UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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





For the
quarter ended June 30, 2009





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





For the
transition period from _____ to _____





Commission
File Number: 0-52150





FRANKLIN
TOWERS ENTERPRISES, INC.


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





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





88 Julong
Road


Lidu
Economic Development Zone


Fulin,
Chongqing, China


(Address
of principal executive offices)





011-86-2372183330


(Issuer's
telephone number)








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





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





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





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




Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ̈Nox





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 123,484,043 shares as of August 18,
2009





TABLE OF
CONTENTS




PART
      I
                3Item
      1.  Financial Statements
                3Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations.
                4Forward-Looking
      Statements
                4Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                16Item
      4.  Controls and Procedures.
                17PART
      II  OTHER INFORMATION
                17Item
      1.  Legal Proceedings.
                17Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds.
                18Item
      3.  Defaults Upon Senior Securities.
                18Item
      4.  Submission of Matters to a Vote of Security
      Holders.
                18Item
      5.  Other Information.
                18Item
      6.  Exhibits
                18


2




PART
I




Item
1.  Financial Statements


FRANKLIN
TOWERS ENTERPRISES, INC. AND SUBSIDIARY
 
 INDEX TO
FINANCIAL STATEMENTS
 
 PageCondensed
      Consolidated Balance Sheets
                        As
      of June 30, 2009 (Unaudited) and December 31, 2008
                      F-1Condensed
      Consolidated Statements of Operations
                        For
      the Three and Six Months Ended June 30, 2009 and 2008
      (Unaudited)
                      F-2Condensed
      Consolidated Statement of Stockholders’ Deficit
                        For
      the Six Months Ended June 30, 2009 (Unaudited)
                        and
      the Year Ended December 31, 2008
                      F-3Condensed
      Consolidated Statements of Cash Flows
                        For
      the Six Months Ended June 30, 2009 and 2008 (Unaudited)
                      F-4Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                      F-5 - F-19
  3
 FRANKLIN TOWERS ENTERPRISES,
INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED
BALANCE SHEETS
 
 June
      30,
                                    2009
                                  
                                  
                                  December 31,
                                    2008(Unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                  
                                  $
                                  360,955
                                  
                                  
                                  $
                                  61,867Accounts
      receivable - net of allowance  for doubtful accounts of $10,532
      and $2,362 as of June 30, 2009 and December 31, 2008,
      respectively
                                  
                                  
                                  251,784
                                  
                                  
                                  
                                  68,727Inventories
                                  
                                  
                                  2,036,925
                                  
                                  
                                  
                                  2,847,009Prepaid
      costs and expenses
                                  
                                  
                                  398,971
                                  
                                  
                                  
                                  772,314Other
      receivables
                                  
                                  
                                  3,554,977
                                  
                                  
                                  
                                  -Restricted
      cash to bank acceptance payables
                                  
                                  
                                  4,611,600
                                  
                                  
                                  
                                  -Total
      Current Assets
                                  
                                  
                                  11,215,212
                                  
                                  
                                  
                                  3,749,917Property
      and Equipment, net
                                  
                                  
                                  847,627
                                  
                                  
                                  
                                  887,693Other
      Assets:Deposits
                                  
                                  
                                  995,520
                                  
                                  
                                  
                                  483,681Deferred
      finance costs - net of accumulated amortization of $376,365 and $325,703
      as of June 30, 2009 and December 31, 2008, respectively
                                  
                                  
                                  6,135
                                  
                                  
                                  
                                  56,797Total
      Other Assets
                                  
                                  
                                  1,001,655
                                  
                                  
                                  
                                  540,478TOTAL
      ASSETS
                                  
                                  $
                                  13,064,494
                                  
                                  
                                  $
                                  5,178,088LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      Liabilities:Convertible
      notes payable - net of unamortized discounts of $305,844
      and  $1,078,882 as of June 30, 2009 and December 31, 2008,
      respectively
                                  
                                  $
                                  2,486,331
                                  
                                  
                                  $
                                  1,713,293Bank
      acceptance payables
                                  
                                  
                                  4,611,600
                                  
                                  
                                  
                                  -Loans
      payable
                                  
                                  
                                  3,889,352
                                  
                                  
                                  
                                  1,866,294Accounts
      payable and accrued expenses
                                  
                                  
                                  724,826
                                  
                                  
                                  
                                  707,843Customer
      prepaid
                                  
                                  
                                  1,016,660
                                  
                                  
                                  
                                  -Convertible
      notes interest and penalty payables
                                  
                                  
                                  1,907,797
                                  
                                  
                                  
                                  1,223,713Loans
      payable - related parties
                                  
                                  
                                  19,391
                                  
                                  
                                  
                                  19,391Total
      Current Liabilities
                                  
                                  
                                  14,655,957
                                  
                                  
                                  
                                  5,530,534TOTAL
      LIABILITIES
                                  
                                  
                                  14,655,957
                                  
                                  
                                  
                                  5,530,534Stockholders'
      Defict:Preferred
      stock, $0.001 par value; 5,000,000 shares authorized, 0 shares issued and
      outstanding as of June 30, 2009 and December 31, 2008
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Common
      stock, $.0001 par value; 1,250,000,000 shares authorized, 123,484,043
      shares issued and outstanding as of June 30, 2009 and December 31, 2008,
      respectively
                                  
                                  
                                  12,348
                                  
                                  
                                  
                                  12,348Deferred
      finance costs
                                  
                                  
                                  (378,489
                                  )
                                  
                                  
                                  (1,335,144
                                  )Additional
      paid-in capital
                                  
                                  
                                  18,345,012
                                  
                                  
                                  
                                  18,345,012Accumulated
      deficit
                                  
                                  
                                  (19,883,654
                                  )
                                  
                                  
                                  (17,690,956
                                  )Accumulated
      other comprehensive income
                                  
                                  
                                  313,320
                                  
                                  
                                  
                                  316,294Total
      Stockholders' Deficit
                                  
                                  
                                  (1,591,463
                                  )
                                  
                                  
                                  (352,446
                                  )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
                                  
                                  $
                                  13,064,494
                                  
                                  
                                  $
                                  5,178,088
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  F -
1
  FRANKLIN TOWERS ENTERPRISES,
INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
 (UNAUDITED)
 
 Three
      Months Ended
                        
                        
                        Six
      Months EndedJune
      30,
                        
                        
                        June
      30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Net
      Sales
                        
                        $
                        2,485,527
                        
                        
                        $
                        1,124,478
                        
                        
                        $
                        2,883,898
                        
                        
                        $
                        2,450,138Cost
      of Sales
                        
                        
                        2,280,552
                        
                        
                        
                        1,097,749
                        
                        
                        
                        2,651,038
                        
                        
                        
                        2,412,610Gross
      Profit
                        
                        
                        204,975
                        
                        
                        
                        26,729
                        
                        
                        
                        232,860
                        
                        
                        
                        37,528Operating
      Expenses:Selling,
      general and administrative expenses
                        
                        
                        145,415
                        
                        
                        
                        338,065
                        
                        
                        
                        282,406
                        
                        
                        
                        553,764Depreciation
      and amortization
                        
                        
                        10,088
                        
                        
                        
                        -
                        
                        
                        
                        19,713
                        
                        
                        
                        -Total
      Operating Expenses
                        
                        
                        155,503
                        
                        
                        
                        338,065
                        
                        
                        
                        302,119
                        
                        
                        
                        553,764Loss
      From Operations
                        
                        
                        49,472
                        
                        
                        
                        (311,336
                        )
                        
                        
                        (69,259
                        )
                        
                        
                        (516,236
                        )Other
      Income (Expenses):Subsidy
      income
                        
                        
                        440,664
                        
                        
                        
                        -
                        
                        
                        
                        706,122
                        
                        
                        
                        -Interest
      income
                        
                        
                        356
                        
                        
                        
                        137
                        
                        
                        
                        6,813
                        
                        
                        
                        1,576Interest
      Expense
                        
                        
                        (1,447,289
                        )
                        
                        
                        (1,282,019
                        )
                        
                        
                        (2,836,374
                        )
                        
                        
                        (2,620,218
                        )Total
      Other (Expense)
                        
                        
                        (1,006,269
                        )
                        
                        
                        (1,281,882
                        )
                        
                        
                        (2,123,439
                        )
                        
                        
                        (2,618,642
                        )Loss
      Before Income Tax
                        
                        
                        (956,797
                        )
                        
                        
                        (1,593,218
                        )
                        
                        
                        (2,192,698
                        )
                        
                        
                        (3,134,878
                        )Provision
      for Income Tax
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      Loss
                        
                        $
                        (956,797
                        )
                        
                        $
                        (1,593,218
                        )
                        
                        $
                        (2,192,698
                        )
                        
                        $
                        (3,134,878
                        )Net
      Loss per Share - Basic and Diluted
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.02
                        )
                        
                        $
                        (0.03
                        )Weighted
      Average Shares Outstanding - Basic and Diluted
                        
                        
                        123,484,043
                        
                        
                        
                        107,684,502
                        
                        
                        
                        123,484,043
                        
                        
                        
                        99,869,750Comprehensive
      Loss:Net
      loss
                        
                        $
                        (956,797
                        )
                        
                        $
                        (1,593,218
                        )
                        
                        $
                        (2,192,698
                        )
                        
                        $
                        (3,134,878
                        )Foreign
      currency translation adjustment
                        
                        
                        2
                        
                        
                        
                        64,627
                        
                        
                        
                        (2,974
                        )
                        
                        
                        145,044Comprehensive
      Loss
                        
                        $
                        (956,795
                        )
                        
                        $
                        (1,528,591
                        )
                        
                        $
                        (2,195,672
                        )
                        
                        $
                        (2,989,834
                        )
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  F -
2
  FRANKLIN TOWERS ENTERPRISES,
INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
 FOR THE SIX MONTHS ENDED
JUNE 30, 2009 (UNAUDITED) AND THE YEAR ENDED DECEMBER 31,
2008
 
 Preferred
      Stock
                          
                          
                          Common
      Stock
                          
                          
                          Additional
                          
                          
                          
                          
                          
                          
                          
                          
                          Accumulated
                            OtherShares
                          
                          
                          Amount
                          
                          
                          Shares
                          
                          
                          Amount
                          
                          
                          Paid
      - in
                            Capital
                          
                          
                          Deferred
                            Finance
      Costs
                          
                          
                          Accumulated
                            Deficit
                          
                          
                          Comprehensive
                            Income
                          
                          
                          TotalBalance
      - December 31, 2007
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          91,130,000
                          
                          
                          $
                          9,113
                          
                          
                          $
                          15,659,700
                          
                          
                          $
                          (3,415,349
                          )
                          
                          $
                          (11,508,096
                          )
                          
                          $
                          104,224
                          
                          
                          $
                          849,592Common
      stock issued for repayment of convertible notes and accrued
      interest
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          32,354,043
                          
                          
                          
                          3,235
                          
                          
                          
                          665,627
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          668,862Amortization
      of deferred finance costs
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,080,205
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,080,205Repayment
      of nonreciprocal funds transferred to shareholder
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,019,685
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,019,685Net
      loss for the year ended December 31, 2008
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          (6,182,860
                          )
                          
