UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





xQuarterly Report Pursuant to Section
13 or 15(d) of the


Securities
Exchange Act of 1934





For the
quarterly period ended September 30, 2009





Commission
File Number: 001-32503




TELESTONE
TECHNOLOGIES CORPORATION


(Exact
Name of Small Business Issuer as Specified in Its Charter)




Delaware
            84-1111224(State
      or Other Jurisdiction of
            (I.R.S.
      Employer Identification No.)Incorporation
      or Organization)





Floor 6,
Saiou Plaza


No. 5
Haiying Road


Fengtai
Technology Park


Beijing,
People’s Republic of China 100070


(Address
of Principal Executive Offices)





(86 10)
8367-0505


(Issuer’s
Telephone Number, Including Area Code)





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 the filing requirements for at least the past 90 days. Yes x    No
 ̈





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





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





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





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




As
of November 12, 2009, 10,404,550 shares of the Issuer’s $.001 par value common
stock were outstanding.








TELESTONE
TECHNOLOGIES CORPORATION





INDEX





PART
I. FINANCIAL INFORMATION





PageItem
      1. Condensed Financial Statements.Condensed
      Consolidated Balance Sheets, as of September 30, 2009 (unaudited) and
      December 31, 2008 (audited)
                                                  
                                                  3Condensed
      Consolidated Statements of Operations, for the three and nine months ended
      September 30, 2009 and 2008 (unaudited)
                                                  
                                                  4Condensed
      Consolidated Statement of Changes in Stockholders’ Equity for the nine
      months ended September  30, 2009 (unaudited)
                                                  
                                                  5Condensed
      Consolidated Statements of Cash Flows, for the nine months ended September
      30, 2009 and 2008 (unaudited)
                                                  
                                                  6Notes
      to Condensed Consolidated Financial Statements (unaudited)
                                                  
                                                  7Item
      2. Management’s Discussion and Analysis or Plan of
    Operation.
                                                  
                                                  19Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                                                  
                                                  28Item
      4. Controls and Procedures.
                                                  
                                                  28PART
      II. OTHER INFORMATION
                                                  
                                                  29Item
      1. Legal Proceedings.
                                                  
                                                  29Item 1A. Risk
      Factors.
                                                  
                                                  29Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
                                                  
                                                  29Item
      3. Defaults Upon Senior Securities.
                                                  
                                                  29Item
      4. Submission of Matters to a Vote of Security Holders.
                                                  
                                                  29Item
      5. Other Information.
                                                  
                                                  29Item
      6. Exhibits.
                                                  
                                                  29


2





Telestone
Technologies Corporation


Condensed
Consolidated Balance Sheets


(Dollars in thousands except share
data and per share amounts)





(Unaudited)
                          As of
                          September
                          30,
                        
                        
                        As of
                          December
                          31,2009
                        
                        
                        2008Note
                        
                        
                        US$’000
                        
                        
                        US$’000ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        
                        
                        
                        
                        5,288
                        
                        
                        
                        7,866Accounts
      receivable, net of allowance
                        
                        
                        
                        
                        
                        59,208
                        
                        
                        
                        62,136Due
      from related parties
                        
                        
                        8
                        
                        
                        
                        1,662
                        
                        
                        
                        1,826Inventories,
      at lower of cost or market
                        
                        
                        6
                        
                        
                        
                        6,930
                        
                        
                        
                        7,843Prepayment
                        
                        
                        
                        
                        
                        
                        1,770
                        
                        
                        
                        2,347Other
      current assets
                        
                        
                        
                        
                        
                        
                        98
                        
                        
                        
                        1,352Total
      current assets
                        
                        
                        
                        
                        
                        
                        74,956
                        
                        
                        
                        83,370Long-term
      receivables
                        
                        
                        
                        
                        
                        
                        18,774
                        
                        
                        
                        -Goodwill
                        
                        
                        
                        
                        
                        
                        3,119
                        
                        
                        
                        3,119Property,
      equipments and software, net
                        
                        
                        
                        
                        
                        
                        1,162
                        
                        
                        
                        1,05023,055
                        
                        
                        
                        4,169Total
      assets
                        
                        
                        
                        
                        
                        
                        98,011
                        
                        
                        
                        87,539LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short-term
      bank loans
                        
                        
                        8,9
                        
                        
                        
                        3,656
                        
                        
                        
                        2,918Accounts
      payable – trade
                        
                        
                        
                        
                        
                        
                        15,338
                        
                        
                        
                        11,776Customer
      deposits for sales of equipment
                        
                        
                        
                        
                        
                        
                        1,232
                        
                        
                        
                        739Due
      to related parties
                        
                        
                        8
                        
                        
                        
                        1,708
                        
                        
                        
                        1,673Taxes
      payable
                        
                        
                        
                        
                        
                        
                        6,700
                        
                        
                        
                        6,805Accrued
      expenses and other accrued liabilities
                        
                        
                        
                        
                        
                        
                        9,480
                        
                        
                        
                        11,197Total
      current liabilities
                        
                        
                        
                        
                        
                        
                        38,114
                        
                        
                        
                        35,108Commitments
      and contingencies
                        
                        
                        4
                        
                        
                        
                        -
                        
                        
                        
                        -Stockholders’
      equity:Preferred
      stock, US$0.001 par value, 10,000,000 shares authorized, no shares
      issued
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Common
      stock and paid-in-capital, US$0.001 par value: Authorized - 100,000,000
      shares as of September 30, 2009 and December 31, 2008
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Issued
      and outstanding - 10,404,550 shares as ofSeptember
      30, 2009 and December 31, 2008
                        
                        
                        
                        
                        
                        
                        11
                        
                        
                        
                        11Additional
      paid-in capital
                        
                        
                        
                        
                        
                        
                        18,989
                        
                        
                        
                        18,989Dedicated
      reserves
                        
                        
                        
                        
                        
                        
                        4,513
                        
                        
                        
                        3,787Other
      comprehensive income
                        
                        
                        
                        
                        
                        
                        5,677
                        
                        
                        
                        5,573Retained
      earnings
                        
                        
                        
                        
                        
                        
                        30,707
                        
                        
                        
                        24,071Total
      stockholders’ equity
                        
                        
                        
                        
                        
                        
                        59,897
                        
                        
                        
                        52,431Total
      liabilities and stockholders’ equity
                        
                        
                        
                        
                        
                        
                        98,011
                        
                        
                        
                        87,539


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


3





Telestone
Technologies Corporation





Condensed
Consolidated Statements of Operations and Other Comprehensive Income
(unaudited)


(Dollars in thousands except share
data and per share amounts)





Three months ended
                                        September 30,
                                      
                                      
                                      Nine months ended
                                        September 30,2009
                                      
                                      
                                      2008
                                      
                                      
                                      2009
                                      
                                      
                                      2008Note
                                      
                                      
                                      US$’000
                                      
                                      
                                      US$’000
                                      
                                      
                                      US$’000
                                      
                                      
                                      US$’000Operating
      revenues:Net
      sales of equipment
                                      
                                      
                                      
                                      
                                      
                                      11,099
                                      
                                      
                                      
                                      5,797
                                      
                                      
                                      
                                      21,504
                                      
                                      
                                      
                                      12,112Service
      income
                                      
                                      
                                      
                                      
                                      
                                      7,792
                                      
                                      
                                      
                                      2,610
                                      
                                      
                                      
                                      17,413
                                      
                                      
                                      
                                      8,832Total
      operating revenues
                                      
                                      
                                      
                                      
                                      
                                      18,891
                                      
                                      
                                      
                                      8,407
                                      
                                      
                                      
                                      38,917
                                      
                                      
                                      
                                      20,944Cost
      of operating revenues:Cost
      of net sales
                                      
                                      
                                      
                                      
                                      
                                      (7,099
                                      )
                                      
                                      
                                      (3,586
                                      )
                                      
                                      
                                      (13,738
                                      )
                                      
                                      
                                      (7,116
                                      )Cost
      of service
                                      
                                      
                                      
                                      
                                      
                                      (2,878
                                      )
                                      
                                      
                                      (879
                                      )
                                      
                                      
                                      (6,558
                                      )
                                      
                                      
                                      (3,281
                                      )Total
      cost of operating revenues
                                      
                                      
                                      
                                      
                                      
                                      (9,977
                                      )
                                      
                                      
                                      (4,465
                                      )
                                      
                                      
                                      (20,296
                                      )
                                      
                                      
                                      (10,397
                                      )Gross
      income
                                      
                                      
                                      
                                      
                                      
                                      8,914
                                      
                                      
                                      
                                      3,942
                                      
                                      
                                      
                                      18,621
                                      
                                      
                                      
                                      10,547Operating
      expenses:Sales
      and marketing
                                      
                                      
                                      
                                      
                                      
                                      2,007
                                      
                                      
                                      
                                      1,430
                                      
                                      
                                      
                                      6,035
                                      
                                      
                                      
                                      4,028General
      and administrative
                                      
                                      
                                      
                                      
                                      
                                      1,182
                                      
                                      
                                      
                                      571
                                      
                                      
                                      
                                      2,503
                                      
                                      
                                      
                                      1,824Research
      and development
                                      
                                      
                                      
                                      
                                      
                                      138
                                      
                                      
                                      
                                      208
                                      
                                      
                                      
                                      467
                                      
                                      
                                      
                                      461Depreciation
      and amortization
                                      
                                      
                                      
                                      
                                      
                                      79
                                      
                                      
                                      
                                      76
                                      
                                      
                                      
                                      253
                                      
                                      
                                      
                                      237Total
      operating expenses
                                      
                                      
                                      
