Forgiveness of debt


–



(33,400)Deferred tax assets


(103,414)



(2,049,812)Share-based compensation


59,783



2,560Increase (decrease) in cash due to change in:Accounts receivable


(166,278)



1,718,747Inventory


2,420,714



(2,546,182)Advance payment to vendor


(457,524)



–Prepaid expense and other current assets


43,507



19,323Prepaid income taxes


18,503



336,890Other assets


(106,852)



4,395Trade accounts payable, including  related party


1,515,944



464,202Income taxes payable


929,538



–Accrued liabilities


430,685



(766,219)Marketing funds payable


1,244,694



–Advance payment from customers


45,866



(389,030)Other liabilities


145,572



–Net cash provided by (used in) operating activities


11,109,872



443,393CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment


(161,646)



(61,833)Capitalized product development


(1,087,684)



–Proceeds from sale of property and equipment


123,936



–Net cash used in investing activities


(1,125,394)



(61,833)CASH FLOWS FROM FINANCING ACTIVITIES:Payment of note payable


–



(300,600)Payment of short-term borrowings


(264,153)



–Payment of long-term borrowing


(27,266)



–Proceeds from short-term borrowings from bank


173,511



–Net cash provided by (used in) financing activities


(117,908)



(300,600)Effect of foreign currency translation


(12,598)



–Net increase in cash and cash equivalents


9,853,972



80,960Cash and cash equivalents, beginning of year


6,253,529



6,172,569Cash and cash equivalents, end of year

$
16,107,501


$
6,253,529Supplemental disclosure of cash flow information:Cash paid during the years for:Interest

$
–


$
–Income taxes

$
2,128,202


$
1,173,046





F-6







Supplemental disclosure of non cash investing activities:On October 1, 2009, the Company acquired a business, (see Note 4). The following table summarizes the purchase transaction on the date of acquisition:Purchase price:Cash

$
833,333Issuance of common shares


478,500Total purchase price


1,311,833Less: fair value ofAssets acquired (including cash acquired of $232)


(2,177,923
)Liabilities assumed


3,180,375Excess purchase price over fair value of net assets acquired


2,315,285Less identifiable intangible assets


2,041,000Goodwill

$
273,285





See accompanying notes to financial statements.











F-7




FRANKLIN WIRELESS CORP. AND ALL SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 1 – 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 our products 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 countries in South America and the Caribbean.





NOTE 2 - 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 year 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.





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





F-8








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, receivables and payables 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 from the shipment, which is covered by our vendors under the purchase agreements.





Reclassifications





Certain reclassifications have been made to prior year amounts to conform to the current period presentation. We didn’t make any reclassifications for the year ended June 30, 2010 to prior year amounts.





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 included in intangible assets in our consolidated balance sheet.





Advertising and Promotion Costs





Costs associated with advertising and promotions are expensed as incurred.  Advertising and promotion costs amounted to $113,745 and $40,677 for the years ended June 30, 2010 and 2009, respectively.





Warranties





We provide a factory warranty for one year which is covered by our vendor under the purchase agreement between the Company and the vendor. These products are shipped directly from our vendor to our customers. As a result, we do not have warranty exposure and do not accrue any warranty expenses.





Shipping and Handling Costs





Most of the Company’s shipping and handling costs are paid by customers or suppliers directly to the shipping locations.  We generally do not collect and incur shipping and handling costs.  As a result, we did not incur any significant shipping and handling costs for the year ended June 30, 2010.





F-9





Cash and Cash Equivalents





For purposes of the consolidated statements of cash flow, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.





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.





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 yearsCapitalized product development in progress








Goodwill and Intangible Assets





On October 1, 2009, we acquired approximately 50.6% of the outstanding capital stock of Diffon Corporation (“Diffon”), which provides design, development and manufacturing services to the Company for high speed wireless data communication products including 3G and 4G wireless modules and modems.  In accordance with ASC 805, “Business Combinations,” we have identified and determined the fair values of the following intangible assets of Diffon, on October 1, 2009, the date of acquisition:








Complete technology

$
490,000

3 yearsCustomer contracts / relationships


1,121,000

8 yearsCapitalized product development in progress


430,000Total

$
2,041,000





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. The capitalized product development in progress of $430,000 has achieved its technological feasibility as of June 30, 2010. 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.