                          
                          -
                          
                          
                          
                          (6,182,860
                          )Foreign
      currency translation adjustment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          212,070
                          
                          
                          
                          212,070Balance
      - December 31, 2008
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          123,484,043
                          
                          
                          
                          12,348
                          
                          
                          
                          18,345,012
                          
                          
                          
                          (1,335,144
                          )
                          
                          
                          (17,690,956
                          )
                          
                          
                          316,294
                          
                          
                          
                          (352,446
                          )Unaudited:Amortization
      of deferred finance costs
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          956,655
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          956,655Net
      loss for the period
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,192,698
                          )
                          
                          
                          -
                          
                          
                          
                          (2,192,698
                          )Foreign
      currency translation adjustment
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,974
                          )
                          
                          
                          (2,974
                          )Balance
      - June 30, 2009
                          
                          
                          -
                          
                          
                          $
                          -
                          
                          
                          
                          123,484,043
                          
                          
                          $
                          12,348
                          
                          
                          $
                          18,345,012
                          
                          
                          $
                          (378,489
                          )
                          
                          $
                          (19,883,654
                          )
                          
                          $
                          313,320
                          
                          
                          $
                          (1,591,463
                          )
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  F -
3
  FRANKLIN TOWERS ENTERPRISES,
INC. AND SUBSIDIARY
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
 (UNAUDITED)
 
 2009
                              
                              
                              2008Cash
      Flows from Operating Activities:Net
      Loss
                              
                              $
                              (2,192,698
                              )
                              
                              $
                              (3,134,878
                              )Adjustments
      to Reconcile Net Loss to Net
                                  Cash
      Provided by (Used in) Operating Activities:Depreciation
      expense
                              
                              
                              46,112
                              
                              
                              
                              36,431Bad
      debt expense
                              
                              
                              8,172
                              
                              
                              
                              14,889Amortization
      of deferred finance costs
                              
                              
                              50,662
                              
                              
                              
                              143,452Amortization
      of debt discount - fair value of warrants and beneficial conversion
      feature
                              
                              
                              773,038
                              
                              
                              
                              862,974Amortization
      of deferred finance costs - consulting
                              
                              
                              956,655
                              
                              
                              
                              1,067,953Common
      stock issued for accrued interest on convertible notes
    payable
                              
                              
                              -
                              
                              
                              
                              174,913Accrued
      convertible notes interest and penalties
                              
                              
                              684,084
                              
                              
                              
                              -Rent
      expense satisfied by reduction of nonreciprocal funds transferred
      balance
                              
                              
                              -
                              
                              
                              
                              29,704Changes
      in operating assets and liabilities:Increase
      in accounts receivable
                              
                              
                              (191,227
                              )
                              
                              
                              (129,275
                              )Decrease
      in inventories
                              
                              
                              810,084
                              
                              
                              
                              316,965Decrease
      (increase) in prepaid costs and expenses
                              
                              
                              373,343
                              
                              
                              
                              (2,093,855
                              )Increase
      in accounts payable and accrued liabilities
                              
                              
                              16,983
                              
                              
                              
                              140,068Increase
      in customer prepaid
                              
                              
                              1,016,660
                              
                              
                              
                              -Net
      Cash Provided by (Used in) Operating Activities
                              
                              
                              2,351,868
                              
                              
                              
                              (2,570,659
                              )Cash
      Flows from Investing Activities:Capital
      expenditures
                              
                              
                              (5,272
                              )
                              
                              
                              (5,567
                              )Bank
      acceptance payables
                              
                              
                              4,611,600
                              
                              
                              
                              -Restricted
      cash to bank acceptance payables
                              
                              
                              (4,611,600
                              )
                              
                              
                              -Other
      receivables
                              
                              
                              (3,554,977
                              )
                              
                              
                              -Acquisition
      deposits (paid) returned
                              
                              
                              (512,400
                              )
                              
                              
                              135,244Net
      Cash (Used in) provided by Investing Activities
                              
                              
                              (4,072,649
                              )
                              
                              
                              129,677Cash
      Flows from Financing Activities:Repayment
      of short term loan
                              
                              
                              -
                              
                              
                              
                              (891,085
                              )Proceeds
      from short term loans
                              
                              
                              2,023,058
                              
                              
                              
                              1,394,960Repayment
      of convertible notes payable
                              
                              
                              -
                              
                              
                              
                              (13,875
                              )Proceeds
      from repayment of nonreciprocal funds transferred to
      shareholder
                              
                              
                              -
                              
                              
                              
                              909,256Net
      Cash Provided by Financing Activities
                              
                              
                              2,023,058
                              
                              
                              
                              1,399,256Effect
      of Exchange Rate Changes on Cash and Cash Equivalents
                              
                              
                              (3,189
                              )
                              
                              
                              28,489Net
      Increase (Decrease) in Cash and Cash Equivalents
                              
                              
                              299,088
                              
                              
                              
                              (1,013,237
                              )Cash
      and Cash Equivalents - Beginning of Period
                              
                              
                              61,867
                              
                              
                              
                              1,311,939Cash
      and Cash Equivalents - End of Period
                              
                              $
                              360,955
                              
                              
                              $
                              298,702Supplemental Cash Flow
      Information:Interest
      paid
                              
                              $
                              370,632
                              
                              
                              $
                              12,500Income
      taxes paid
                              
                              $
                              -
                              
                              
                              $
                              -Supplemental Disclosure of Non-Cash Investing
      Activities:Fixed
      assets purchased from related party
                              
                              $
                              -
                              
                              
                              $
                              253,617Supplemental Disclosures of Non-Cash Financing
      Activities:Common
      stock issued for convertible notes principal payment
                              
                              $
                              -
                              
                              
                              $
                              493,959Common
      stock issued for convertible notes interest payment
                              
                              $
                              -
                              
                              
                              $
                              174,913
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  F -
4
  FRANKLIN TOWERS ENTERPRISES,
INC. AND SUBSIDIARY
 NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 NOTE 1 –
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 
 Organization
 
 Franklin
Towers Enterprises, Inc. (“Franklin”) was
incorporated on March 23, 2006 under the laws of the State of
Nevada.
 
 On June
19, 2007, Franklin entered into a Share Purchase Agreement with the shareholders
of Chongqing Qiluo Textile Co. Ltd.(“Qiluo”), a limited liability company
organized under the laws of the People’s Republic of China, whereby Franklin
agreed to acquire 100% of the issued and outstanding registered capital of Qiluo
for consideration of 5,000,000 shares of Franklin’s Series A Convertible
Preferred Stock (convertible into 52,880,000 shares of common stock) (see Note
13). Upon consummation of such purchase, Qiluo became a wholly-owned subsidiary
of Franklin.
 
 The
acquisition is accounted for as a “reverse acquisition”, since the stockholders
of Qiluo owned a majority of Franklin’s common stock immediately following the
transaction. The combination of the two companies is recorded as a
recapitalization of Qiluo pursuant to which Qiluo is treated as the continuing
entity although Franklin is the legal acquirer. Accordingly, the Company’s
historical financial statements are those of Qiluo.
 
 Qiluo was
incorporated on December 15, 2006, named “Chongqing Qiluo Industry Ltd.” under
the laws of the People’s Republic of China with the purpose of engaging in the
manufacture and sale of silk and silk products. Qiluo renamed to “Chongqing
Qiluo Textile Co., Ltd.” On May 30, 2008, Qiluo renamed to “Chongqing Fuling
Qiluo Wintus Silk Co., Ltd”.
 
 After the
acquisition, Franklin focused on the production and sale of silk and silk
products. The Company started its test production at the end of June 2007 and
commenced operations in the third quarter of 2007.
 
 Principles of
Consolidation
 
 The
accompanying consolidated financial statements include the accounts of Franklin
(Parent) and its wholly owned subsidiary Qiluo. All significant intercompany
accounts and transactions have been eliminated in consolidation.
 
 Subsequent
Events
 
 The
Company has evaluated subsequent events through the filing date of this Form
10-Q and has determined that there were no subsequent events to recognize or
disclose in these financial statements.
 
 Going
Concern
 
 The
Company started its test production at the end of June 2007 and commenced its
manufacturing operations during the third quarter of 2007. The Company has
incurred a net loss of $2,192,698 for the six months ended June 30, 2009 and has
an accumulated deficit of $19,883,654 at June 30, 2009.  Substantial
portions of the losses are attributable to the common stock issued for
consulting service, amortization of debt discount, deferred finance costs and
beneficial conversion feature, and accrued interest and penalties in connection
with the default of the Convertible Notes. The Company had a working capital
deficiency of $3,440,745 and $1,780,617 as of June 30, 2009 and December 31,
2008, respectively. In addition, the Company’s gross margin rate from its
current operations was low.  It was 8% for the six months ended June
30, 2009 and 5.2% for the year ended December 31, 2008.
 
 F -
5
 
 Going Concern
(Continued)
 
 Furthermore,
as of July 12, 2008, the Company was in default on its Convertible Notes
payments due July 12, 2008. The Notes provide that, at the option of the holder,
an event of default shall make all sums of principal and interest then remaining
unpaid and all other amounts payable immediately due and payable upon demand. As
of June 30, 2009, the unpaid convertible notes payable balance is $2,792,175;
unpaid accrued interest is $344,741; and unpaid accrued liquidated damages
penalty and default penalty are $1,563,056. The Company is currently negotiating
with investors and seeking ways to resolve the default issue with all
investors.
 
 These
factors raise substantial doubt concerning the Company’s ability to continue as
a going concern.
 
 There can
be no assurance that funds will be generated during the next twelve months or
thereafter from the Company’s current operations, or that funds will be
available from external sources such as debt or equity financings or other
potential sources.  The lack of additional capital could force the
Company to curtail or cease operations and would, therefore, have a material
adverse effect on its business.  Furthermore, there can be no
assurance that any such required funds, if available, will be available on
attractive terms or that they will not have a significant dilutive effect on the
Company's existing stockholders.
 
 During
the six months ended June 30, 2009, the Company received net proceeds of
$2,023,058 from various short term loans.
 
 The
Company has undertaken further steps as part of a plan to improve operations and
to address our lack of liquidity by raising additional funds, either in the form
of debt or equity or some combination thereof. The Company is planning to reduce
its cost of goods sold by purchasing its main raw material directly from farmers
in the local neighbored area and to reduce its overhead cost by fully utilizing
its current manufacture facilities. From the Spring of 2008, the Company began
purchasing its main raw material directly from farmers through the planned
acquisition of “Zhengzhong” (see Note 7), thereby helping the Company to reduce
its raw material - cocoon cost. During the six months ended June 30, 2009, the
gross margin rate was 8%, as compared to 1.5% for the six months ended June 30,
2008. However, there can be no assurance that the Company will be able to raise
enough funds to complete the acquisition of “Zhengzhong” and to accomplish these
objectives, and it is uncertain whether the Company will achieve a profitable
level of operations or be able to obtain additional financing.
 