                                      
                                      
                                      3,406
                                      
                                      
                                      
                                      2,285
                                      
                                      
                                      
                                      9,258
                                      
                                      
                                      
                                      6,550Operating
      income
                                      
                                      
                                      
                                      
                                      
                                      5,508
                                      
                                      
                                      
                                      1,657
                                      
                                      
                                      
                                      9,363
                                      
                                      
                                      
                                      3,997Interest
      expense
                                      
                                      
                                      
                                      
                                      
                                      (40
                                      )
                                      
                                      
                                      (112
                                      )
                                      
                                      
                                      (170
                                      )
                                      
                                      
                                      (255
                                      )Other
      income, net
                                      
                                      
                                      
                                      
                                      
                                      83
                                      
                                      
                                      
                                      (28
                                      )
                                      
                                      
                                      372
                                      
                                      
                                      
                                      915Income
      before income taxes
                                      
                                      
                                      
                                      
                                      
                                      5,551
                                      
                                      
                                      
                                      1,517
                                      
                                      
                                      
                                      9,565
                                      
                                      
                                      
                                      4,657Income
      taxes
                                      
                                      
                                      4
                                      
                                      
                                      
                                      (1,308
                                      )
                                      
                                      
                                      (395
                                      )
                                      
                                      
                                      (2,203
                                      )
                                      
                                      
                                      (917
                                      )Net
      income
                                      
                                      
                                      
                                      
                                      
                                      
                                      4,243
                                      
                                      
                                      
                                      1,122
                                      
                                      
                                      
                                      7,362
                                      
                                      
                                      
                                      3,740Other
      comprehensive incomeForeign
      currency translation adjustment
                                      
                                      
                                      
                                      
                                      
                                      
                                      (27
                                      )
                                      
                                      
                                      26
                                      
                                      
                                      
                                      104
                                      
                                      
                                      
                                      1,515Comprehensive
      income
                                      
                                      
                                      
                                      
                                      
                                      
                                      4,216
                                      
                                      
                                      
                                      1,148
                                      
                                      
                                      
                                      7,466
                                      
                                      
                                      
                                      5,255Earnings
      per share:
                                      
                                      
                                      3Weighted
      average number of common stock outstandingBasic
                                      
                                      
                                      
                                      
                                      
                                      
                                      10,404
                                      
                                      
                                      
                                      10,404
                                      
                                      
                                      
                                      10,404
                                      
                                      
                                      
                                      10,404Dilutive
      effect of warrants
                                      
                                      
                                      
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      20
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      59Diluted
                                      
                                      
                                      
                                      
                                      
                                      
                                      10,404
                                      
                                      
                                      
                                      10,424
                                      
                                      
                                      
                                      10,404
                                      
                                      
                                      
                                      10,463Net
      income per share of common stockBasic
      and diluted (US$)
                                      
                                      
                                      
                                      
                                      
                                      
                                      0.41
                                      
                                      
                                      
                                      0.11
                                      
                                      
                                      
                                      0.71
                                      
                                      
                                      
                                      0.36





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


4





Telestone
Technologies Corporation





Condensed
Consolidated Statement of Changes in Stockholders' Equity
(unaudited)


(Dollars in thousands except share
data and per share amounts)





Common
      stockNumber
                  of
      shares
                
                
                Amount
                
                
                Additional
                  paid-in
                  capital
                
                
                Dedicated
                  reserves
                
                
                Other
                  compre-
                  hensive
                  income
                
                
                Retained
                  earnings
                
                
                TotalUS$’000
                
                
                US$’000
                
                
                US$’000
                
                
                US$’000
                
                
                US$’000
                
                
                US$’000Balance
      at January 1, 2009
                
                
                10,404,550
                
                
                
                11
                
                
                
                18,989
                
                
                
                3,787
                
                
                
                5,573
                
                
                
                24,071
                
                
                
                52,431Net
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,362
                
                
                
                7,362Foreign
      currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                104
                
                
                
                
                
                
                
                104Transfer
      to dedicated reserves
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                726
                
                
                
                
                
                
                
                (726
                )
                
                
                -Balance
      at September 30, 2009
                
                
                10,404,550
                
                
                
                11
                
                
                
                18,989
                
                
                
                4,513
                
                
                
                5,677
                
                
                
                30,707
                
                
                
                59,897





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


5





Telestone
Technologies Corporation





Condensed
Consolidated Statements of Cash Flows (Unaudited)


(Dollars in thousands except share
data and per share amounts)





Nine months ended
                      September 30,2009
                    
                    
                    2008US$’000
                    
                    
                    US$’000Cash
      flows from operating activitiesNet
      income
                    
                    
                    7,362
                    
                    
                    
                    3,740Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Loss
      on disposal of property, plant and equipment
                    
                    
                    -
                    
                    
                    
                    (15
                    )Depreciation
      and amortization
                    
                    
                    253
                    
                    
                    
                    237Allowance
      for doubtful accounts
                    
                    
                    1,163
                    
                    
                    
                    337Changes
      in assets and liabilities:Accounts
      receivable
                    
                    
                    (17,009
                    )
                    
                    
                    (8,349
                    )Due
      from related parties
                    
                    
                    164
                    
                    
                    
                    55Inventories
                    
                    
                    913
                    
                    
                    
                    881Prepayment
                    
                    
                    577
                    
                    
                    
                    (330
                    )Other
      current assets
                    
                    
                    1253
                    
                    
                    
                    (751
                    )Accounts
      payable
                    
                    
                    3,562
                    
                    
                    
                    1,693Customer
      deposits for sales of equipment
                    
                    
                    493
                    
                    
                    
                    (64
                    )Due
      to related parties
                    
                    
                    35
                    
                    
                    
                    (595
                    )Taxes
      payable
                    
                    
                    (105
                    )
                    
                    
                    (66
                    )Accrued
      expenses and other accrued liabilities
                    
                    
                    (1,718
                    )
                    
                    
                    3,335Net
      cash (used in) provided by operating activities
                    
                    
                    (3,057
                    )
                    
                    
                    108Cash
      flows from investing activitiesPurchase
      of property, plant and equipment
                    
                    
                    (366
                    )
                    
                    
                    (32
                    )Proceeds
      from disposal of property, plant and equipment
                    
                    
                    -
                    
                    
                    
                    49Net
      cash (used in) provided by investing activities
                    
                    
                    (366
                    )
                    
                    
                    17Cash
      flows from financing activitiesRepayment
      of short-term bank loans
                    
                    
                    (2,918
                    )
                    
                    
                    (2,142
                    )Repayment
      of long-term loan from related parties
                    
                    
                    -
                    
                    
                    
                    (27
                    )Proceeds
      from new short-term bank loans raised
                    
                    
                    3,656
                    
                    
                    
                    2,856Net
      cash provided by financing activities
                    
                    
                    738
                    
                    
                    
                    687Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (2,685
                    )
                    
                    
                    812Cash
      and cash equivalents, beginning of the period
                    
                    
                    7,866
                    
                    
                    
                    5,473Effect
      on exchange rate changes
                    
                    
                    107
                    
                    
                    
                    42Cash
      and cash equivalents, end of the period
                    
                    
                    5,288
                    
                    
                    
                    6,327Supplemental
      disclosure of cash flows informationInterest
      received
                    
                    
                    7
                    
                    
                    
                    23Interest
      paid
                    
                    
                    (76
                    )
                    
                    
                    187Tax
      paid
                    
                    
                    (2,587
                    )
                    
                    
                    54





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


6





Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


(Dollars in thousands except share
data and per share amounts)




1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES




Telestone
Technologies Corporation (“TSTC”) is incorporated in the State of
Delaware.  TSTC offers wireless coverage solutions through application
of wireless communication technology.  These solutions enhance the
coverage of mobile telecommunications networks of indoor and outdoor
environments, including hotels, residential estates, office buildings, airports,
exhibition centers, underground stations, highways and tunnels.  TSTC
also provides project design, project management, installation, maintenance and
other after-sales services required by customers.




2.
            PREPARATION
      OF INTERIM FINANCIAL STATEMENTS




Basis
of presentation


The
accompanying condensed consolidated balance sheet as of December 31, 2008 was
derived from audited financial statements and the unaudited condensed
consolidated financial statements as of September 30, 2009, have been prepared
based upon Securities and Exchange Commission ("SEC") rules that permit reduced
disclosure for interim periods and include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments and reclassifications)
necessary to present fairly the financial position, results of operations and
cash flows as of September 30, 2009 and for all periods presented.




Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("USA") have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Form-10K for
the year ended December 31, 2008 filed on March 31, 2009. The results of
operations for the three and nine months ended September 30, 2009 and 2008 are
not necessarily indicative of the operating results to be expected for the full
year.




The
condensed consolidated financial statements and accompanying notes are presented
in United States dollars and prepared in conformity with accounting principles
generally accepted in the USA ("US GAAP") which requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.




Basis
of consolidation


The
condensed consolidated financial statements include the accounts of TSTC and its
subsidiaries Success Million International Limited (“SMI”), Beijing Telestone
Technology Company Limited (“Beijing Telestone”), Beijing Telestone Wireless
Telecommunication Company Limited (“BTWTC”), Shandong Guolian Telecommunication
Technology Limited (“Guolian”), Pan-pacific Telecommunication Company Limited
(“Pan-pacific”), and Beijing Telestone Communication Technology Corporation
Limited (“BTCTC”) (collectively, the “Company”.) All significant intercompany
accounts and transactions have been eliminated upon
consolidation.