F-10








Intangible Assets





The definite lived intangible assets consisted of the following at June 30, 2010:


Average

Gross





NetRemaining

Intangible


Accumulated


IntangibleDefinite lived intangible assets:

Expected Life
Life

Assets


Amortization


AssetsComplete technology

3 years
2.3 years

$
490,000


$
122,500


$
367,500Complete technology

3 years
2.8 years


1,517,683



42,186



1,475,497Customer contracts / relationships

8 years
7.3 years


1,121,000



105,095



1,015,905Total




$
3,128,683


$
269,781


$
2,858,902







The amortization expenses of the definite lived intangible assets for the next five years and thereafter total as follows:





FY2011


FY2012


FY2013


FY2014


FY2015


ThereafterTotal

$
809,353


$
809,353


$
644,666


$
140,125


$
140,125


$
315,280





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 our 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 our 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 are less than its carrying amount.





As of June 30, 2010, we are not aware of any events or changes in circumstances that would indicate that the long-lived assets are impaired.





Income Taxes





Income tax provision (benefit) from continuing operations for the years ended June 30, 2010 and 2009 consists of the following:


YearEnded June 30,2010


2009(Consolidated)Current income tax expense:Federal

$
2,468,810


$
611,955State


588,930



215,5333,057,740



827,488Deferred income tax expense (benefit):Federal


(27,539
)


(1,914,190
)State


9,723



(135,622
)Foreign


(85,598
)


–(103,414
)


(2,049,812
)Provision (benefit) for income taxes

$
2,954,326


$
(1,222,324
)





F-11







The provision (benefit) for income taxes reconciles to the amount computed by applying effective federal statutory income tax rate to income before provision for income taxes as follows:


Year Ended June 30,2010


%


2009


%Federal tax provision, at statutory rate of 34%

$
2,577,563



34.0


$
821,916



34.0State tax, net of fed tax benefit


395,111



5.2



140,403



5.8Nondeductible expenses


25,489



0.3



6,924



0.3Alternative minimum tax credit


–



–



–



–R&D Credits


(161,229
)


(2.1
)


–



–Reduction in valuation allowance


–



–



(2,194,532
)


(90.8
)Uncertain tax position


73,431



1.0



–



–Foreign rate difference


39,228



0.5



–



–Others


4,733



0.1



2,965



(0.1
)Provision (benefit) for income taxes

$
2,954,326



39.0


$
(1,222,324
)


(50.8
)





Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows:





June 30,

2010


June 30,

2009Current deferred tax assets (liabilities):Net operating losses

$
135,622


$
135,622Other, net


236,568



34,109Non-current deferred tax assets (liabilities):Net operating losses


1,812,309



1,911,272Intangibles


(432,351)



–Other, net


(80,212)



(31,191)
)Total deferred tax assets


1,671,936



2,049,812Less valuation allowance


–



–Net deferred tax asset

$
1,671,936


$
2,049,812








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 may be subject to limitations under provision of the Internal Revenue Code Section 382 and similar state provisions.





F-12





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.





A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:





Balance at June 30, 2009


–Gross increase or (decrease)


73,431Balance at June 30, 2010

$
73,431





We do not anticipate any material change in the total amount of unrecognized tax benefits to occur within the next twelve months. ASC 740 requires us to accrue interest and penalties where there is an underpayment of taxes based on our best estimate of the amount ultimately to be paid. Our policy is to recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense. We have not recorded any interest or penalties as the liability associated with the unrecognized tax benefits is immaterial. We are subject to taxation in the U.S., various state and foreign jurisdictions.   We are no longer subject to U.S. examination for years before 2006 by the federal taxing authority, and years before 2005 by state taxing authorities.





Concentrations of Credit Risk





We extend credit to our customers and perform ongoing credit evaluations of such customers. We evaluate our accounts receivable on a regular basis for collectability and provide for an allowance for potential credit losses as deemed necessary.  No reserve was required or recorded for any of the periods presented.





Substantially all of our revenues are derived from sales of wireless data products.  Any significant decline in market acceptance of our products or in the financial condition of our existing customers could impair our ability to operate effectively.