 There can
be no assurance that any additional financings will be available to the Company
on satisfactory terms and conditions, if at all.  In the event we are
unable to continue as a going concern, we may elect or be required to seek
protection from our creditors by filing a voluntary petition in bankruptcy or
may be subject to an involuntary petition in bankruptcy.
 
 The accompanying unaudited condensed
consolidated financial statements do not include any adjustments related to the
recoverability or classification of asset carrying amounts or the amounts and
classifications of liabilities that may result should the Company be unable to
continue as a going concern.
  Reclassifications
 
 Certain
reclassifications have been made to prior year’s consolidated financial
statements and notes thereto for comparative purposes to conform with current
year’s presentation. These reclassifications have no effect on previously
reported results of operations.
 
 F -
6
 
 Basis of
presentation
 
 The
unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(“US GAAP”).
 
 NOTE 2 –
INTERIM FINANCIAL STATEMENTS
 
 The
unaudited condensed consolidated financial statements as of June 30, 2009 and
for the three and six months ended June 30, 2009 and 2008 have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with instructions to Form 10 - Q. In the
opinion of management, the unaudited condensed consolidated financial statements
have been prepared on the same basis as the annual consolidated financial
statements and reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the financial position as of June 30,
2009 and the results of operations and cash flows for the six months ended June
30, 2009 and 2008. The financial data and other information disclosed in these
notes to the interim financial statements related to these periods are
unaudited. The results for the six month period ended June 30, 2009 is not
necessarily indicative of the results to be expected for any subsequent quarter
of the entire year ending December 31, 2009. The balance sheet at December 31,
2008 has been derived from the audited consolidated financial statements at that
date.
 
 Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to the Securities and
Exchange Commission’s rules and regulations. These unaudited condensed
consolidated financial statements should be read in conjunction with our audited
consolidated financial statements and notes thereto for the year ended December
31, 2008 included in our Form 10 –K/A filed April 15, 2009.
 
 NOTE 3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Use of
Estimates
 
 The
preparation of condensed consolidated financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods.  Actual
results could differ from those estimates.
 
 Fair Value of Financial
Instruments
 
 The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivable, net, other receivables, restricted cash to bank acceptance payables,
bank acceptance payables, accounts payable and accrued liabilities, short term
loans and convertible notes, net.  The fair value of these financial
instruments approximate their carrying amounts reported in the condensed
consolidated balance sheets due to the short term maturity of these instruments
or by comparison to other instruments with similar terms.
 
 Foreign Currency
Translation
 
 The
functional currency of Franklin is the United States dollar.  The
functional currency of Qiluo is the Chinese Renminbi (“RMB”).  The
reporting currency of the Company is the United States dollar.
 
 The
assets and liabilities of Qiluo were translated into United States dollars at
period-end exchange rates.  The revenues and expenses were translated
into United States dollars at average exchange rates for the
period.  Resulting translation adjustments are recorded as a component
of accumulated other comprehensive income within stockholders’
deficit.
  F -
7
 
 Transaction
gains or losses arising from exchange rate fluctuation on transactions
denominated in a currency other than the functional currency are included in the
consolidated results of operations.  There is no material foreign
currency transaction gain or loss for the three and six months ended June 30,
2009 and 2008.
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents consist of cash on hand, cash on deposit with banks, and highly
liquid debt investments with a maturity of three months or less when
purchased.
 
 Inventories
 
 Inventories
are stated at the lower of cost (first-in, first-out method) or
market.
 
 Property, Plant and
Equipment, Net
 
 Property,
plant and equipment is stated at cost less accumulated
depreciation.  Depreciation is calculated on a straight-line basis
over the estimated useful lives of the respective assets.
 
 Revenue
Recognition
 
 Sales of
products are recorded when title passes to the customer, which is generally at
time of shipment.  The Company performs ongoing credit evaluations of
its customers’ financial condition, but generally does not require collateral to
support customer receivables.  The credit risk is controlled through
credit approvals, limits and monitoring procedures.  The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other
factors.  Accounts receivable are charged against the allowance for
doubtful accounts once all collection efforts have been
exhausted.  The Company does not routinely permit customers to return
product.
 
 Stock-Based
Compensation
 
 Stock-based
compensation is accounted for at fair value in accordance with SFAS No. 123(R),
“Accounting for Stock-Based Compensation”.  No stock options have been
granted and none are outstanding.
 
 Advertising
 
 Advertising
costs are expensed as incurred. The Company did not incur significant
advertising costs for the three  and six months ended June 30, 2009
and 2008.
 
 Shipping and Handling
Costs
 
 Shipping
and handling costs, primarily related to outbound freight, are reported in the
consolidated statements of operations as a component of selling, general and
administrative expenses.
 
 Research and
Development
 
 In
accordance with SFAS No. 2, “Accounting For Research and Development Costs”, the
Company expenses all research and development costs as incurred.
 
 Segment
Information
 
 SFAS No.
131, “Disclosure About Segments of and Enterprise and Related Information”,
changed the way public companies report information about segments of their
business in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues and its major
customers. The Company operates as a single segment and will evaluate additional
segment disclosure requirements as it expands its operations.
  F -
8
 
 Income
Taxes
 
 The
Company accounts for income taxes using the asset and liability method described
in SFAS No. 109, “Accounting For Income Taxes”, the objective of which is to
establish deferred tax assets and liabilities for the temporary differences
between the financial reporting and the tax bases of the Company’s assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled.  A valuation allowance related to deferred tax
assets is recorded when it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
 
 No
provision has been made for corporation income taxes due to the current loss. In
addition, no future tax benefit has been calculated. According to the tax
regulations of China, the amount of loss that will carry over to the next tax
period should be assessed and approved by the tax regulation agency. The maximum
carry over period is five years.
 
 Net Loss Per Common
Share
 
 The
Company has adopted SFAS No. 128, “Earnings per Share,” (“EPS”) which requires
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
 
 Basic
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding during the period.
 
 Diluted
loss per share is computed similarly to basic loss per share except that it
includes the potential dilution that could occur if dilutive securities were
converted.  Diluted loss per share is the same as basic loss per
share, as the effect of potentially dilutive securities, convertible notes
payable and warrants, are anti-dilutive.
 
 Recently Issued Accounting
Pronouncements
 
 Certain
accounting pronouncements have been issued by the FASB and other standard
setting organizations which are not yet effective and have not yet been adopted
by the Company. The impact on the Company’s financial position and results of
operations from adoption of these standards is not expected to be
material.
 
 NOTE 4 -
INVENTORIES
 Inventories
consist of the following:
 June
      31,
                    
                    
                    December
      31,2009
                    
                    
                    2008(Unaudited)Finished
      Goods
                    
                    $
                    559,011
                    
                    
                    $
                    131,684Processed
      cocoons
                    
                    
                    773,753
                    
                    
                    
                    1,857,227Raw
      Materials
                    
                    
                    98,442
                    
                    
                    
                    255,971Work
      in Process
                    
                    
                    605,719
                    
                    
                    
                    602,127Total
                    
                    $
                    2,036,925
                    
                    
                    $
                    2,847,009
 
 Finished
goods consist of those silks and by products available for sale. There was no
valuation allowance for inventory loss at June 30, 2009 and December 31,
2008.
 
 F -
9
 
 NOTE 5 –
PREPAID COSTS AND EXPENSES
 
 Prepaid
costs and expenses consist of:
 June 30,
                      2009
                    
                    
                    December 31,
                      2008(Unaudited)Prepayment
      in connection with short term loan obtained in January 2009 (see Note
      10)
                    
                    $
                    -
                    
                    
                    $
                    439,710Advances
      to personnel for future overhead costs
                    
                    
                    66,723
                    
                    
                    
                    7,423Advances
      to vendors for future overhead costs
                    
                    
                    292,612
                    
                    
                    
                    116,460Value
      added tax credits
                    
                    
                    39,593
                    
                    
                    
                    208,678Other
                    
                    
                    43
                    
                    
                    
                    43Total
                    
                    $
                    398,971
                    
                    
                    $
                    772,314
 
 NOTE 6 -
PROPERTY AND EQUIPMENT
 
 Property
and equipment is summarized as follows:
 Description
                        
                        Estimated
                          Useful Life
                        
                        
                        June 30,
                          2009
                        
                        
                        December 31,
                          2008(Unaudited)Production
      Equipment
                        
                        
                        10
                        
                        
                        $
                        725,665
                        
                        
                        $
                        726,508Auxiliary
      Equipment
                        
                        
                        10
                        
                        
                        
                        6,939
                        
                        
                        
                        6,947Office
      Equipment
                        
                        
                        3-5
                        
                        
                        
                        28,253
                        
                        
                        
                        23,006Automobile
                        
                        
                        5
                        
                        
                        
                        124,440
                        
                        
                        
                        124,585Furniture
      and Fixtures
                        
                        
                        5-7
                        
                        
                        
                        36,581
                        
                        
                        
                        36,624Construction
      in progress
                        
                        
                        
                        
                        
                        
                        104,293
                        
                        
                        
                        102,5821,026,171
                        
                        
                        
                        1,020,252Less:
      Accumulated Depreciation
                        
                        
                        
                        
                        
                        
                        178,544
                        
                        
                        
                        132,559$
                        847,627
                        
                        
                        $
                        887,693
 
 Depreciation
expense was $46,112 and $36,431 for the six months ended June 30, 2009 and 2008,
respectively, of which $26,399 and $25,939, respectively,
were  included in cost of sales.
 
 NOTE 7 -
DEPOSITS
 
 Deposits
      consist of:
                    
                    June 30,
                      2009
                    
                    
                    December 31,
                      2008(Unaudited)Down
      payment in connection with Letter Agreement
      dated   November 26, 2007 to acquire cocoon purchase
      stations,   warehouse, and certain other assets from
      Zhengzhong    Silkworm Industrial Development Co.
      Ltd., a state owned   entity ("Zhengzhong")
                    
                    $
                    411,270
                    
                    
                    $
                    411,270Deposit
      paid in connection with agreement dated March 19,   2008 to
      use cocoon purchase stations and warehouse at   no cost
      from March 19, 2008 to March 18, 2009
                    
                    
                    7,329
                    
                    
                    
                    7,329Additional
      payments relating to acquisition of Zhengzhong assets
                    
                    
                    549,043
                    
                    
                    
                    36,643Foreign
      currency translation adjustment
                    
                    
                    27,878
                    
                    
                    
                    28,439Total
                    
                    $
                    995,520
                    
                    
                    $
                    483,681
  F -
10
 
 The
Letter Agreement dated November 26, 2007 and subsequent amendments provided that
the total purchase price of the Zhengzhong assets was 10,374,800 RMB ($1,518,870
translated at the June 30, 2009 exchange rate). If the Company is unable to pay
the remaining 3,574,800 RMB ($523,350 translated at the June 30, 2009 exchange
rate) due, the Company’s total payments of 6,800,000 RMB ($995,520 translated at
the June 30, 2009 exchange rate) may be forfeited and not recovered (partially
or in full). In February 2009, the due date of the remaining 3,574,800 RMB
($523,350 translated at the June 30, 2009 exchange rate) due was extended to
September 2009.
 