7




Beijing
Telestone does not own any direct ownership interests in BTWTC because Beijing
Telestone is considered as a foreign entity under the PRC laws. Due to the
restrictions on foreign ownership to provide and engage in certain wireless
telecommunication services in the PRC, Beijing Telestone, through loans to the
two stockholders and directors of TSTC, established BTWTC with a view to conduct
such operations without violating the relevant PRC rules and regulations as such
BTWTC is not considered as a foreign entity. A declaration of trust was signed
between the two stockholders and directors of TSTC and Beijing Telestone on June
12, 2005 that BTWTC is held by the two stockholders and directors of TSTC on
behalf of Beijing Telestone which is the beneficial owner of BTWTC. Pursuant to
the declaration of trust as described above, Beijing Telestone generally has
economic control over BTWTC and is considered as the primary beneficiary of
BTWTC. In light of the above, BTWTC is considered as a variable interest entity
(“VIE”) of Beijing Telestone and the financial statements of BTWTC are
consolidated into the financial statements of Beijing Telestone for all periods
presented in accordance with the FIN 46(R), “Consolidation of Variable Interest
Entities”,which was primarily codified into FASB ASC 810– Consolidation(ASC
810.)




3.
            EARNINGS
      PER SHARE




The
Company reports earnings per share in accordance with the provisions of SFAS
128, “Earnings Per
Share,” which was primarily codified into FASB ASC 260 – Earnings Per Share (ASC
260.)  ASC 260 requires presentation of basic and diluted earnings per
share in conjunction with the disclosure of the methodology used in computing
such earnings per share.




Basic
earnings per share is computed based upon the weighted average number of shares
of common stock outstanding during each period.




Diluted
earnings per share is computed based on net income for the periods presented
attributable to stockholders on the weighted average number of common stock
outstanding during the periods presented, adjusted for the effect of the
dilutive common stock equivalents outstanding during the periods presented. The
dilutive effect of warrants to purchase common stock which were outstanding
during the period is reflected in diluted earnings per share by application of
the treasury stock method.




The
following table sets forth the computation of basic and diluted net income per
share for the periods indicated:


Three
      months ended
                    September
      30,
                  
                  
                  Nine
      months ended
                    September
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008US$’000
                  
                  
                  US$’000
                  
                  
                  US$’000
                  
                  
                  US$’000Numerator:Net
      income in computing basic and diluted net income per share
                  
                  
                  4,243
                  
                  
                  
                  1,122
                  
                  
                  
                  7,362
                  
                  
                  
                  3,740Earnings
      per share:Weighted
      average number of common stock outstandingWeighted
      average ordinary shares outstanding in computing basic net income per
      share
                  
                  
                  10,404
                  
                  
                  
                  10,404
                  
                  
                  
                  10,404
                  
                  
                  
                  10,404Dilutive
      effect of warrants
                  
                  
                  
                  
                  
                  
                  20
                  
                  
                  
                  
                  
                  
                  
                  59Total
      weighted average shares outstanding in computing diluted net income per
      share
                  
                  
                  10,404
                  
                  
                  
                  10,424
                  
                  
                  
                  10,404
                  
                  
                  
                  10,463Net
      income per share of common stockBasic
      net income per share(US$)
                  
                  
                  0.41
                  
                  
                  
                  0.11
                  
                  
                  
                  0.71
                  
                  
                  
                  0.36Diluted
      net income per share(US$)
                  
                  
                  0.41
                  
                  
                  
                  0.11
                  
                  
                  
                  0.71
                  
                  
                  
                  0.36


8





4.
            INCOME
      TAXES





Effective
Income Tax Rate





TSTC and
its subsidiaries are subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which each entity is
domiciled.





TSTC had
a net operating loss carry-forward for income tax reporting purposes that might
be offset against future taxable income. These net operating loss carry-forwards
are severely limited when TSTC experiences a change in
control.  Therefore, following the re-capitalization in August 2005,
the amount available to offset future taxable income is limited. No tax benefit
has been reported in the financial statements, because TSTC believes that it is
more likely than not that the carry-forwards will finally expire and therefore
cannot be used.  Accordingly, the potential tax benefits of the loss
carry-forwards are offset by a valuation allowance of the same
amount.





No
provision for withholding or United States federal or state income taxes or tax
benefits on the undistributed earnings and/or losses of the Company's
subsidiaries has been provided as the earnings of these subsidiaries, in the
opinion of the management, will be reinvested indefinitely.




The
Company’s income is principally generated in the PRC by Beijing Telestone,
BTWTC, BTCTC, Guolian and Pan-pacific. Except for income from Beijing Telestone
which was still subject to the PRC concessionary income tax rate of 24% in
fiscal year 2008, all income of the Company had been taxed by the unified income
tax rate of 25% since January 1, 2008 by virtue of the New Enterprise Income Tax
Law (“NEITL”) of the PRC issued on March 16, 2007.




The NEITL
had unified the enterprise income tax as three applicable rates as
follows:





Unified
      EIT rate effective January 1, 2008
                    
                    
                    25
                    %Small
      scale / low profit enterprises
                    
                    
                    20
                    %High
      / new technology enterprises
                    
                    
                    15
                    %




Beijing
Telestone has been granted as a high / new technology enterprise (“Hi-tech
enterprise”) under the NEITL in 2009 . All income of the Company generated
during the 9 months ended September 30, 2009 is subject to the preferential
income tax rate of 15%


9





4.
            INCOME
      TAXES (CONTINUED)




Income
tax expenses have been provided at the following rates on the respective
subsidiaries’ estimated assessable incomes arising from PRC during the periods
presented.


(Unaudited)
                      Nine months ended
                      September 30,2009
                    
                    
                    2008%
                    
                    
                    %Beijing
      Telestone
                    
                    
                    15
                    
                    
                    
                    24BTWTC
                    
                    
                    25
                    
                    
                    
                    25BTCTC
                    
                    
                    25
                    
                    
                    
                    25Guolian
                    
                    
                    25
                    
                    
                    
                    25Pan-pacific
                    
                    
                    25
                    
                    
                    
                    25




Income
tax expenses comprised the following:





(Unaudited)
                      Nine months ended
                      September 30,2009
                    
                    
                    2008US$’000
                    
                    
                    US$’000Current
      taxUnited
      States
                    
                    
                    
                    
                    
                    -PRC
                    
                    
                    2,203
                    
                    
                    
                    9172,203
                    
                    
                    
                    917





Reconciliation
from the expected statutory tax rate in PRC of 25% (2008:25%) is as
follows:





(Unaudited)
                      Nine months ended
                      September 30,2009
                    
                    
                    2008%
                    
                    
                    %Statutory
      rate – PRC
                    
                    
                    25
                    
                    
                    
                    25.0Difference
      in tax rate of a subsidiary of the Company
                    
                    
                    -
                    
                    
                    
                    (0.7
                    )Tax
      exemption
                    
                    
                    (11
                    )
                    
                    
                    (10.1
                    )Non-deductible
      items
                    
                    
                    1
                    
                    
                    
                    5.7Others
                    
                    
                    7
                    
                    
                    
                    (0.2
                    )Effective
      tax rate
                    
                    
                    22
                    
                    
                    
                    19.7


10





4.
            INCOME
      TAXES (CONTINUED)




Uncertain
Tax Position




Under FIN
48 (ASC 740), the Company must recognize the tax benefit from an uncertain
position only if it is more-likely-than-not the tax position will be sustained
on examination by the taxing authority, based on the technical merits of the
position. The tax benefits recognized in the financial statements attributable
to such position are measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon the ultimate resolution of the
position.




By
adoption of FIN 48 (ASC 740), the Company has analyzed its filing positions in
all of the federal, state and foreign jurisdictions where it is required to file
income tax returns. As of September 30, 2009 and December 31, 2008, the Company
has identified the jurisdictions in the United States and PRC as “major” tax
jurisdictions, as defined, in which it is required to file income tax returns.
Based on the evaluations noted above, the Company has concluded that there are
no significant uncertain tax positions requiring recognition in its consolidated
financial statements.





The
Company recognizes its revenue upon the completion of contract and has made full
tax provision in accordance with relevant national and local laws and
regulations of the PRC.  A contract is considered completed upon
completion of all essential contract work and the installation has been accepted
by the customer. It is the common practice in the PRC that invoices are not
issued to customers until payments are received. The Company follows the
practice of reporting its revenue for PRC tax purposes when invoices are issued.
All unbilled revenue will become taxable when invoices are issued. For PRC tax
reporting purpose, PRC subsidiaries of the Company recognized revenue on an
“invoice basis” instead of when goods are delivered and services are rendered.
This is not in strict compliance with the relevant laws and
regulations.  Accordingly, despite the fact that the PRC subsidiaries
of the Company had made full tax provision in the financial statements, these
PRC subsidiaries may be subject to penalties for the deferred reporting of tax
obligations. The exact amount of penalties cannot be estimated with any
reasonable degree of certainty.  The board of directors considers it
is more-likely-than-not that the tax penalties will not be imposed.




Based on
a review of tax positions for all open years, no reserves for uncertain income
tax positions have been recorded pursuant to FIN 48 (ASC 740) during the nine
months ended September 30, 2009 and during the year ended December 31, 2008, and
the Company does not anticipate that it is reasonably possible that any material
increase or decrease in its unrecognized tax benefits will occur within twelve
months.




As of
September 30, 2009 and December 31, 2008, the Company had no unrecognized tax
benefits or accruals for the potential payment or interest and penalties. The
Company’s policy is to record interest and penalties in this connection as a
component of the provision for income tax expense. For the nine-month periods
ended September 30, 2009 and 2008, no interest or penalties were
recorded.