A significant portion of our revenue is derived from a small number of customers. For the year ended June 30, 2010, net sales from one customer represented the substantial majority of our consolidated revenue and had related accounts receivable balances in the amounts of $1,862,000, or 59.7% of total accounts receivable, as of June 30, 2010.





We purchase most of our wireless data products from a design and manufacturing company located in South Korea. If the design and manufacturing company were to experience delays, capacity constraints or quality control problems, product shipments to the Company's customers could be delayed, or our customers could consequently elect to cancel the underlying product purchase order, which would negatively impact the Company's revenue.  We purchased wireless data products from this supplier in the amounts of $82,631,324 and $21,655,374 for the years ended June 30, 2010 and 2009, respectively, and had related accounts payable of $5,371,153 and $4,466,741 at June 30, 2010 and 2009, respectively. On November 2, 2009, we received a written notice from this supplier to terminate its agreement with the Company, effective January 5, 2010. Following this date, it continues to supply us with certain products.





We maintain our cash accounts with established commercial banks.  Such cash deposits exceed the Federal Deposit Insurance Corporation insured limit of $250,000 for each account.  However, the Company does not anticipate any losses on excess deposits.








F-13





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 did not 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 of the date 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.








NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS





The carrying amounts and estimated fair value of our financial instruments consisted of the following at:





June 30, 2010

June 30, 2009Fair Value

Carrying

Amount

Fair Value

Carrying

AmountAssets:Cash and cash equivalents (a)

$
16,107,501


$
16,107,501


$
6,253,529


$
6,253,529





(a)
The fair value of cash and cash equivalents approximates their carrying amount because of the short maturities of such instruments.








F-14








NOTE 4 – PROPERTY AND EQUIPMENT





Property and equipment consisted of the following at:





June 30,

2010


June 30,

2009Land

$
90,400


$
–Building


305,202



–Machinery and facility


82,046



–Office equipment


236,803



131,846Molds


196,751



–Vehicle


8,768



–Construction-in-progress


131,372



–1,051,342



131,846Less accumulated depreciation


(66,039
)


(42,039
)Total

$
985,303


$
89,807





Depreciation expense associated with property and equipment was $63,502 and $20,692 for the fiscal years ended June 30, 2010 and 2009, respectively.








NOTE 5 – ACQUISITION





On October 1, 2009, we completed the acquisition of approximately 50.6% of the outstanding capital stock of Diffon.  The purpose of the acquisition was to support research and development of our current products, as well as future products.  The condensed consolidated financial statements include the results of Diffon from the date of acquisition. The purchase price has been allocated based on estimated fair values as of the acquisition date. The purchase price was allocated as follows:





October 1, 2009Current assets




$
1,054,797Property, plant & equipment, net





1,076,063Goodwill





273,285Intangible assets:Complete technology

$
490,000Capitalized product development in progress


430,000Customer contracts/relationships


1,121,000Total intangible assets






2,041,000Other long-term assets






47,063Current liabilities






(1,141,553
)Deferred tax liability






(489,840
)Long-term liabilities






(268,260
)Non-controlling interest






(1,280,722
)Total purchase price





$
1,311,833








In determining the purchase price allocation, management considered, among other factors, our intention to use the acquired assets. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized, with no expected residual value.





F-15





NOTE 6 - ACCRUED LIABILITIES





Accrued liabilities consisted of the following at:





June 30, 2010


June 30, 2009Accrued salaries, incentives

$
200,000


$
–Accrued salaries, severance


244,369



–Accrued vacations


67,435



46,995Accrued professional fees


12,128



–Payroll taxes


54,853



2,552Other accrued liabilities


153,380



26,655Total

$
732,165


$
76,202








NOTE 7 – SHORT-TERM BORROWINGS FROM BANK





Short-term borrowings from banks consisted of the following at:





June 30, 2010


June 30, 2009Loan dated January 2010, due to financial institution, with principal at maturity

and monthly interest payments (interest rate at 15.21% per annum

at June 30, 2010) and the remaining balance due in January 2011.

$
123,936


$
–Loan dated February 2010, due to financial institution, with principal

and monthly interest payments of (interest rate of 8% per annum at June 30, 2010),

and the remaining balance due in one month, March 2010.