 NOTE 8 –
OTHER RECEIVABLES
 
 During
the six months ended June 30, 2009, the Company advanced $3,554,977 to the
following individuals, entities and related party.
 June
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008(Unaudited)Receivables
      from individualsZhong,
      Songbai
                    
                    $
                    278,160
                    
                    
                    $
                    -Qin,
      Siwen
                    
                    
                    158,595
                    
                    
                    
                    -Du,
      Wenbing
                    
                    
                    43,920
                    
                    
                    
                    -Total
      receivables from individuals
                    
                    
                    480,675
                    
                    
                    
                    -Receivables
      from entitiesChongqing
      Qiao Da Investment, Ltd.
                    
                    
                    1,371,768
                    
                    
                    
                    -Chongqing
      First Capital Investment, Ltd.
                    
                    
                    292,800
                    
                    
                    
                    -Chongqing
      Aikekaer Paint Co., Ltd.
                    
                    
                    1,007,720
                    
                    
                    
                    -Others
                    
                    
                    6,734
                    
                    
                    
                    -Total
      receivables from entities
                    
                    
                    2,679,022
                    
                    
                    
                    -Receivable
      from related partyChongqing
      Guojing Silk Company, Ltd.
                    
                    
                    395,280
                    
                    
                    
                    -Total
      Other Receivables
                    
                    $
                    3,554,977
                    
                    
                    $
                    -
 
 These
receivables are interest free and due on demand. The advances may be deemed
violations of various restrictive covenants contained in the various loan
agreements.
 
 NOTE 9 -
RESTRICTED CASH TO BANK ACCEPTANCE AND BANK ACCEPTANCE PAYABLE
 
 During
March 2009, Qiluo borrowed 31,500,000 RMB ($4,611,600) from Chongqing Guojing
Silk Company, Ltd.(“Guojing Silk”) and simultaneously delivered a bank
acceptance (from Chongqing Shan Xia Bank) for the same amount to Guojing Silk
due by September 2009. Guojing Silk is controlled by the brother-in-law of Mr.
Kuang, indirect majority stockholder and chief executive officer of the Company.
Under the related agreement with Shan Xia Bank, use of the 31,500,000 RMB is not
permitted while the bank acceptance is outstanding. Accordingly, $4,611,600 was
reported under the caption “restricted cash to bank acceptance payable” in the
current assets and the caption of “bank acceptance payable” in the current
liabilities, respectively.  The purpose of this arrangement is to
encourage and nurture the Company’s relationship with Chongqing Shan Xia
Bank.
  F -
11
 
 NOTE 10 -
LOANS PAYABLE
 
 Loans
      payable consist of:
                  
                  June 30,
                    2009
                  
                  
                  December 31,
                    2008(Unaudited)Qiluo
      loan payable to Chongqing Aikekaer Paint Co., Ltd.1,166,670
      RMB,  interest at 6% per annum, due May 31, 2009
                  
                  $
                  -
                  
                  
                  $
                  170,999Qiluo
      loan payable to Chongqing Shi Bell Technology, Ltd.430,000
      RMB, interest at 6% per   annum, due on
    demand
                  
                  
                  62,952
                  
                  
                  
                  63,025Qiluo
      loans payable to Jin Cheng Small Loans Company, Ltd.11,000,000
      RMB, interest at 18% per annum, due March 23, 2009
                  
                  
                  -
                  
                  
                  
                  1,612,2704,000,000
      RMB, interest at 21.24% per annum, due November 24, 2009
                  
                  
                  585,600
                  
                  
                  
                  -7,000,000
      RMB, interest at 19.44% per annum, due September 2009
                  
                  
                  1,024,800
                  
                  
                  
                  -Total
      Qiluo loans payable to Jin Cheng Small Loans Company, Ltd.
                  
                  
                  1,610,400
                  
                  
                  
                  1,612,270Qiluo
      loans payable to Chongqing Shan Xia Bank30,000,000
      RMB, interest at 10% per annum, due January 19, 2010
                  
                  
                  4,392,000
                  
                  
                  
                  -Less:
      used by Mr. Chen, Wensheng, 3,000,000 RMB
                  
                  
                  (439,200
                  )
                  
                  
                  -Less:
      used by Mr. Zhong, Songbai, 2,000,000 RMB
                  
                  
                  (292,800
                  )
                  
                  
                  -Less:
      used by Guojing Silk, 10,000,000 RMB
                  
                  
                  (1,464,000
                  )
                  
                  
                  -Qiluo
      loans payable to Chongqing Shan Xia Bank, net
                  
                  
                  2,196,000
                  
                  
                  
                  -Franklin
      loans payable to two individualsinterest
      at 8% per annum, due April 24, 2008 (past due)
                  
                  
                  20,000
                  
                  
                  
                  20,000Total
      Loans Payable
                  
                  $
                  3,889,352
                  
                  
                  $
                  1,866,294
 
 On
January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company, Ltd.
(“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short term
credit line in the amount of 30,000,000 RMB ($4,392,000 translated at the June
30, 2009 exchange rate) from Chongqing Shan Xia Bank. The loan is collateralized
with the assets of Guojing Silk and real estate property of Mr. Wensheng Chen
and Mr. Songbai Zhong. From this jointly acquired credit line, Qiluo received
15,000,000 RMB ($2,196,000), Guojing Silk received 1,000,000 RMB ($1,464,000),
Mr. Chen received 3,000,000 RMB ($439,200), and Mr. Zhong received 2,000,000 RMB
($292,000). Guojing Silk is controlled by the brother-in-law of Mr. Kuang,
indirect majority stockholder and chief executive officer of the
Company.
 
 As of
June 30, 2009 and December 31, 2008, the accrued interest payable for short term
loans totaled $22,634 and $29,581, respectively, which was included in accounts
payable and accrued expenses.
 
 NOTE 11 –
LOANS PAYABLE – RELATED PARTIES
 
 Loans
      payable – related parties consist of:
                      
                      June 30,
                        2009
                      
                      
                      December 31,
                        2008(Unaudited)Franklin
      loan payable to former chief executive officer, interest at 8% per annum,
      due on demand
                      
                      $
                      12,233
                      
                      
                      $
                      12,233Franklin
      loan payable to former chief executive officer, non-interest bearing, due
      on demand
                      
                      
                      7,158
                      
                      
                      
                      7,158Total
                      
                      $
                      19,391
                      
                      
                      $
                      19,391
 
 The
accrued interest payable to related party was $2,782 and $2,292 as of June 30,
2009 and December 31, 2008, respectively.
 
 F -
12
 
 NOTE 12 -
CONVERTIBLE NOTES PAYABLE
 
 June
      30,
                    
                    
                    December
      31,Convertible
      notes payable, net consist of:
                    
                    2009
                    
                    
                    2008(Unaudited)Convertible
      notes - initial face amount
                    
                    $
                    3,300,000
                    
                    
                    $
                    3,300,000Less
      unamortized debt discounts:Discount
      on relative fair value of warrants
                    
                    
                    (2,903,247
                    )
                    
                    
                    (2,903,247
                    )Discount
      on beneficial conversion feature
                    
                    
                    (396,753
                    )
                    
                    
                    (396,753
                    )Less
      accumulated amortization
                    
                    
                    2,994,156
                    
                    
                    
                    2,221,118Unamortized
      debt discounts
                    
                    
                    (305,844
                    )
                    
                    
                    (1,078,882
                    )Repayment
      of convertible notes
                    
                    
                    (507,825
                    )
                    
                    
                    (507,825
                    )Convertible
      notes payable, net
                    
                    $
                    2,486,331
                    
                    
                    $
                    1,713,293
 
 On
September 12 and September 20, 2007, the Company entered into Subscription
Agreements (the "Subscription Agreements") with 11 investors ("Purchasers"), for
the purchase and sale of $3,300,000 of Secured Convertible Promissory Notes of
the Company (the “Notes”) for the aggregate purchase price of $3,300,000 (the
“Note Financing”). The Company received net proceeds from the issuance of the
Notes of $2,622,425 after finance costs of $382,500 and other expenses of
$295,075. Pursuant to the terms of the Subscription Agreements, the Company also
issued to the Purchasers warrants to purchase up to 26,400,000 shares of common
stock of the Company, subject to adjustments for certain issuances and
transactions.
 
 The Notes
bear interest at the rate of 10% per annum, payable in either (a) cash or (b)
absent an event of default, in shares of the Company’s common stock at the
lesser of (i) $0.25 per share or (ii) 75% of the average of the closing bid
prices of the Company’s common stock for the 5 trading days preceding the
payment date. Said payments commence on March 12, 2008 and all accrued but
unpaid interest and any other amounts due thereon is due and payable on
September 12, 2009, or earlier upon acceleration following an event of default,
as defined in the Notes.
 
 All
principal and accrued interest on the Notes is convertible into shares of the
Company’s common stock at the election of the Purchasers at any time at the
conversion price of $0.25 per share, subject to adjustment for certain
issuances, transactions or events that would result in “full ratchet” protection
to the holders.
 
 The Notes
contain default events which, if triggered and not timely cured (if curable),
will result in a default interest rate of 15% per annum. The Notes also contain
full ratchet antidilution provisions with respect to certain securities
issuances, including the issuances of stock for less than $.25 per share. In
addition, the Company has to pay the Purchasers an additional amount of
principal plus accrued interest if the Company is no longer listed on the
Bulletin Board or sells substantially all of its assets.
 
 As part
of the financing, the Company also issued to the Purchasers an aggregate of
13,200,000 Class A Common Stock Purchase Warrants and 13,200,000 Class B Common
Stock Purchase Warrants. The Class A Warrants are exercisable at a price of
$0.50 per share at any time until the fifth anniversary from the date the
Registration Statement is declared effective by the Securities and Exchange
Commission (“the Expiration Date”) and the Class B Warrants are exercisable at a
price of $1.00 per share at any time until the Expiration Date. The warrants
include a cashless exercise provision which is triggered after March 12, 2008 as
well as “full ratchet” antidilution provisions with respect to certain
securities issuances.
 
 Absent a
waiver from a Purchaser, conversion of the Notes, or exercise of the Warrants,
is subject to the restriction that such conversion or exercise does not result
in the Purchaser beneficially owning at any one time more than 4.99% of the
Company’s outstanding shares of common stock.
  F -
13
  Payment
of the Notes along with the Company’s other obligations to the Purchasers is
secured by all the assets of the Company and of its wholly-owned subsidiary,
Qiluo. Such obligations are also secured by a guaranty and pledge of the
17,100,000 shares of the Company’s common stock held by Xinshengxiang Industrial
Development Co., Ltd., a significant shareholder of the Company. In connection
with the transaction, the Company agreed to prepare and file with the Securities
and Exchange Commission within 60 days following the closing a registration
statement on Form SB-2 for the purpose of registering for resale all of the
shares of common stock underlying the Notes. If the Company failed to file such
registration statement within such time, or if the registration statement is not
declared effective within 120 days from September 12, 2007, the Company must pay
monthly liquidated damages in cash equal to 2% of the principal amount of the
Notes. The Purchasers were also granted standard piggyback registration rights
along with certain demand registration rights. The Company filed a registration
statement on December 26, 2007. The registration statement has not yet been
declared effective (see Note 18).
 