11




5.
            OPERATING
      RISK





(a)
              Concentration
      of major customers and
suppliers




(Unaudited)
                                    Nine months ended
                                    September 30,2009
                                  
                                  
                                  2008US$’000
                                  
                                  
                                  US$’000Major
      customers with revenues of more than 10% of the Company’s total
      revenuesSales
      to major customers
                                  
                                  
                                  35,180
                                  
                                  
                                  
                                  18,499Percentage
      of sales
                                  
                                  
                                  91
                                  %
                                  
                                  
                                  88
                                  %Number
                                  
                                  
                                  2
                                  
                                  
                                  
                                  2Major
      suppliers with purchases of more than 10% of the Company’s
      purchasesPurchases
      from major suppliers
                                  
                                  
                                  4,907
                                  
                                  
                                  
                                  2,258Percentage
      of purchases
                                  
                                  
                                  37
                                  %
                                  
                                  
                                  36
                                  %Number
                                  
                                  
                                  3
                                  
                                  
                                  
                                  1




Accounts
receivable related to the Company’s major customers comprised 91% and 96% of all
accounts receivables as of September 30, 2009 and December 31, 2008
respectively.





Credit
      risk represents the accounting loss that would be recognized at the
      reporting date if counter parties failed to perform as contracted.
      Concentrations of credit risk (whether on or off balance sheet) that arise
      from financial economic characteristics that would cause their ability to
      meet contractual obligations to be similarly affected by changes in
      economic or other conditions. The major concentrations of credit risk
      arise from the Company’s accounts receivable. Even though the Company has
      major concentrations, it does not consider itself exposed to significant
      risk with regards to the related receivables. Additionally, the Company
      believes that all of our outstanding accounts receivables are collectible
      as the Company’s major customers, China Mobile and China Unicom, are state
      owned and the Company has not experienced any significant bad debts in the
      past.


12




5.
            OPERATING
      RISK (CONTINUED)





(b)
            Country
      risks





The
      Company may also be exposed to the risks as a result of its principal
      operation being primarily in the PRC. These include risks associated with,
      among others, the political, economic and legal environmental and foreign
      currency exchange. The Company’s results may be adversely affected by
      change in the political and social conditions in the PRC, and by changes
      in governmental policies with respect to laws and regulations,
      anti-inflationary measures, currency conversion and remittance abroad, and
      rates and methods of taxation, among other things. The Company’s
      management does not believe these risks to be significant. There can be no
      assurance, however, those changes in political and other conditions will
      not result in any adverse impact.





(c)
            Cash
      and time deposits





The
      Company mainly maintains its cash balances with various banks located in
      the PRC. In common with local practice, such amounts are not insured or
      otherwise protected should the financial institutions be unable to meet
      their liabilities. There has been no history of credit losses. There are
      neither material commitment fees nor compensating balance requirements for
      any outstanding loans of the
Company.


13




6.
            INVENTORIES




Inventories consisted of the
followings:


(Unaudited)
                      As
      of
                      September
      30,
                      2009
                    
                    
                    As
      of
                      December
      31,
                      2008US$’000
                    
                    
                    US$’000Raw
      materials
                    
                    
                    -
                    
                    
                    
                    5Finished
      goods
                    
                    
                    6,930
                    
                    
                    
                    7,8386,930
                    
                    
                    
                    7,843




7.
            SEGMENT
      INFORMATION





During
the period ended September 30, 2009 and the year ended December 31, 2008, all
revenues of the Company are from its network installation and optimization
services and trading of wireless telecommunication products.  No
financial information by business segment is presented.





As the
Company operates mainly in the PRC and over 98% of its revenue and operating
profit are from the PRC, no geographical analysis is presented.





8.
            RELATED
      PARTY TRANSACTIONS





The
following are related party transactions:





Note
                                          
                                          
                                          (Unaudited)
                                            As
      of
                                            September
      30,
                                            2009
                                          
                                          
                                          As
      of
                                            December
      31,
                                            2008US$’000
                                          
                                          
                                          US$’000Due
      from related partiesEmployees
                                          
                                          
                                          a
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          430Ex-stockholders
      of SMI/Guolian
                                          
                                          
                                          b
                                          
                                          
                                          
                                          1,662
                                          
                                          
                                          
                                          1,3961,662
                                          
                                          
                                          
                                          1,826Due
      to related partiesDirectors
                                          
                                          
                                          a
                                          
                                          
                                          
                                          200
                                          
                                          
                                          
                                          200Ex-stockholders
      of Beijing Telestone/Guolian
                                          
                                          
                                          b
                                          
                                          
                                          
                                          1,508
                                          
                                          
                                          
                                          1,4731,708
                                          
                                          
                                          
                                          1,673Guarantor
      of short term loanA
      director
                                          
                                          
                                          c
                                          
                                          
                                          
                                          3,656
                                          
                                          
                                          
                                          2,918


14





Note:





(a)
            The
      amounts due from employees and due to directors represent unsecured
      advances made to those parties from time to time. These amounts are
      interest free and repayable on
demand.





(b)
            Included
      in the amounts due to ex-stockholders of Beijing Telestone, US$1,287
      represented the consideration arising from the consummation of the
      business combination. The ex-stockholders of SMI had represented that they
      had fully settled the amount with the ex-stockholders of Beijing Telestone
      and also undertaken to fully indemnify SMI against any claims from the
      ex-stockholders of Beijing Telestone (the “Undertaking”). However, an
      ex-stockholder of Beijing Telestone has initiated lawsuit against SMI
      alleging that the consideration amount has not been settled. The court
      hearing commenced on May 10, 2006 and finalized on December 19, 2006.
      Verdict has been issued by the Second Intermediate People’s Court of
      Beijing (“北京市第二中級人民法院”)
      and announced that SMI and Beijing Telestone are not required to
      compensate for the ex-stockholder of SMI.  On October 23, 2007,
      another verdict was issued by the High People’s Court of Beijing (“北京市高級人民法院”)
      to announce that the verdict from Second Intermediate People’s Court of
      Beijing was kept and SMI was not require to compensate for the
      ex-shareholder.





(c)
            All
      bank loans are secured by guarantees provided by a director, Mr. Han
      Daqing and an independent guaranty company.  The bank loans are
      charged at interest rate of 5.31% per annum and wholly repayable within
      one year.




9.
            SHORT-TERM
      BANK LOANS




On
      May 12, 2009, Beijing Telestone entered into a bank loan agreement to
      borrow up to RMB7.0M (approximately US$1.0M) for working capital
      purposes.  The loan is subject to floating interest rate, which
      is based on a benchmark interest rate announced by the People’s Bank of
      China on the date of the first withdrawal.  As of September 30,
      2009, the bank loans are charged at interest rate of 5.31% per annum and
      wholly repayable within one year.  The bank loan is secured by a
      guarantee provided by an independent guaranty company.  The
      guarantee provided by an independent guaranty company is secured by motor
      vehicles and account receivables of the Company and guarantees provided by
      a director, Mr. Han Daqing.


15





10.
            FAIR
      VALUE MEASUREMENTS





The
Company adopted SFAS 157, Fair
Value Measurements(“SFAS 157”) on April 1, 2009, which was primarily
codified into FASB ASC 820 – Fair Value Measurements and
Disclosures (ASC 820.)  The adoption of ASC 820 did not have a
material impact on our consolidated financial statements. ASC 820 establishes a
three-tier fair value hierarchy to prioritize the inputs used in measuring fair
value.  The hierarchy gives the highest priority to quoted prices in
active markets (Level 1) and the lowest priority to unobservable inputs (Level
3).  The three levels are defined as follows:




Level 1
    :
              Observable
      inputs, such as unadjusted quoted market prices in active markets for the
      identical asset or liability.
 
 Level 2
    :
              Inputs
      that are observable for the asset or liability, either directly or
      indirectly through market corroboration, for substantially the full term
      of the financial instrument.
 
 Level
3:
              Unobservable
      inputs reflecting the entity’s own assumptions in measuring the asset or
      liability at fair value.




The
Company’s financial instruments consist principally of cash deposits, accounts
and other receivables, accounts payable, certain accrued liabilities, and
short-term debt that generally approximate their fair values based on the
short-term nature of these instruments.





11.
            RECENT
      ACCOUNTING PRONOUNCEMENTS




In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13,
Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging
Issues Task Force (“ASU 2009-13”).  ASU 2009-13 addresses the
accounting for multiple-deliverable arrangements to enable vendors to account
for products or services separately rather than as a combined unit and modifies
the manner in which the transaction consideration is allocated across the
separately identified deliverables.  ASU 2009-13 significantly expands the
disclosures requirements for multiple-deliverable revenue arrangements. 
ASU 2009-13 will be effective for the first annual reporting period beginning on
or after June 15, 2010, and may be applied retrospectively for all periods
presented or prospectively to arrangements entered into or materially modified
after the adoption date.  Early adoption is permitted, provided that the
guidance is retroactively applied to the beginning of the year of adoption. The
company is currently evaluating the impact this update will have on its
condensed consolidated financial statements.




In
September 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) — Measuring Liabilities at Fair Value (“ASU
2009-05”).  ASU 2009-05 amends ASC 820 to provide guidance concerning the
measurement of liabilities at fair value. ASU 2009-05 is effective for the first
reporting period beginning after issuance or the quarter ended December 31,
2009 for a calendar year company. The company is currently evaluating the impact
this update will have on its condensed consolidated financial
statements.