49,575



–Total

$
173,511


$
–





The remaining balances of short-term borrowings from banks are due to the consolidation of the Diffon debt, and the entire remaining balance was paid off on September 6, 2010 and August 12, 2010, respectively.








NOTE 8 – LONG-TERM BORROWINGS FROM BANK





Long-term borrowings from bank consisted of the following at:





June 30, 2010


June 30, 2009Loan dated July 2006, due to financial institution with principal at maturity and quarterly interest payments (interest rate at 4.5% per annum at June 30, 2010)

and the remaining balance due in June 2014.

$
231,761


$
–Less current portion


(68,165
)


–Total

$
163,596


$
–





The long-term borrowing from bank was due to the consolidation of the Diffon debt, and the entire remaining balance was paid-off on September 6, 2010.








F-16





NOTE 9 – 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. The weighted average number of shares outstanding used to compute earnings per share is as follows:




Year Ended June 30,2010


2009Net income before non-controlling interests

$
4,626,742


$
–Non-controlling interests in net loss of subsidiary


151,042



–Net income

$
4,777,784


$
3,639,166Weighted-average shares of common stock outstanding:Basic


13,583,551



13,231,491Dilutive effect of common stock equivalents arising from stock options


157,031



18,926Diluted


13,740,582



13,250,417Basic earnings per share

$
0.35


$
0.28Diluted earnings per share

$
0.35


$
0.27








NOTE 10 - COMMITMENTS AND CONTINGENCIES





Leases





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


2015


ThereafterAdministrative office facility

$
117,418


$
19,696


$
-


$
-


$
-


$
-Corporate housing facility


7,220



-



-



-



-



-Total Obligation

$
124,638


$
19,696


$
-


$
-


$
-


$
-








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 and $107,704 for the years ended June 30, 2010 and 2009, 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 and $18,194 for the years ended June 30, 2010 and 2009, respectively.





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





Litigation





We are from time to time involved in certain legal proceedings and claims arising in the ordinary course of business.  On June 18, 2009, MSTG, Inc. filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division against one of our customers as one of several defendants. The complaint alleges that certain wireless devices, including devices provided by the Company, infringe on U.S. Patent Nos. 5,920,551; 6,198,936 and 6,438,113. All of the Company provided devices were purchased by the Company from one of its suppliers. The supplier has been notified of the complaint and is evaluating this matter. As of June 30, 2010, this legal proceeding is pending, but we do not expect a material adverse effect on its financial condition for the year ended June 30, 2010 or thereafter.


F-17





NOTE 11 – 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 and 2009 was $0.





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


285,400


$
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.





F-18








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.





NOTE 12 – RELATED PARTY TRANSACTIONS





We purchased CDMA wireless data products in the amount of $ 82,631,324.00 and $21,655,374 from C-Motech, for the years ended June 30, 2010 and 2009, and had related accounts payable of $5,371,153 and of $4,466,741 as of June 30, 2010 and 2009.  C-Motech owns 3,370,356 shares, or 24.5%, of our Common Stock and Jaeman Lee, Chief Executive Officer of C-Motech Co. Ltd., has 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 created by the resignation of Jaeman Lee, the former chief executive officer of C-Motech.





NOTE 13 - SUBSEQUENT EVENTS





On July 6, 2010, Diffon’s shareholders approved the issuance of shares of Diffon capital stock to the Company in exchange for non-cash consideration of $500,000, for a settlement of certain disputes between the parties.  Following the completion of the stock transfer, the company owns approximately 58.2% of the outstanding capital stock of Diffon.  Also on July 6, 2010, three members of Diffon’s board of directors resigned and the Diffon shareholders approved a change to the board structure that affords the Company full control of all of Diffon’s board seats.  In addition, the Diffon shareholders approved the appointment of OC Kim, president of the Company, as CEO of Diffon and approved changing the name of Diffon Corporation to Franklin Technology Inc.





On July 27, 2010, we entered into a Common Stock Repurchase Agreement with C-Motech (the “Agreement”) under which 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.





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 of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009. Our management evaluated all events or transactions that occurred after June 30, 2009 up through the date the financial statements were available to be issued.  During these periods, we did not have any material recognizable subsequent events required to be disclosed other than those disclosed in this note to the financial statements as of June 30, 2010 and for the year ended June 30, 2010.