 In
connection with the convertible debt, the Company recorded deferred finance
costs of $4,466,334, of which $382,500 was recorded as an asset and $4,083,834
was recorded as a component of stockholders’ equity. Such deferred finance costs
are being amortized over the life of the related debt. The Company also recorded
a deferred debt discount in the amount of $3,300,000 to reflect the beneficial
conversion feature of the convertible debt and the fair value of the warrants.
The beneficial conversion feature was recorded pursuant to Emerging Issues Task
Force (“EITF”) 00-27: “Application of EITF No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, to Certain Convertible Instruments”. In accordance with EITF
00-27, the Company evaluated the value of the beneficial conversion feature and
recorded the amount of $396,753 as a reduction to the carrying amount of the
convertible debt and as an addition to paid-in capital. Additionally, the
relative fair value of the warrants of $2,903,247 was calculated and recorded as
a further reduction to the carrying amount of the convertible debt and as an
addition to paid-in capital. The amortization of these deferred finance costs
and debt discounts are reported as a component of the interest expense. The
amortization of the debt discount was $773,038 and $862,974 for the six months
ended June 30, 2009 and 2008, respectively. The amortization of deferred finance
costs was $956,655 and $1,067,953 for the six months ended June 30, 2009 and
2008, respectively. Such amortizations have been included as interest
expense.
 
 The
Company commenced the repayment of the convertible notes and interest on March
12, 2008 and paid $26,375 in cash to three of the Purchasers, which represented
accrued interest of $12,500 and repayment of principal of $13,875 due on the
convertible promissory notes. Also, the Company issued a total of 32,354,043
shares to seven of the Purchasers during the six months ended June 30, 2008,
which represented accrued interest of $174,912 and repayment of principal of
$493,950. The Company did not make any repayments during the six months ended
December 31, 2008 due to its financing difficulties. The Company is in default
to all eleven investors (see Note 20).
 
 NOTE 13 -
STOCKHOLDERS’ EQUITY AND SHARE PURCHASE AGREEMENT
 
 On June
19, 2007, Franklin entered into a Share Purchase Agreement (the “Share Purchase
Agreement”) with the following persons: Chongqing Qiluo Textile Co. Ltd., a
limited liability company organized under the laws of the People’s Republic of
China (“Qiluo”); Xinshengxiang Industrial Development Co., Ltd., a limited
liability company organized under the laws of the People’s Republic of China
(“Xinshengxiang”); Mr. Dingliang Kuang (“Dingliang”); and Ms. Yue Kuang (“Yue,”
and together with Xinshengxiang and Dingliang, the "Qiluo Shareholders").
Pursuant to the Share Purchase Agreement, Franklin agreed to acquire Qiluo at a
closing held simultaneously therewith by purchasing from the Qiluo Shareholders
all of their respective shares of Qiluo’s registered capital, which represent
100% of the issued and outstanding registered capital stock of Qiluo. Upon the
consummation of such purchase, Qiluo became a wholly-owned subsidiary of
Franklin. In consideration therefor, Franklin agreed to issue to the Qiluo
Shareholders an aggregate of 5,000,000 shares of Franklin’s Series A Convertible
Preferred Stock (convertible into 52,880,000 shares of common stock), which were
allocated between the Qiluo Shareholders as follows: 4,750,000 shares to
Xinshengxiang; 125,000 shares to Dingliang; and 125,000 shares to Yue. Each
share of Series A Convertible Preferred Stock was convertible, at the option of
the holder thereof, into 10.576 shares of Franklin's common stock.
 
 F -
14
 
 In
connection with the foregoing transaction, on June 19, 2007, Kelly Fan, the
former President, Chief Executive Officer, Treasurer, and Director of Franklin,
transferred without consideration to the Qiluo Shareholders 18,000,000 shares of
the common stock of Franklin which were issued and outstanding and held by Ms.
Fan. Such shares were allocated between the Qiluo Shareholders as follows:
17,100,000 shares to Xinshengxiang Industrial Development Co., Ltd.; 450,000
shares to Dingliang Kuang; and 450,000 shares to Yue Kuang.
 
 As a
result of the foregoing transactions: (a) Xinshengxiang held approximately 81%
of the total combined voting power of all classes of Franklin’s capital stock
entitled to vote; (b) Diangliang Kuang is the principal owner and manager of
Xinshengxiang and thus has voting, investment, and dispositive control over the
shares of Franklin’s capital stock owned by Xinshengxiang. Accordingly, Mr.
Kuang is also deemed to be the indirect beneficial owner of the shares of
Franklin’s capital stock owned by Xinshengxiang. Mr. Kuang thus directly and
indirectly (by Xinshengxiang) held approximately 83% of the total combined
voting power of all classes of Franklin’s capital stock entitled to vote; and
(c) Yue Kuang, who is the sister of Diangliang Kuang, directly held
approximately 2% of the total combined voting power of all classes of Franklin’s
capital stock who is entitled to vote.
 
 In
September 2007, the Company agreed to issue an aggregate of 8,000,000 shares of
its common stock valued at $9,200,000 to Bonsai Venture Partner, Ltd., a British
Virgin Islands Limited company in consideration for consulting services
rendered. These issuances were offered and sold in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act and the Rule 506
promulgated thereunder. The shares issued in consideration for services rendered
were valued at $9,200,000, based on the price of our stock on the date of
issuance.
 
 The
Company issued a total of 32,354,043 shares to seven of the Purchasers as
repayment of loan and loan interest during the six months ended June 30, 2008,
pursuant to the terms of the Notes (see Note 12).  The issuing price
was calculated at 75% of the average of the closing bid prices of the Company’s
common stock for the 5 days preceding the payment date.
 
 NOTE 14 -
PREFERRED STOCK
 
 On June
18, 2007, the Company designated a series of Preferred Stock known as the
“Series A Convertible Preferred Stock” (the “Series A Preferred Stock”) by
filing a Certificate of Designation with the Secretary of State of
Nevada.  The number of shares constituting such Series A Preferred
Stock was designated to be 5,000,000 shares, par value $0.001 per
share.  Pursuant to the Certificate of Designation, the principal
rights, preferences, powers, limitations and restrictions of the Series A
Preferred Stock are as follows:
 
 Each
share of Series A Preferred Stock is convertible, at the option of the holder
thereof, without payment of additional consideration, into 10.576 shares of the
Company’s common stock.  Holders of Series A Preferred Stock shall be
entitled to vote, together with holders of common stock as a single class, on
all matters upon which stockholders of the Company are entitled to vote, with
each share of Series A Preferred Stock having one vote.  The Series A
Preferred Stock shall rank senior to the common stock.  In the event
of any liquidation, dissolution or winding up of the Company, the holders of
Series A Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the Company to the holders of the
common stock of the Company and any other issue of stock, should there be any,
by reason of their ownership thereof, an amount per share equal to $0.001 per
each share of Series A Preferred Stock owned by such shareholder plus any
declared and unpaid dividends on the Series A Preferred Stock.
 
 On
December 10, 2007, the Company issued an aggregate of 52,880,000 shares of
common stock to complete the conversion of the 5,000,000 shares of Series A
Preferred Stock then outstanding.
 
 F -
15
 
 NOTE 15 -
WARRANTS
 
 A summary
of the status of the Company’s warrants is presented below:
 Date of
                        Issuance
                      
                      Number of
                        Warrants
                      
                      
                      Weighted Average
                        Exercise PriceOutstanding
      - January 1, 2007
                      
                      
                      
                      
                      -
                      
                      
                      $
                      -Issued,
      Class A Warrants
                      
                      9/12/2007
                      
                      
                      13,200,000
                      
                      
                      
                      0.50Issued,
      Class B Warrants
                      
                      9/12/2007
                      
                      
                      13,200,000
                      
                      
                      
                      1.00Issued,
      Finder's Fees Warrants
                      
                      9/12/2007
                      
                      
                      3,960,000
                      
                      
                      
                      0.25Outstanding
      - June 30, 2009 (Unaudited) and December 31, 2008
                      
                      
                      
                      
                      30,360,000
                      
                      
                      $
                      0.68
 
 Warrants
outstanding and exercisable by price range as of June 30, 2009 and December 31,
2008 are:
 
 Warrants Outstanding
                                    
                                    
                                    Warrants ExercisableRange of
                                    
                                    Number
                                      Outstanding
                                    
                                    
                                    WeightedAverage
                                      Remaining
                                      Contractual
                                      Life in Years*
                                    
                                    
                                    Weighted
                                      Average
                                      Exercise
                                      Price
                                    
                                    
                                    Number
                                      Exercisable
                                    
                                    
                                    Weighted
                                      Average
                                      Exercise
                                      Price$
                                    0.25
                                    
                                    
                                    3,960,000
                                    
                                    
                                    
                                    5.00
                                    
                                    
                                    $
                                    0.25
                                    
                                    
                                    
                                    3,960,000
                                    
                                    
                                    $
                                    0.25$
                                    0.50
                                    
                                    
                                    13,200,000
                                    
                                    
                                    
                                    5.00
                                    
                                    
                                    
                                    0.50
                                    
                                    
                                    
                                    13,200,000
                                    
                                    
                                    
                                    0.50$
                                    1.00
                                    
                                    
                                    13,200,000
                                    
                                    
                                    
                                    5.00
                                    
                                    
                                    
                                    1.00
                                    
                                    
                                    
                                    13,200,000
                                    
                                    
                                    
                                    1.0030,360,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    0.68
                                    
                                    
                                    
                                    30,360,000
                                    
                                    
                                    $
                                    0.68
 
 *
Warrants expire 5 years after effective date of registration statement. The
registration statement filed on December 26, 2007 is not effective as of the
date of filing of this Form 10-Q.
 
 The
significant assumptions used to determine the fair values of the warrants, using
a Black-Scholes option pricing model, were as follows:
 
 Significant
      assumptions:Risk-free
      interest rate at grant date
                      
                      
                      4.11
                      %Expected
      stock price volatility
                      
                      
                      93.95
                      %Expected
      dividend payout
                      
                      
                      -Expected
      option life-years
                      
                      
                      5
 
 NOTE 16 -
RELATED PARTY TRANSACTIONS
 
 During
2007, the Company received funds from and advanced funds to Xinshengxiang, one
of its significant shareholders (see Note 13) for working capital purposes. As
of December 31, 2007, the excess advanced payments to Xinshengxiang amounted to
$2,019,685. The Company has accounted for this excess as a nonreciprocal
transfer in 2007 and recorded the overpayment as a direct reduction of
additional paid-in capital. Xinshengxiang repaid $1,722,656 in cash during the
year ended December 31, 2008 and the Company recorded the repayments as an
increase in additional paid-in capital.
 
 During
the three months ended March 31, 2008, the Company acquired four silk reeling
machines and an automobile from Xinshengxiang valued at a total of $253,617
(1,850,000 RMB), which the parties agreed to be treated as a repayment of the
nonreciprocal funds transferred in 2007. The Company recorded the $253,617
repayment as an increase in additional paid-in capital.
 