16




In
June 2009, the FASB issued an accounting standard, currently included in
ASC Topic 105, Generally
Accepted Accounting Principles (“ASC 105”), which established only two
levels of GAAP, authoritative and nonauthoritative (formerly SFAS No. 168,
The FASB Accounting Standards
Codification TM
and the Hierarchy of
Generally Accepted Accounting Principles — a replacement of FASB Statement
No. 162 ). The FASB ASC became the only source of authoritative
nongovernmental GAAP, except for rules and interpretive releases of the
SEC, which are sources of authoritative GAAP for SEC registrants.  All
other nongrandfathered, non-SEC accounting literature not included in the ASC
will become nonauthoritative.  ASC 105 was effective for financial
statements issued in interim or annual reporting periods ending after
September 15, 2009.  The ASC was not intended to change or alter
existing GAAP, consequently the adoption of ASC 105 did not have a material
impact on the condensed consolidated financial statements.




In
May 2009, the FASB issued guidance, currently included in ASC Topic 855,
Subsequent Events ,
which established general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or available to be issued (formerly SFAS No. 165, Subsequent Events ). This
guidance requires disclosure of the date through which subsequent events have
been evaluated, as well as whether that is the date the financial statements
were issued or the date the financial statements were available to be issued.
The provisions of this guidance were effective for interim or annual financial
periods ending after June 15, 2009.  The adoption of this guidance did
not have a material impact on the condensed consolidated financial position and
results of operations.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R).” SFAS No. 167 amends the evaluation criteria to identify the primary
beneficiary of a variable interest entity included in FASB Interpretation No.
46(R), “Consolidation of Variable Interest Entities—An Interpretation of ARB No.
51.” Additionally, SFAS No. 167 requires ongoing reassessments of whether an
enterprise is the primary beneficiary of the variable interest entity. SFAS No.
167 is effective for annual reporting periods that begin after November 15, 2009
and interim periods within those fiscal years. The company is currently
assessing the impact of SFAS No. 167 on its condensed consolidated financial
statements.





In April
2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies.”
FSP No. FAS 141(R)-1 amends and clarifies FASB Statement No. 141(R), to address
application issues raised on initial recognition and measurement, subsequent
measurement and accounting and disclosure of assets and liabilities arising from
contingencies in a business combination. FSP No. FAS 141(R)-1 is effective for
the first annual reporting period on or after December 31, 2008. The impact of
FSP No. FAS 141(R)-1 on the company’s Condensed Consolidated Financial
Statements will depend on the number and size of acquisition transactions, if
any, engaged in by the company in the future.





In
November 2008, the Emerging Issues Task Force issued EITF No. 08-6, “Equity
Method Investment Accounting Considerations,” which clarifies accounting for
certain transactions and impairment considerations involving equity-method
investments. EITF No. 08-6 is effective prospectively for fiscal years beginning
on or after December 15, 2008 and interim periods within those fiscal years. Any
future impact of EITF No. 08-6 on the company’s condensed consolidated financial
statements will depend on the results and activities of the company’s equity
method investees. EITF No. 08-6 has not had a material impact on the company’s
condensed consolidated financial statements.




17


In June
2008, the Emerging Issues Task Force issued EITF No. 07-5, “Determining Whether
an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock.” This
EITF provides additional guidance when determining whether an option or warrant
on an entity’s own shares is eligible for the equity classification provided for
in EITF No. 00-19. EITF No. 07-5 is effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years and did not have
a material impact on the condensed consolidated financial
statements.





In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets.” This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other
Intangible Assets.” This FSP is effective prospectively for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal years.
The impact of FSP No. FAS 142-3 on the company’s condensed consolidated
financial statements will depend on the number and size of future acquisitions,
if any, of intangible assets. This FSP has not had a material impact on the
company’s condensed consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS No. 160
requires: (a) noncontrolling interests in subsidiaries to be separately
presented within equity; (b) consolidated netincome  to be adjusted to
include the net income attributable to a noncontrolling interest; (c)
consolidated comprehensive income to be adjusted to include the comprehensive
income attributed to a noncontrolling interest; (d) additional disclosures; and
(e) a noncontrolling interest to continue to be attributed its share of losses
even if that attribution results in a deficit noncontrolling interest balance.
SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and
interim periods within those fiscal years. The adoption of SFAS No. 160 was not
material to the company’s condensed consolidated financial
statements.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.” SFAS No. 141(R) expands the existing guidance related to
transactions in obtaining control of a business and the related recognition and
measurement of assets, liabilities, contingencies, goodwill and intangible
assets. SFAS No. 141(R) is effective for fiscal years beginning after December
15, 2008 and interim periods within those fiscal years. The impact of SFAS No.
141(R) on the company’s condensed consolidated financial statements will depend
on the number and size of acquisition transactions, if any, engaged in by the
company. SFAS No. 141(R) has not had a material impact on the company’s
condensed consolidated financial statements.


18





ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The
following is management’s discussion and analysis of certain significant factors
which have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as well
as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words “believes,”
“anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents we file with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not be
placed on these forward-looking statements which speak only as of the date
hereof. We undertake no obligation to update these forward-looking
statements.





Unless we
indicate otherwise, references below to “we”, “us”, “our” and “Telestone” mean
Telestone Technologies Corporation and its subsidiaries.





BUSINESS
DESCRIPTION





We are a
wireless communications local coverage solutions provider in the People’s
Republic of China (the “PRC”). We principally provide mobile telecommunication
local access network solutions to our customers in the PRC.





Our
wireless local coverage solutions business enhances mobile telecommunication
coverage signals and improves the quality of reception for mobile phone users.
These solutions are used in a variety of indoor and outdoor environments such as
hotels, residential estates, office buildings, airports, exhibition centers,
underground stations, highways, tunnels and vast countryside
regions.





Our
wireless local coverage solutions business is comprised of research, development
and the application of wireless communications technology. In addition to sales
of our internally designed wireless communication equipment, including
repeaters, antennas and radio frequency accessories, we also provide project
design, project management, installation, maintenance and other after-sales
services in accordance with our customers’ requirements.





Since the
establishment of Telestone in 1997, we have gradually developed business
relationships with China Mobile Group (“China Mobile”), China Unicom Group
(“China Unicom”), China Telecom Group (“China Telecom”) and China Netcom Group
(“China Netcom”). Due to the reconstruction of the Chinese telecom industry,
China Netcom was acquired by China Unicom on October, 2008. As a result, our
main customers currently are China Mobile, China Unicom and China
Telecom.





During
the three months ended September 30, 2009, we continued to improve our business
relationships with our wireless system equipment customers within China. We have
been exploring the wireless system equipment industry internationally over the
past year and have continued to expand our business into overseas markets as
well. So far, our marketing effort has been expanded to twenty eight (28)
countries in the world, including the U.S., Vietnam, Mexico, Brazil, Russia,
India, The Philippines, Thailand, Ireland, Ecuador, Mongolia, South Africa,
Turkey, Indonesia and New Zealand. Expansion outside of China is an important
business strategy for Telestone. The Company believes that the quality of the
products and services will allow Telestone to be increasingly competitive
internationally.





Our major
achievements during the three months ended September 30, 2009 are summarized as
follows:





First,
for marketing development, our strategic cooperation with Huawei Technologies
Corp has gained a deeper and further development, which is building a solid
foundation for future market expansion, especially for overseas market
development. This development has a positive effect on our customer base
expansion.




19


Second
and most importantly our benchmark technology WFDS has further been applied in
our business. In China WFDS technology based projects account for about 20% of
our revenue for the quarter. This 3G technology provides higher margins than the
old 2G RFPA technology, which has more competition due to its maturity and wider
applications in the market place. WFDS technology projects are also larger in
size and our customers for these projects tend to make quicker payments. Due to
its superior performance, substantial cost savings to carriers, easy
installation and minimal intrusion to property owners, as well as its low-power
low-radiation environment-friendly characteristics, we expect our WFDS
technology to become industry standard and drive our market share expansion. We
expect to occupy approximately 30% of the domestic market share by
2012.





Internationally
WFDS technology passed the U.S. FCC certification in September 2009. This has
cleared the last hurdle for the Company to apply this advanced technology in the
North and South American markets. The percentage of our international revenue as
of the total revenue continues to grow. We have stable orders coming in from our
South East and South Asia customers. We expect to have
approximately  30% of our revenue originated from outside of China in
2-3 years.





Third,
due to the high technology content in our business and continued efforts in
developing our market leading technologies, we have been receiving many awards,
certifications and top ratings in advanced technology development by the local
and central government agencies and organizations, which promote technology
development in  the national and local markets. These awards and
certifications provide the Company with many benefits, such as tax rate
reductions and tax exemptions, special market or business entry permits, and
credit support. Most recently the Company has been certified under a set of very
stringent criteria as a “High and New Technology Enterprise” by the Beijing
Municipal Government.





Finally,
we are on our way to meet our growth target for the year. We had a record
quarter for revenue and net income. We have also been taking a variety of
measures to collect accounts receivables. During the reporting period, more than
33 million RMB of overdue accounts receivables had been collected and compared
with the second quarter of 2009, accounts receivable turnover has improved by
nearly 31%.





BUSINESS
STRATEGY





Being one
of the leading companies in the PRC’s wireless coverage solution sector is our
business goal. In order to maintain our leading position, and expand and
diversify our revenue, we have adopted a three-pronged tactics to achieve our
goals:




1.
            As
      our basic strategy, we will continue to invest in research and development
      in our key technologies and products in the competitive environment to
      enhance our leading position in wireless coverage technology and take full
      advantage of the PRC’s government investment in the 3G
      networks.