 F -
16
 
 During
the year ended December 31, 2008, the Company and Xinshengxiang agreed to offset
the Company’s $43,412 rent liability to Xinshengxiang and treat the $43,412 as a
repayment of the nonreciprocal funds transferred in 2007. The Company recorded
the $43,412 repayment as an increase in additional paid-in capital.
 
 As of
December 31, 2008, the unpaid balance of the nonreciprocal funds transferred to
Xinshengxiang in 2007 is $0.
 
 During
the three months ended March 31, 2008, the Company purchased approximately 42.3
tons raw material–cocoon for $301,455 (2,198,960 RMB) at market price from
Xinshengxiang.
 
 Chongqing
Guojing Silk Company, Ltd. (“Guojing Silk”), is controlled by the brother-in-law
of Mr. Kuang, indirect majority stockholder and chief executive officer of the
Company. On January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company,
Ltd. (“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short
term credit line in the amount of 30,000,000 RMB ($4,392,000 translated at the
June 30, 2009 exchange rate) from Chongqing Shan Xia Bank. The loan is
collateralized with the assets of Guojing Silk and real estate property of Mr.
Wensheng Chen and Mr. Songbai Zhong. From this jointly acquired credit line,
Qiluo received 15,000,000 RMB ($2,196,000), Guojing Silk received 1,000,000 RMB
($1,464,000), Mr. Chen received 3,000,000 RMB ($439,200), and Mr. Zhong received
2,000,000 RMB ($292,000).
 
 In March
2009, Qiluo borrowed 31,500,000 RMB ($4,611,600) from Chongqing Guojing Silk
Company, Ltd.(“Guojing Silk”) and simultaneously delivered a bank acceptance
(from Shan Xia Bank) for the same amount to Guojing Silk. Under the related
agreement with Shan Xia Bank, use of the 31,500,000 RMB is not permitted while
the bank acceptance is outstanding.
 
 During
the six months ended June 30, 2008, the Company received funds from and advanced
funds to Guojing Silk for working capital purposes. As of June 30, 2009, the
excess advanced payments to Guojing Silk amounted to $395,280 (2,700,000 RMB),
which was reported under the caption of “Other receivables” (Note
8).
 
 NOTE 17 -
CONCENTRATION OF CREDIT RISK
 
 Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents, accounts
receivable, other receivables, and restricted cash to bank acceptance
payables.
 
 Qiluo
maintains cash balances in various banks in the People’s Republic of China.
Currently, no deposit insurance system has been set up in the People’s Republic
of China. Therefore, the Company will bear a risk if any of these banks become
insolvent. Qiluo’s uninsured cash balance was $4,972,555 and $61,867 as of June
30, 2009 and December 31, 2008, respectively.
 
 NOTE 18 -
COMMITMENTS AND CONTINGENCIES
 
 Lease
agreement
 
 On
January 28, 2007, Qiluo signed a twenty (20) years lease with Xinshengxiang, a
related party (see Note 13), for the use of a factory building located in Fulin,
Chongqing. The lease commenced on March 1, 2007 and provides for annual rental
payments of 200,000 Renminbi ($29,280 translated at the June 30, 2009 exchange
rate) plus other occupancy costs.
 
 F -
17
 
 Future
minimum rentals under this lease are as follows:
 Twelve
                          Months
                          Ending
                          June 30,
                          (Unaudited)
                        
                        Future
                          Minimum
                          Rent Payments2010
                        
                        $
                        29,2802011
                        
                        
                        29,2802012
                        
                        
                        29,2802013
                        
                        
                        29,2802014
                        
                        
                        29,280Thereafter
                        
                        
                        341,600Total
                        
                        $
                        488,000
 
 Registration Rights
Arrangement
 
 In
connection with the convertible notes payable (see Note 12), the Company agreed
to prepare and file with the Securities and Exchange Commission within 60 days
following the closing a registration statement for the purpose of registering
for resale all of the shares of common stock underlying the Notes. If the
Company fails to file such registration statement within such time, or if the
registration statement is not declared effective within 120 days from September
12, 2007, the Company is to pay monthly liquidated damages in cash equal to 2%
of the principal amount of the Notes. The Company filed a registration statement
on December 26, 2007; the registration statement has not yet been declared
effective. Accordingly, the Company has accrued liquidated damages of $1,144,229
as of June 30, 2009, which has been recorded as interest expense and included in
convertible notes interest and penalty payables.
 
 Lack of
Insurance
 
 The
Company currently has no insurance in force for its office facilities and
operations and it cannot be certain that it can cover the risks associated with
such lack of insurance or that it will be able to obtain and/or maintain
insurance to cover these risks at economically feasible premiums.
 
 Country
Risk
 
 As the
Company's principal operations are conducted in the People’s Republic of China
(the “PRC”), the Company is subject to special considerations and significant
risks not typically associated with companies in North America and Western
Europe. These risks include, among others, risks associated with the political,
economic and legal environments and foreign currency exchange limitations
encountered in the PRC. The Company's results of operations may be adversely
affected by changes in the political and social conditions in the PRC, and by
changes in governmental policies with respect to laws and regulations, among
other things.
 
 In
addition, all of the Company's transactions undertaken in the PRC are
denominated in Renminbi, which must be converted into other currencies before
remittance out of the PRC may be considered. Both the conversion of Renminbi
into foreign currencies and the remittance of foreign currencies abroad require
the approval of the PRC government.
 
 NOTE 19 –
LEGAL PROCEEDING
 
 On July
28, 2008, Professional Offshore Opportunity Fund Ltd. (the “Plaintiff”) obtained
a default judgment against the Company. On April 21, 2008, the Plaintiff
initiated the action in the United States District Court Southern District of
New York, on a claim of breach of contract and non payment on a promissory note
dated September 12, 2007, made by the Company in favor of the Plaintiff, in the
principal amount of $500,000. The Plaintiff claimed approximately $671,000 in
total relief, which amount includes a 15% principal charge of $75,000, accrued
interest of $48,125, and liquidated damages of $37,000.
 
 F -
18
 
 NOTE 20 –
DEFAULT ON CONVERTIBLE NOTES PAYABLE
 
 As of
June 12, 2008, the Company was in default to six (6) Purchasers on convertible
notes payments due June 12, 2008 and earlier. As of July 12, 2008, the Company
was in default to all eleven (11) Purchasers on convertible notes payments due
July 12, 2008. The Notes provide that, at the option of the holder, an event of
default shall make all sums of principal and interest then remaining unpaid and
all other amounts payable immediately due and payable upon demand. As of June
30, 2009, the unpaid convertible notes payable balance is $2,792,175; unpaid
accrued interest is $344,741; and unpaid accrued liquidated damages penalty and
default penalty are $1,563,056. The Company is currently negotiating with
investors and seeking ways to resolve the default issue with all
investors.
 
 F -
19




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




Forward-Looking
Statements





The
following discussion should be read in conjunction with our financial
statements, which are included elsewhere in this Form 10-Q (the “Report”) and
Form 10-K/A filed on April 15, 2009. Although Qiluo is a subsidiary of Franklin,
the acquisition of Qiluo by Franklin that was consummated on June 19, 2007 has
been treated as a reverse merger of Qiluo. This means that Qiluo is the
continuing entity for financial reporting purposes.




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




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




Plan
of Operation





In an
effort to obtain a stable raw material supply and to maximize both output and
quality of our silk production through Qiluo, we are contemplating the
acquisition of various other silk worm farms. On November 26, 2007, we entered
into a letter of intent with Chongqing Fulin Municipal Government to acquire
certain assets from Zhengzhong Silkworm Industrial Development Co., Ltd., a
state owned entity, pursuant to which we intend to acquire the assets of cocoon
purchase stations from Zhengzhong and exclusive right of those purchase stations
to purchase cocoons produced from approximately 15,000 acres of mulberry farms
in the local area.





The
Letter Agreement dated November 26, 2007 and subsequent amendments provided that
the total purchase price of the Zhengzhong assets was 10,374,800 RMB ($1,518,870
translated at the June 30, 2009 exchange rate). If the Company is unable to pay
the remaining 3,574,800 RMB ($523,350 translated at the June 30, 2009 exchange
rate) due, the Company’s total payments of 6,800,000 RMB ($995,520 translated at
the June 30, 2009 exchange rate) may be forfeited and not recovered (partially
or in full). In February 2009, the due date of the remaining 3,574,800 RMB
($523,350 translated at the June 30, 2009 exchange rate) due was extended to
September 2009.





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


4




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





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




Results
of Operations





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





Three Months EndedJune 30,Sales
      in US dollars
                            
                            2009
                            
                            
                            2008Silk
                            
                            $
                            1,511,403
                            
                            
                            $
                            586,579Cocoons
                            
                            
                            723,927
                            
                            
                            
                            284,047By
      products and others
                            
                            
                            250,197
                            
                            
                            
                            253,852Total
      sales
                            
                            $
                            2,485,527
                            
                            
                            $
                            1,124,478





Net
Sales





Our net
sales were $2,485,527 for the three months ended June 30, 2009, an increase of
$1,361,049, or 121%, as compared to $1,124,478 for the three months ended June
30, 2008.  The increase of our sales was primarily attributable to the
improvement of the commodity market and increased demand during the second
quarter of 2009.





The
Company sold 72.48 tons of silk during the three months ended June 30, 2009, an
increase of 46.09 tons, or 175% as compared to 26.39 tons during the three
months ended June 30, 2008. The revenue from sale of silk was $1,511,403 during
the three months ended June 30, 2009, an increase of $924,824, or 158% as
compared to $586,579 for the same period of 2008.


5





The
cocoon is a raw material for production of silk. The sales of cocoon were 146.52
tons for the three months ended June 30, 2009, an increase of 102.35 tons, or
232% as compared to 44.17 tons sold in the same period of 2008. The revenue from
sale of cocoon was $723,927 for the three months ended June 30, 2009, an
increase of $439,880, or 155%, as compared to $284,047 for the three months
ended June 30, 2008.





Gross
Profit





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


Three Months Ended
                      June 30,2009
                    
                    
                    2008Net
      sales
                    
                    $
                    2,485,527
                    
                    
                    $
                    1,124,478Cost
      of sales
                    
                    
                    2,280,552
                    
                    
                    
                    1,097,749Gross
      profit
                    
                    $
                    204,975
                    
                    
                    $
                    26,729Gross profit margin
      rate
                    
                    
                    8.25
                    %
                    
                    
                    2.38
                    %





Gross
profit for the three months end June 30, 2009 and 2008 was $204,975 and $26,729,
respectively. The gross profit margin rate for the three months ended June 30,
2009 increased 5.87 percentage points from 2.38% during the three months ended
June 30, 2008 to 8.25% for the three months ended June 30, 2009. This
improvement is mainly the result of our acquisition of Zhengzhong (see Plan of
Operation). The Company started to use its exclusive right through acquired
assets of Zhengzhong to purchase cocoons directly from local farmers commencing
in the spring cocoon season of 2008. As a result, the Company had better quality
and lower cost cocoons.