2.
            On
      our marketing strategy, besides building strong relationships with China’s
      major mobile carriers, we are also targeting other major provincial
      markets where we do not have leading market shares by making strategic
      acquisitions in those target provincial markets. By promoting our new
      solutions based on our market leading technology, we believe we will raise
      our domestic market share to about one third of the total
      sector.





3.
            Strengthening
      overseas market exploration is our strategy of customer base development.
      In order to increase our presence in overseas markets, we plan to seek
      cooperation with companies that have strong research and development
      ability, and develop technology and products that fit those
      international markets locally.  In addition, we will also
      try to find international partners locally, with whom we could set up
      distribution channels and sell our products in those
    markets.




20





Our
      particular strategies for international markets are: 1. Extending the
      product life cycle of our 2G technology products by marketing and selling
      to less developed countries in South and Southeast Asia, Africa and Middle
      East; and 2. Developing a new business model by testing the markets with
      pilot projects in developed nations with our new 3G based technology which
      has a strong competitive edge.





BUSINESS
OUTLOOK





We
believe the fact that the Chinese telecom restructuring and the issuance of 3G
licenses in China with an investment in the construction of the 3G system of
approximately $ 70 billion over the next three years, an average of
approximately $23 billion per year, presents an excellent opportunity for our
business development. With our advanced technologies, close relationships with
the telecom operators in China and strong management team, we believe that we
will continue to demonstrate increasingly robust growth in the
future.




CRITICAL
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES





Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates based on historical experience and on
various other assumptions that are believed 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. Actual results may differ from these estimates under different
assumptions or conditions. We believe critical accounting policies as disclosed
in our Annual Report on Form 10-K for the year ended December 31, 2008 reflect
the judgments and estimates used in preparation of our financial statements. We
believe there have been no material changes to our critical accounting policies
and estimates during the three months ended September 30, 2009 compared to those
discussed in our Annual Report on Form 10-K for the year ended December 31,
2008.





BUSINESS
REVIEW





For the
three months ended September 30, 2009, our total revenue increased by 124.71%;
cost of equipment and services increased by 123.45%; net income increased by
278.16%; compared to the same periods of 2008.




The
following is statement of our operations for the three months ended September
30, 2009 and 2008:





Item
                
                2009 Q3
                
                
                2008Q3
                
                Comparisons$'000
                
                
                % of revenue
                
                
                $'000
                
                
                % of revenue
                
                $'000
                
                
                %Revenue
                
                
                18,891
                
                
                
                
                
                
                8,407
                
                
                
                
                
                
                10,484
                
                
                
                124.71
                %Cost
      of equipment and services
                
                
                9,977
                
                
                
                52.81
                %
                
                
                4,465
                
                
                
                53.11
                %
                
                
                5,512
                
                
                
                123.45
                %Gross
      profit
                
                
                8,914
                
                
                
                47.19
                %
                
                
                3,942
                
                
                
                46.89
                %
                
                
                4,972
                
                
                
                126.13
                %Sales
      and marketing expenses
                
                
                2,007
                
                
                
                10.63
                %
                
                
                1,430
                
                
                
                17.01
                %
                
                
                577
                
                
                
                40.35
                %General
      and administrative
                
                
                1,182
                
                
                
                6.26
                %
                
                
                571
                
                
                
                6.79
                %
                
                
                611
                
                
                
                107.01
                %Research
      and development
                
                
                138
                
                
                
                0.73
                %
                
                
                208
                
                
                
                2.48
                %
                
                
                -70
                
                
                
                -33.65
                %Depreciation
      and Amortization
                
                
                79
                
                
                
                0.42
                %
                
                
                76
                
                
                
                0.91
                %
                
                
                3
                
                
                
                3.95
                %Interest
      expenses
                
                
                40
                
                
                
                0.21
                %
                
                
                112
                
                
                
                1.33
                %
                
                
                -72
                
                
                
                -64.29
                %Other
      income
                
                
                83
                
                
                
                0.44
                %
                
                
                -28
                
                
                
                -0.33
                %
                
                
                111
                
                
                
                396.43
                %Income
      before tax
                
                
                5,551
                
                
                
                29.38
                %
                
                
                1,517
                
                
                
                18.04
                %
                
                
                4,034
                
                
                
                265.92
                %Income
      tax
                
                
                1,308
                
                
                
                6.92
                %
                
                
                395
                
                
                
                4.69
                %
                
                
                913
                
                
                
                231.14
                %Net
      income
                
                
                4,243
                
                
                
                22.46
                %
                
                
                1,122
                
                
                
                13.35
                %
                
                
                3,121
                
                
                
                278.16
                %




21


For the
nine months ended September 30, 2009, our total revenue increased by 85.81%;
cost of equipment and services increased by 95.21%; net income increased by
96.84%; compared to the same periods of 2008.





The
following is statement of our operations for the nine months ended September 30,
2009 and 2008:




Item
                
                2009 nine months
                
                
                2008 nine months
                
                
                Comparisons$'000
                
                
                % of revenue
                
                
                $'000
                
                
                % of revenue
                
                
                $'000
                
                
                %Revenue
                
                
                38,917
                
                
                
                
                
                
                20,944
                
                
                
                
                
                
                17,973
                
                
                
                85.81
                %Cost
      of equipment and services
                
                
                20,296
                
                
                
                52.15
                %
                
                
                10,397
                
                
                
                49.64
                %
                
                
                9,899
                
                
                
                95.21
                %Gross
      profit
                
                
                18,621
                
                
                
                47.85
                %
                
                
                10,547
                
                
                
                50.36
                %
                
                
                8,074
                
                
                
                76.55
                %Sales
      and marketing expenses
                
                
                6,035
                
                
                
                15.51
                %
                
                
                4,028
                
                
                
                19.23
                %
                
                
                2,007
                
                
                
                49.83
                %General
      and administrative
                
                
                2,503
                
                
                
                6.43
                %
                
                
                1,824
                
                
                
                8.71
                %
                
                
                679
                
                
                
                37.22
                %Research
      and development
                
                
                467
                
                
                
                1.20
                %
                
                
                461
                
                
                
                2.20
                %
                
                
                6
                
                
                
                1.30
                %Depreciation
      and Amortization
                
                
                253
                
                
                
                0.65
                %
                
                
                237
                
                
                
                1.13
                %
                
                
                16
                
                
                
                6.75
                %Interest
      expenses
                
                
                170
                
                
                
                0.44
                %
                
                
                255
                
                
                
                1.22
                %
                
                
                -85
                
                
                
                -33.33
                %Other
      income
                
                
                372
                
                
                
                0.96
                %
                
                
                915
                
                
                
                4.37
                %
                
                
                -543
                
                
                
                -59.34
                %Income
      before tax
                
                
                9,565
                
                
                
                24.58
                %
                
                
                4,657
                
                
                
                22.23
                %
                
                
                4,908
                
                
                
                105.39
                %Income
      tax
                
                
                2,203
                
                
                
                5.66
                %
                
                
                917
                
                
                
                4.38
                %
                
                
                1,286
                
                
                
                140.24
                %Net
      income
                
                
                7,362
                
                
                
                18.92
                %
                
                
                3,740
                
                
                
                17.85
                %
                
                
                3,622
                
                
                
                96.84
                %





Our
revenues during the three months ended September 30, 2009 were derived from
system integration services to domestic telecom carriers, direct product sales
to system integration providers and direct product sales to overseas markets.
Our major customers include China Mobile, China Unicom, China Telecom. Our
operating revenues are composed of sales of wireless equipment and service
income that includes system integration, engineering services, technical
support, wireless network optimization and network maintenance.





Along
with our research and development capabilities in developing new products, we
have also implemented a series of effective cost control measures, including
implementing price controls, optimizing our supply chain, and reducing the use
of raw materials, which we expect will relieve the pressure of rising costs and
improve our gross margin.





RESULTS
OF OPERATION





Revenues





For the
three months and nine months ended September 30, 2009, our revenues were $
18,891,000 and $38,917,000, representing increases of 124.71% and 85.81% as
compared to the same period in 2008. The revenue increase is due to the telecom
carriers increasing their investments in 3G fixed assets. Accordingly, we have
more business opportunities in 3G indoor coverage projects and equipment sales.
Meanwhile, we continue to gain more market shares.




22


Breakdown
by Nature of the Revenues





Three
months ended September 30, 2009 and 2008




2009 Q3
                  
                  
                  2008 Q3
                  
                  
                  Growth$'000
                  
                  
                  % of revenue
                  
                  
                  $'000
                  
                  
                  % of revenue
                  
                  
                  $'000
                  
                  
                  %Product
      sales
                  
                  
                  11,099
                  
                  
                  
                  58.75
                  %
                  
                  
                  5,797
                  
                  
                  
                  68.95
                  %
                  
                  
                  5,302
                  
                  
                  
                  91.46
                  %Service
      sales
                  
                  
                  7,792
                  
                  
                  
                  41.25
                  %
                  
                  
                  2,610
                  
                  
                  
                  31.05
                  %
                  
                  
                  5,182
                  
                  
                  
                  198.54
                  %Total
                  
                  
                  18,891
                  
                  
                  
                  100.00
                  %
                  
                  
                  8,407
                  
                  
                  
                  100.00
                  %
                  
                  
                  10,484
                  
                  
                  
                  124.71
                  %




Nine
months ended September 30, 2009 and 2008




2009 First nine months
                  
                  
                  2008 First nine months
                  
                  
                  Growth$'000
                  
                  
                  % of revenue
                  
                  
                  $'000
                  
                  
                  % of revenue
                  
                  
                  $'000
                  
                  
                  %Product
      sales
                  
                  
                  21,504
                  
                  
                  
                  55.26
                  %
                  
                  
                  12,112
                  
                  
                  
                  57.83
                  %
                  
                  
                  9,392
                  
                  
                  
                  77.54
                  %Service
      sales
                  
                  
                  17,413
                  
                  
                  
                  44.74
                  %
                  
                  
                  8,832
                  
                  
                  
                  42.17
                  %
                  
                  
                  8,581
                  
                  
                  
                  97.16
                  %Total
                  
                  
                  38,917
                  
                  
                  
                  100.00
                  %
                  
                  
                  20,944
                  
                  
                  
                  100.00
                  %
                  
                  
                  17,973
                  
                  
                  
                  85.81
                  %





Our
revenues were primarily derived from product sales and service
sales.





For the
three months and nine months ended September 30, 2009, revenues generated from
product sales were $11,099,000 and $21,504,000 which represent increases of
91.46% and 77.54%, respectively, compared to the corresponding periods of 2008.
Sales of 2G technology products are still very strong because it takes time to
fully adopt new technologies for our customers. However WFDS technology products
sales are growing very fast, because the projects sizes are large and the
equipment is of high value-added products and commands high gross
margins.





For the
three months and nine months ended September 30, 2009, revenues generated from
service sales were $7,792,000 and $17,413,000, which represented increases of
198.54% and 97.16%, respectively, compared to the same periods of 2008. The
increase of service sales resulted from 3G launching and we secured this
business opportunity to obtain more service projects. Services revenues increase
faster than products revenue because our new technology based projects have more
services contents than 2G projects.





For the
three months and nine months ended September 30, 2009, revenues generated from
product sales accounted for 58.75% and 55.26% of total revenues, respectively,
compared to 68.95% and 57.83% for the corresponding periods of 2008. For the
aforementioned periods, revenues generated from system integration service sales
accounted for 41.25% and 44.74% of total revenues, respectively, compared to
31.05% and 42.17% for the same periods of 2008. The weight of service revenues
in the total revenues continues to increase.





Breakdown
by Customers





Three
months ended September 30, 2009 and 2008:




2009 Q3
                
                
                2008 Q3
                
                
                Growth$’000
                
                
                % of revenue
                
                
                $'000
                
                
                % of revenue
                
                
                $'000
                
                
                %China
      Mobile
                
                
                9,935
                
                
                
                52.59
                %
                
                
                2,704
                
                
                
                32.16
                %
                
                
                7,231
                
                
                
                267.42
                %China
      Unicom
                
                
                7,696
                
                
                
                40.74
                %
                
                
                5,484
                
                
                
                65.23
                %
                
                
                2,212
                
                
                
                40.34
                %China
      Telecom
                
                
                952
                
                
                
                5.04
                %
                
                
                73
                
                
                
                0.87
                %
                
                
                879
                
                
                
                1,204.11
                %Overseas
                
                
                283
                
                
                
                1.50
                %
                
                
                106
                
                
                
                1.26
                %
                
                
                177
                
                
                
                166.98
                %Others
                
                
                25
                
                
                
                0.13
                %
                
                
                40
                
                
                
                0.48
                %
                
                
                -15
                
                
                
                -37.50
                %Total
                
                
                18,891
                
                
                
                100.00
                %
                
                
                8,407
                
                
                
                100.00
                %
                
                
                10,484
                
                
                
                124.71
                %




Nine
months ended September 30, 2009 and 2008:




2009 Nine months
                
                
                2008 Nine months
                
                
                Growth$' 000
                
                
                % of Revenue
                
                
                $'000
                
                
                % of revenue
                
                
                $'000
                
                
                %China
      Mobile
                
                
                16,908
                
                
                
                43.45
                %
                
                
                9,402
                
                
                
                44.89
                %
                
                
                7,506
                
                
                
                79.83
                %China
      Unicom
                
                
                18,271
                
                
                
                46.95
                %
                
                
                10,260
                
                
                
                48.99
                %
                
                
                8,011
                
                
                
                78.08
                %China
      Telecom
                
                
                2,741
                
                
                
                7.04
                %
                
                
                392
                
                
                
                1.87
                %
                
                
                2,349
                
                
                
                599.23
                %Overseas
                
                
                613
                
                
                
                1.58
                %
                
                
                329
                
                
                
                1.57
                %
                
                
                284
                
                
                
                86.32
                %Others
                
                
                384
                
                
                
                0.99
                %
                
                
                561
                
                
                
                2.68
                %
                
                
                -177
                
                
                
                -31.55
                %Total
                
                
                38,917
                
                
                
                100.00
                %
                
                
                20,944
                
                
                
                100.00
                %
                
                
                17,973
                
                
                
                85.81
                %




23


Revenues
from the wireless telecom carriers were the Company’s major source of revenue
during the reporting period, and the majority of such revenues were generated
from China Mobile and China Unicom. For the three months and nine months ended
September 30, 2009, our revenues generated from China Mobile were $9,935,000 and
$16,908,000, representing revenue percentages of 52.59% and 43.45%,
respectively. Our revenues generated from China Unicom were $7,696,000 and
$18,271,000, representing revenue percentages of 40.74% and 46.95%,
respectively.





For the
three months and nine months ended September 30, 2009, our revenues generated
from China Telecom were $952,000 and $2,741,000, representing increases of
1,204.11% and 599.23%, compared to $ 73,000 and $ 392,000 of the same period of
last year. The increased revenues from China Telecom were mainly due to China
Telecom’s increasing investment in the 3G sector. China Telecom is a late comer
in China’s wireless telecommunications industry. It is traditionally a fixed
line telecommunication services provider. However it is expanding into the
wireless market very quickly with its own standards and large
investments.





The
revenues from China Unicom increased 40.34% and 78.08%, compared to $5,484,000
and $10,260,000 of the corresponding periods of 2008. The increased revenues
from China Unicom were mainly because China Unicom targeted 3G market, WCDMA
network construction was underway and our products were included on a shortlist
of Unicom’s equipment centralized purchasing system. Thus, we secured more
business from China Unicom.





For the
three months ended September 30, 2009, our revenue generated from China Mobile
increased 267.42% to $9,935,000 from $ 2,704,000 for the same period of 2008.
This large increase is due to several large projects that the Company completed
for China Mobile in Beijing, Shanghai, Chongqing and Shandong
province.




For the
three months and nine months ended September 30, 2009, our revenues generated
from overseas were $283,000 and $613,000, representing increases of 166.98% and
86.32%, compared to the same periods of 2008. The increased revenue from
overseas market is due to the following two factors: First, due to business
expansion in South America, traditional product sales increased significantly
compared to the same period of last year. Second, our revenues from Vietnam
increased slightly due to the strengthening of our cooperation with Vietnamese
telecom carriers. Finally our sales representatives in Bangladesh and Thailand
had secured large orders from local carriers.





For the
three months and nine months ended September 30, 2009, the total sales to other
customers were $25,000 and $384,000, as compared to $40,000 and $561,000
generated as of the same periods in 2008.





The
revenues from other customers decreased because we focused on our core products
and services.





Cost
Analysis





Three
months ended September 30, 2009 and 2008




2009 Q3
                
                
                2008 Q3
                
                
                Growth$'000
                
                
                % of revenue
                
                
                $'000
                
                
                % of revenue
                
                
                $'000
                
                
                %products
      sales cost
                
                
                7,099
                
                
                
                37.58
                %
                
                
                3,586
                
                
                
                42.65
                %
                
                
                3,513
                
                
                
                97.96
                %service
      cost
                
                
                2,878
                
                
                
                15.23
                %
                
                
                879
                
                
                
                10.46
                %
                
                
                1,999
                
                
                
                227.42
                %Total
                
                
                9,977
                
                
                
                52.81
                %
                
                
                4,465
                
                
                
                53.11
                %
                
                
                5,512
                
                
                
                123.45
                %




24


Nine
months ended September 30, 2009 and 2008


2009 Nine months
                
                
                2008 Nine months
                
                
                Growth$'000
                
                
                % of revenue
                
                
                $'000
                
                
                % of revenue
                
                
                $'000
                
                
                %products
      sales cost
                
                
                13,738
                
                
                
                35.30
                %
                
                
                7,116
                
                
                
                33.98
                %
                
                
                6,622
                
                
                
                93.06
                %service
      cost
                
                
                6,558
                
                
                
                16.85
                %
                
                
                3,281
                
                
                
                15.66
                %
                
                
                3,277
                
                
                
                99.88
                %Total
                
                
                20,296
                
                
                
                52.15
                %
                
                
                10,397
                
                
                
                49.64
                %
                
                
                9,899
                
                
                
                95.21
                %





For the
three months and nine months ended September 30, 2009, our total costs were
$9,977,000 and $20,296,000, representing an increase of 123.45% and an increase
of 95.21%, respectively, as compared to the corresponding periods of
2008.




Costs of
revenues include costs of product sales and costs of system integration service
sales.




For the
three months and nine months ended September 30, 2009, our costs of product
sales were $7,099,000 and $13,738,000, representing increases of 97.96% and
93.06%, respectively, as compared to the same periods of 2008. The products
costs increases are largely in proportion with the increases in the products
sales.





For the
three months and nine months ended September 30, 2009, our costs of service
sales were $2,878,000 and $6,558,000, representing an increase of 227.42% and an
increase of 99.88%, respectively, as compared to the same periods of 2008. The
high growth in the telecommunication market generated fierce competition, and
therefore costs of labor and construction increased accordingly. Also initially
the service revenues have much higher margins than the product revenues. However
the margins are reduced to a more reasonable level after the initial high growth
period.