Income
(Loss) from Operations





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





ThreeMonthsEnded
                    June30,2009
                  
                  
                  2008Gross
      profit
                  
                  $
                  204,975
                  
                  
                  $
                  26,729Professional
      fees
                  
                  
                  17,365
                  
                  
                  
                  87,108Depreciation
      and amortization
                  
                  
                  10,088
                  
                  
                  
                  8,170Other
      general and administrative expenses
                  
                  
                  128,050
                  
                  
                  
                  242,787Income
      (Loss) from operations
                  
                  $
                  49,472
                  
                  
                  $
                  (311,336
                  )


6





Income
from operations for the three months ended June 30, 2009 were $49,472, an
improvement of $360,808, as compared to loss from operations of $311,336 for the
three months ended June 30, 2008. The improvement was primarily due to the
decrease of professional fees. Professional fees totaled $17,365 for the three
months ended June 30, 2009, a decrease of $69,743, or 80%, as compared to
$87,108 for the three months ended June 30, 2008. We incurred significant cost
in connection with professional services associated with the legal and
accounting reporting obligations of being a public company in 2008.





Other
general and administrative expenses consist of selling expenses, general and
administrative expenses relating to our  back office and general and
administrative expenses relating to our cocoon stations. Other general and
administrative expenses decreased $114,737 from $242,787 for the three months
ended June 30, 2008 to $128,050 for the three months ended June 30, 2009. The
decrease of other general and administrative expenses was primarily due to the
decrease in expenses on new acquired cocoon stations. The expenses in connection
with cocoon stations decreased $134,872 from $143,197 for the three months ended
June 30, 2008 to $8,325 for the three months ended June 30, 2009.





Other
Expenses, Net





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





ThreeMonthsEnded
                    June30,2009
                  
                  
                  2008Subsidy
      income
                  
                  $
                  440,664
                  
                  
                  $
                  -Interest
      income
                  
                  
                  356
                  
                  
                  
                  137Interest
      expense
                  
                  
                  (1,447,289
                  )
                  
                  
                  (1,282,019
                  )Other Expenses,
      net
                  
                  $
                  (1,006,269
                  )
                  
                  $
                  (1,281,882
                  )





Total
other expenses, net was $1,006,269 for the three months ended June 30, 2009, a
decrease of $275,613 as compared to $1,281,882 for the three months ended June
30, 2008. The decrease was primarily attributable to a net income of $440,664,
various Chinese government subsidy income received during the second quarter of
2009. These government subsidies were in connection with the purchase of cocoon
and incentive of technology innovation. Part of these subsidies will pass
through to the farmers who produced the cocoons when we purchase the cocoons
from farmers.





Interest
expenses consist of interest paid for short term loans and amortization of
deferred financing cost and debt discount in connection with the convertible
debt issuances in September 2007. Interest paid and accrued to various loans was
$234,247 and $10,784 for the three months ended June 30, 2009 and 2008,
respectively.  We have incurred and recorded $871,000 and $1,092,715
amortization expenses of deferred finance costs and debt discount and cash
discount for the three months ended June 30, 2009 and 2008,
respectively.  In addition, we also recorded accrued interest expense
and penalties in connection with the default of convertible notes. Such expenses
totaled $342,042 and $178,520 for the three months ended June 30, 2009 and 2008,
respectively.


7





Comparison of Sales for the
Six Months Ended June 30, 2009 and 2008





Six Months EndedJune 30,Sales
      in US dollars
                    
                    2009
                    
                    
                    2008Silk
                    
                    $
                    1,769,364
                    
                    
                    $
                    1,275,095Cocoons
                    
                    
                    757,492
                    
                    
                    
                    812,438By
      products and others
                    
                    
                    357,042
                    
                    
                    
                    362,605Total
      sales
                    
                    $
                    2,883,898
                    
                    
                    $
                    2,450,138





Net
Sales





Our net
sales were $2,883,898 for the six months ended June 30, 2009, an increase of
$433,760, or 18%, as compared to $2,450,138 for the six months ended June 30,
2008.  The increase of our sales was primarily attributable to the
improvement of the commodity market and increased demand during the second
quarter of 2009.





The
Company sold 85.24 tons of silk during the six months ended June 30, 2009, an
increase of 25.48 tons, or 43% as compared to 59.76 tons during the six months
ended June 30, 2008. The revenue from sale of silk was $1,769,364 during the six
months ended June 30, 2009, an increase of $494,269, or 39% as compared to
$1,275,095 for the same period of 2008.





The
cocoon is a raw material for production of silk. The sales of cocoon were 153.17
tons for the six months ended June 30, 2009, an increase of 25.59 tons, or 20%
as compared to 127.58 tons sold in the same period of 2008. The revenue from
sale of cocoon was $757,492 for six months ended June 30, 2009, a decrease of
$54,946, or 7%, as compared to $812,438 for the six months ended June 30,
2008.





Gross
Profit





Comparison of Gross Profit
for the Six Months Ended June 30, 2009 and 2008





Six Months Ended
                    June 30,2009
                  
                  
                  2008Net
      sales
                  
                  $
                  2,883,898
                  
                  
                  $
                  2,450,138Cost
      of sales
                  
                  
                  2,651,038
                  
                  
                  
                  2,412,610Gross
      profit
                  
                  $
                  232,860
                  
                  
                  $
                  37,528Gross
      profit margin rate
                  
                  
                  8.07
                  %
                  
                  
                  1.53
                  %





Gross
profit for the six months end June 30, 2009 and 2008 was $232,860 and $37,528,
respectively. The gross profit margin rate for the six months ended June 30,
2009 increased 6.54 percentage points from 1.53% during the six months ended
June 30, 2008 to 8.07% for the six months ended June 30, 2009. This improvement
is mainly the result of our acquisition of Zhengzhong (see Plan of Operation).
The Company started to use its exclusive right through acquired assets of
Zhengzhong to purchase cocoons directly from local farmers commencing in the
spring cocoon season of 2008. As a result, the Company had better quality and
lower cost cocoons.


8





Loss
from Operations





Comparison of Loss from
Operations for the Six Months Ended June 30, 2009 and 2008





SixMonthsEnded
                    June30,2009
                  
                  
                  2008Gross
      profit
                  
                  $
                  232,860
                  
                  
                  $
                  37,528Professional
      fees
                  
                  
                  33,994
                  
                  
                  
                  206,968Depreciation
      and amortization
                  
                  
                  19,713
                  
                  
                  
                  10,482Other
      general and administrative expenses
                  
                  
                  248,412
                  
                  
                  
                  336,314Loss
      from operations
                  
                  $
                  (69,259
                  )
                  
                  $
                  (516,236
                  )





Loss from
operations for the six months ended June 30, 2009 were $69,259, an improvement
of $446,977, as compared to loss from operations of $516,236 for the six months
ended June 30, 2008. The decrease was primarily due to the decrease of
professional fees. Professional fees totaled $33,994 for the six months ended
June 30, 2009, a decrease of $172,974, or 84%, as compared to professional fees
of $206,968 for the six months ended June 30, 2008. We incurred significant cost
in connection with professional services associated with the legal and
accounting reporting obligations of being a public company in 2008.





Other
general and administrative expenses consist of selling expenses, general and
administrative expenses relating to our back office and general and
administrative expenses relating to our cocoon stations. Other general and
administrative expenses decreased $87,902 from $336,314 for the six months ended
June 30, 2008 to $248,412 for the six months ended June 30, 2009. The decrease
of other general and administrative expenses was primarily due to the decrease
in expenses on new acquired cocoon stations. The expenses in connection with
cocoon stations decreased $115,823 from $143,197 for the six months ended June
30, 2008 and to $27,374 for the six months ended June 30, 2009.





Other
Expenses, Net





Comparison of Other
Expenses, net for the Six Months Ended June 30, 2009 and
2008





SixMonthsEnded
                    June30,2009
                  
                  
                  2008Subsidy
      income
                  
                  $
                  706,122
                  
                  
                  $
                  -Interest
      income
                  
                  
                  6,813
                  
                  
                  
                  1,576Interest
      expense
                  
                  
                  (2,836,374
                  )
                  
                  
                  (2,620,218
                  )Other
      Expenses, net
                  
                  $
                  (2,123,439
                  )
                  
                  $
                  (2,618,642
                  )





Total
other expenses, net was $2,123,439 for the six months ended June 30, 2009,
decreased by $495,203 as compared to $2,618,642 for the six months ended June
30, 2008. The decrease was primarily attributable to a net income of $706,122,
various Chinese government subsidy income received during the six months ended
June 30, 2009. These government subsidies were in connection with the purchase
of cocoon and incentive of technology innovation. Part of these subsidies will
pass through to the farmers who produced the cocoons when we purchase the
cocoons from farmers.


9





Interest
expenses consist of interest paid for short term loans and amortization of
deferred financing cost and debt discount in connection with the convertible
debt issuances in September 2007. Interest paid and accrued to various loans was
$371,935 and $16,570 for the six months ended June 30, 2009 and 2008,
respectively.  We have incurred and recorded $1,780,355 and $2,074,379
amortization expenses of deferred finance costs and debt discount and cash
discount for the six months ended June 30, 2009 and 2008,
respectively.  In addition, we also recorded accrued interest expense
and penalties in connection with the default of convertible notes. Such expenses
totaled $684,084 and $529,269 for the six months ended June 30, 2009 and 2008,
respectively.





Liquidity
and Capital Resources





As of
June 30, 2009 and December 31, 2008, we had $360,955 and $61,867 in cash,
respectively. We believe that such funds will not be sufficient to effectuate
our plans with respect to the business over the next twelve months. We will need
to seek additional capital for our operations.





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





Net cash
provided by operating activities during the six months ended June 30, 2009 was
$2,351,868, compared to $2,570,659 net cash used in operating activates for the
six months ended June 30, 2008. This was mainly due to that the Company
commenced its operation after third quarter of 2007, which required more upfront
payments.  As a result, the Company prepaid more expenses during the
six months ended June 30, 2008 than the same period of 2009. The Company also
received $1,016,660 in advance from customers during the six months ended June
30, 2009, as compared to $0 during the same period of 2008.





Net cash
used in investing activities was $4,072,649 during six months ended June 30,
2009, as compared to net cash provided by investing activities of $129,677
during the six months ended June 30, 2008. It was the results of paid additional
acquisition deposit of $512,400 and lend $3,554,977 to various entities and
individuals (see Note 8 to Financial Statements).





Net cash
provided by financing activities was $2,023,058 and $1,399,256 for the six
months ended June 30, 2009 and 2008, respectively. During six months ended June
30, 2009, the company received net proceeds of $2,196,000 from Chongqing Shan
Xia Bank. For the six months ended June 30, 2008, the Company received net
proceeds from various short term loans of $503,875, and received proceeds of
$909,256 from shareholder.


10





Loans Payable to various
Banks and Entities





Loans payable consist of:
                    
                    June 30,
                      2009
                    
                    
                    December 31,
                      2008(Unaudited)Qiluo
      loan payable to Chongqing Aikekaer Paint Co., Ltd.1,166,670
      RMB,  interest at 6% per annum, due May 31, 2009
                    
                    $
                    -
                    
                    
                    $
                    170,999Qiluo
      loan payable to Chongqing Shi Bell Technology, Ltd.430,000
      RMB, interest at 6% per   annum, due on
    demand
                    
                    
                    62,952
                    
                    
                    
                    63,025Qiluo
      loans payable to Jin Cheng Small Loans Company, Ltd.11,000,000
      RMB, interest at 18% per annum, due March 23, 2009
                    
                    
                    -
                    
                    
                    
                    1,612,2704,000,000
      RMB, interest at 21.24% per annum, due November 24, 2009
                    
                    
                    585,600
                    
                    
                    
                    -7,000,000
      RMB, interest at 19.44% per annum, due September 2009
                    
                    
                    1,024,800
                    
                    
                    
                    -Total
      Qiluo loans payable to Jin Cheng Small Loans Company, Ltd.
                    
                    
                    1,610,400
                    
                    
                    
                    1,612,270Qiluo
      loans payable to Chongqing Shan Xia Bank30,000,000
      RMB, interest at 10% per annum, due January 19, 2010
                    
                    
                    4,392,000
                    
                    
                    
                    -Less:
      used by Mr. Chen, Wensheng, 3,000,000 RMB
                    
                    
                    (439,200
                    )
                    
                    
                    -Less:
      used by Mr. Zhong, Songbai, 2,000,000 RMB
                    
                    
                    (292,800
                    )
                    
                    
                    -Less:
      used by Guojing Silk, 10,000,000 RMB
                    
                    
                    (1,464,000
                    )
                    
                    
                    -Qiluo
      loans payable to Chongqing Shan Xia Bank, net
                    
                    
                    2,196,000
                    
                    
                    
                    -Franklin
      loans payable to two individualsinterest
      at 8% per annum, due April 24, 2008 (past due)
                    
                    
                    20,000
                    
                    
                    
                    20,000Total
      Loans Payable
                    
                    $
                    3,889,352
                    
                    
                    $
                    1,866,294





On
January 20, 2009, Qiluo jointly with Chongqing Guojing Silk Company, Ltd.
(“Guojing Silk”), Mr. Wensheng Chen and Mr. Songbai Zhong, obtained a short term
credit line in the amount of 30,000,000 RMB ($4,392,000 translated at the June
30, 2009 exchange rate) from Chongqing Shan Xia Bank. The loan is collateralized
with the assets of Guojing Silk and real estate property of Mr. Wensheng Chen
and Mr. Songbai Zhong. From this jointly acquired credit line, Qiluo received
15,000,000 RMB ($2,196,000), Guojing Silk received 1,000,000 RMB ($1,464,000),
Mr. Chen received 3,000,000 RMB ($439,200), and Mr. Zhong received 2,000,000 RMB
($292,000). Guojing Silk is controlled by the brother-in-law of Mr. Kuang,
indirect majority stockholder and chief executive officer of the
Company.





As of
June 30, 2009 and December 31, 2008, the accrued interest payable for short term
loans totaled $22,634 and $29,581, respectively, which was included in accounts
payable and accrued expenses.





Convertible Notes
Payable





June 30,
                              
                              
                              December 31,Convertible
      notes payable, net consist of:
                              
                              2009
                              
                              
                              2008(Unaudited)Convertible
      notes - initial face amount
                              
                              $
                              3,300,000
                              
                              
                              $
                              3,300,000Less
      unamortized debt discounts:Discount
      on relative fair value of warrants
                              
                              
                              (2,903,247
                              )
                              
                              
                              (2,903,247
                              )Discount
      on beneficial conversion feature
                              
                              
                              (396,753
                              )
                              
                              
                              (396,753
                              )Less
      accumulated amortization
                              
                              
                              2,994,156
                              
                              
                              
                              2,221,118Unamortized
      debt discounts
                              
                              
                              (305,844
                              )
                              
                              
                              (1,078,882
                              )Repayment
      of convertible notes
                              
                              
                              (507,825
                              )
                              
                              
                              (507,825
                              )Convertible
      notes payable, net
                              
                              $
                              2,486,331
                              
                              
                              $
                              1,713,293


11


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





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





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





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





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





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





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


12


In
connection with the convertible debt, the Company recorded deferred finance
costs of $4,466,334, of which $382,500 was recorded as an asset and $4,083,834
was recorded as a component of stockholders’ equity. Such deferred finance costs
are being amortized over the life of the related debt. The Company also recorded
a deferred debt discount in the amount of $3,300,000 to reflect the beneficial
conversion feature of the convertible debt and the fair value of the warrants.
The beneficial conversion feature was recorded pursuant to Emerging Issues Task
Force (“EITF”) 00-27: “Application of EITF No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, to Certain Convertible Instruments”. In accordance with EITF
00-27, the Company evaluated the value of the beneficial conversion feature and
recorded the amount of $396,753 as a reduction to the carrying amount of the
convertible debt and as an addition to paid-in capital. Additionally, the
relative fair value of the warrants of $2,903,247 was calculated and recorded as
a further reduction to the carrying amount of the convertible debt and as an
addition to paid-in capital. The amortization of these deferred finance costs
and debt discounts are reported as a component of the interest expense. The
amortization of the debt discount was $773,038 and $862,974 for the six months
ended June 30, 2009 and 2008, respectively. The amortization of deferred finance
costs was $956,655 and $1,067,953 for the six months ended June 30, 2009 and
2008, respectively. Such amortizations have been included as interest
expense.





The
Company commenced the repayment of the convertible notes and interest on March
12, 2008 and paid $26,375 in cash to three of the Purchasers, which represented
accrued interest of $12,500 and repayment of principal of $13,875 due on the
convertible promissory notes. Also, the Company issued a total of 32,354,043
shares to seven of the Purchasers during the six months ended June 30, 2008,
which represented accrued interest of $174,912 and repayment of principal of
$493,950. The Company did not make any repayments during the six months ended
December 31, 2008 due to its financing difficulties. The Company is in default
to all eleven investors.




Going
Concern Consideration





The
Company started its test production at the end of June 2007 and commenced its
manufacturing operations during the third quarter of 2007. The Company has
incurred a net loss of $2,192,698 for the six months ended June 30, 2009 and has
an accumulated deficit of $19,883,654 at June 30, 2009.  Substantial
portions of the losses are attributable to the common stock issued for
consulting service, amortization of debt discount, deferred finance costs and
beneficial conversion feature, and accrued interest and penalties in connection
with the default of the Convertible Notes. The Company had a working capital
deficiency of $3,440,745 and $1,780,617 as of June 30, 2009 and December 31,
2008, respectively. In addition, the Company’s gross margin rate from its
current operations was low.  It was 8% for the six months ended June
30, 2009 and 5.2% for the year ended December 31, 2008.





Furthermore,
as of July 12, 2008, the Company was in default on its Convertible Notes
payments due July 12, 2008. The Notes provide that, at the option of the holder,
an event of default shall make all sums of principal and interest then remaining
unpaid and all other amounts payable immediately due and payable upon demand. As
of June 30, 2009, the unpaid convertible notes payable balance is $2,792,175;
unpaid accrued interest is $344,741; and unpaid accrued liquidated damages
penalty and default penalty are $1,563,056. The Company is currently negotiating
with investors and seeking ways to resolve the default issue with all
investors.


13


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





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





During
the six months ended June 30, 2009, the Company received net proceeds of
$2,023,058 from various short term loans.





The
Company has undertaken further steps as part of a plan to improve operations and
to address our lack of liquidity by raising additional funds, either in the form
of debt or equity or some combination thereof. The Company is planning to reduce
its cost of goods sold by purchasing its main raw material directly from farmers
in the local neighbored area and to reduce its overhead cost by fully utilizing
its current manufacture facilities. From the Spring of 2008, the Company began
purchasing its main raw material directly from farmers through the planned
acquisition of “Zhengzhong” (see Note 7), thereby helping the Company to reduce
its raw material - cocoon cost. During the six months ended June 30, 2009, the
gross margin rate was 8%, as compared to 1.5% for the six months ended June 30,
2008. However, there can be no assurance that the Company will be able to raise
enough funds to complete the acquisition of “Zhengzhong” and to accomplish these
objectives, and it is uncertain whether the Company will achieve a profitable
level of operations or be able to obtain additional financing.





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





Critical
Accounting Policies and Estimates





General





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


14


Basis of
Presentation





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





Foreign Currency
Translation





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





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





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





Intangible and Other
Long-Lived Assets





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





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





Revenue
Recognition





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


15


Stock-Based
Compensation





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





Income
Taxes





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





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





Segment
Information





SFAS No.
131, “Disclosure About Segments of and Enterprise and Related Information”,
changed the way public companies report information about segments of their
business in their quarterly reports issued to shareholders. It also requires
entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues and its major
customers. The Company operates as a single segment and will evaluate additional
segment disclosure requirements as it expands its operations.





Recently Issued Accounting
Pronouncements





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




Item
3. Quantitative and Qualitative Disclosures About Market Risk.





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


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Item
4.  Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures




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




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





Changes
in Internal Control Over Financial Reporting





In
addition, our management with the participation of our Principal Executive
Officer and Principal Financial Officer have determined that no change in our
internal control over financial reporting occurred during or subsequent to the
quarter ended June 30, 2009 that has materially affected, or is (as that term is
defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of
1934) reasonably likely to materially affect, our internal control over
financial reporting.




PART
II  OTHER INFORMATION




Item
1.  Legal Proceedings.




The
Company is in default to all eleven (11) Purchasers on convertible notes
payments due July 12, 2008. The Notes provide that, at the option of the holder,
an event of default shall make all sums of principal and interest then remaining
unpaid and all other amounts payable immediately due and payable upon demand. as
of July 12, 2008, the Company was in default on its Convertible Notes payments
due July 12, 2008. As of June 30, 2009, the unpaid convertible notes payable
balance is $2,792,175; unpaid accrued interest is $344,741; and unpaid accrued
liquidated damages penalty and default penalty are $1,563,056. The Company is
currently negotiating with investors and seeking ways to resolve the default
issue with all investors.





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


17




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





Unregistered Sales of Equity
Securities





None





Purchases of equity
securities by the issuer and affiliated purchasers





None.





Use of
Proceeds





None




Item
3.  Defaults Upon Senior Securities.





See Part
II – Item 1. above.




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





There was
no matter submitted to a vote of security holders during the fiscal quarter
ended June 30, 2009.




Item
5.  Other Information.





None




Item
6.  Exhibits





Exhibit
                    No.
                  
                  Description31.1
                  
                  Rule
      13a-14(a)/15d14(a) Certifications of Dingliang Kuang, the President, Chief
      Executive Officer, Treasurer and Director (Attached
  Hereto)32.1
                  
                  Section
      1350 Certifications of Dingliang Kuang, the President, Chief Executive
      Officer, Treasurer and Director (Attached
  Hereto)


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SIGNATURES





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





FRANKLIN
      TOWERS ENTERPRISES, INC.Dated:
      August 18, 2009
              By:
              /s/  Dingliang
    KuangName:
              Dingliang
      KuangTitle:
              President,
      Chief Executive Officer,
                Treasurer
      and Director(Principal
      Executive, Financial and
                Accounting
      Officer)


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