Gross
Profit and Gross Margin





For the
three months and nine months ended September 30, 2009, our gross profit was
$8,914,000 and $18,621,000, representing an increase of 126.13% and an increase
of 76.55% respectively, as compared to the same periods of 2008. Our gross
margin for the aforementioned periods were 47.19% and 47.85%, respectively,
compared to 46.89% and 50.36 % for the same periods of last year.





Our gross
profit increased during the reporting period due to the same factors as the
increase in revenue.





The
decrease in gross margin during the reporting period was primarily due to the
increased costs of equipment and services, in particular labor costs which have
gone up with the hiring of our subcontracted local construction
teams.





Operating
Expenses




Three
months ended September 30, 2009 and 2008




Item
                
                2009 Q3
                
                
                2008 Q3
                
                
                Comparisons$’000
                
                
                % of  revenue
                
                
                $'000
                
                
                % of revenue
                
                
                $'000
                
                
                %Sales
      and marketing expenses
                
                
                2,007
                
                
                
                10.62
                %
                
                
                1,430
                
                
                
                17.01
                %
                
                
                577
                
                
                
                40.35
                %General
      and administrative
                
                
                1,182
                
                
                
                6.26
                %
                
                
                571
                
                
                
                6.79
                %
                
                
                611
                
                
                
                107.00
                %Research
      and development
                
                
                138
                
                
                
                0.73
                %
                
                
                208
                
                
                
                2.47
                %
                
                
                -70
                
                
                
                -33.65
                %Total
                
                
                3,327
                
                
                
                17.61
                %
                
                
                2,209
                
                
                
                26.27
                %
                
                
                1,118
                
                
                
                50.61
                %




25


Nine
months ended September 30, 2009 and 2008





2009 Nine months
                
                
                2008 Nine months
                
                
                ComparisonsItem
                
                $’000
                
                
                % of revenue
                
                
                $'000
                
                
                % of revenue
                
                
                $'000
                
                
                %Sales
      and marketing expenses
                
                
                6,035
                
                
                
                15.51
                %
                
                
                4,028
                
                
                
                19.23
                %
                
                
                2,007
                
                
                
                49.83
                %General
      and administrative
                
                
                2,503
                
                
                
                6.43
                %
                
                
                1,824
                
                
                
                8.71
                %
                
                
                679
                
                
                
                37.23
                %Research
      and development
                
                
                467
                
                
                
                1.20
                %
                
                
                461
                
                
                
                2.20
                %
                
                
                6
                
                
                
                1.30
                %Total
                
                
                9,005
                
                
                
                23.14
                %
                
                
                6,313
                
                
                
                30.14
                %
                
                
                2,692
                
                
                
                42.64
                %





Operating
expenses mainly include sales and marketing expenses, general and administrative
expenses and research and development expenses.





Sales
and Marketing Expenses





Sales and
marketing expenses include all related expenses and remunerations for sales
personnel and travel expenses related to sales of products and market
development.





For the
three months and nine months ended September 30, 2009, sales and marketing
expenses were $2,007,000 and $6,035,000, accounting for 10.62% and 15.51% of
total revenues, as compared to $1,430,000 and $4,028,000, or 17.01% and 19.23%
of total revenues, respectively, for the corresponding periods of 2008. Sales
and marketing expenses for the aforementioned periods increased 40.35% and
49.83%, respectively, as compared to the same periods of last year. The increase
in sales and marketing expenses is due to the increase in sales. Yet the
percentage increases are smaller. This indicates we are spending our sales and
marketing dollars more efficiently. We did not spend a lot in advertising,
benefiting from the highly concentrated customer base. Our sales and marketing
expense are mostly exhibition and conference expenses, and promotional money
spent with property owners.





General
and Administrative Expenses





General
and administrative expenses consist primarily of compensation for personnel,
travel expenses, materials expenses related to ordinary administration, fees for
professional services, and provisions for doubtful accounts.





For the
three months and nine months ended September 30, 2009, general and
administrative expenses were $1,182,000 and $2,503,000, accounting for 6.26% and
6.43% of total revenues, as compared to $571,000 and $1,824,000 or 6.79% and
8.71% of total revenues, respectively, for the corresponding periods of 2008.
General and administrative expenses for the three months periods ended September
30, 2009 increased 107.00% and for the nine months periods increased 37.23%, as
compared to the same periods of last year. The increase in general and
administrative expenses is attributable to provision for doubtful debts in the
third quarter of 2009.





Research
& Development Expenses





Research
and development expenses include remunerations for research and development
staff, material expenses, travel expenses and facilities.





For the
three months and nine months ended September 30, 2009, research and development
expenses were $138,000 and $467,000, accounting for 0.73% and 1.20% of total
revenues, as compared to $208,000 and $461,000, or 2.47% and 2.20% of total
revenues, respectively, for the corresponding periods of 2008. Research and
development expenses for the aforementioned periods decreased by 33.65% and
increased by 1.30% respectively, compared to the same periods of
2008.





The
increase in research and development expenses is due to our development of new
products in the third quarter of 2009. The dollar amount invested in our R&D
activities will increase, although the percentage expenditure in terms of total
revenue will decrease slightly due to fast increases in revenues.




26


Net
Income





For the
three and nine months ended September 30, 2009, our net income was $4,243,000
and $7,362,000, respectively,  representing increases of 278.16% and
96.84% respectively, as compared to the same period in 2008.





LIQUIDITY
AND CAPITAL RESOURCES





We
generally finance our operations from cash flow generated internally. As of
September 30, 2009, we had current assets of $74,956,000. Current assets are
comprised of inventories of $6,930,000, accounts receivable of $59,208,000,
prepayments, deposits and other receivables of $3,530,000, and cash and cash
equivalents of $5,288,000. Current liabilities are comprised of accounts payable
of $15,338,000, tax payables of $6,700,000, a short-term bank loan of
$3,656,000, and other payables and accruals of $12,420,000.





Our
trading terms with our customers are mainly on credit. As of September 30, 2009,
our accounts receivable were $59,208,000 compared to $62,136,000 as of December
31, 2008. However long-term receivables are at $18,774,000, compared to zero as
of December 31, 2008. The credit period is generally less than one year. But we
have about 10% of our project fees paid after 24 months of warranty period. As
we stated in our last quarterly report on Form 10-Q, our account receivable in
terms of days of sales has come down substantially despite the large increase in
revenue in the third quarter over the second quarter. The primary reason for the
reduction in our account receivables is:  A large portion of the
account receivable that was put on hold due to the consolidation of the wireless
communications industry in China has been received as the carriers completed
their reorganizations and resumed normal payments.





We
experience a longer accounts receivable turnover period than some of our
competitors, due to traditionally long payment periods from China’s
state-controlled telecom carriers. Telestone continues to believe that all of
our outstanding accounts receivables will be paid as the Company’s major
customers, China Mobile and China Unicom, are state owned and the Company has
not experienced any significant bad debts in the past.





As of
September 30, 2009, our inventories were $6,930,000, as compared to $7,843,000
as of December 31, 2008, representing a decrease of 11.64%. The decrease in the
inventories was mainly attributable to improvement in our inventory control
measures.





As of
September 30, 2009, our cash and bank balances were mainly denominated in
Renminbi (“RMB”) and United States dollars (“US$”) while our bank borrowings
were mainly denominated in RMB. Our revenue and expenses, assets and liabilities
are mainly denominated in RMB and US$. Recently, the exchange rate fluctuations
in the PRC have led to an appreciation of RMB. This may result in certain
exchange risks.





We have
still experienced negative cash flows from operating activities for the periods
ended September 30, 2009, which is primarily the result of extended turnover
periods related to our account receivables. However the negative amount has
decreased significantly as compared with that of last quarter.





Our
gearing ratio, calculated as total debts over total assets, was 38.89% as of
September 30, 2009 and 40.11% as of December 31, 2008,
respectively.





OFF-BALANCE
SHEET ARRANGEMENTS




We do not
have any off-balance sheet arrangements





CONTINGENT
LIABILITIES





Under FIN
48, the Company must recognize the tax benefit from an uncertain position only
if it is more-likely-than-not the tax position will be sustained on examination
by the taxing authority, based on the technical merits of the position. The tax
benefits recognized in the financial statements attributable to such position
are measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon the ultimate resolution of the position.




27


We
recognize our revenue upon the completion of contracts and have made full tax
provision in accordance with relevant national and local laws and regulations of
the PRC. A contract is considered completed upon completion of all essential
contract work and when installation has been accepted by the customer. It is the
common practice in the PRC that invoices are not issued to customers until
payments are received. We follow the practice of reporting our revenue for PRC
tax purposes when invoices are issued. All unbilled revenue will become taxable
when invoices are issued. For PRC tax reporting purposes, we recognize revenue
on an "invoice basis" instead of when goods are delivered and services are
rendered. This is not in strict compliance with the relevant laws and
regulations. Accordingly, despite the fact that we have made full tax provision
in the financial statements, we may be subject to a penalty for the deferred
reporting of tax obligations. The exact amount of any penalty cannot be
estimated with any reasonable degree of certainty. The Board of Directors
considers it is unlikely that the tax penalty will be imposed.





NEW
ACCOUNTING POLICIES





The
Company adopted SFAS 157, Fair
Value Measurements(“SFAS 157”) on April 1, 2009.  The adoption
of SFAS 157 did not have a material impact on our consolidated financial
statements. SFAS 157 establishes a three-tier fair value hierarchy to prioritize
the inputs used in measuring fair value.  The hierarchy gives the
highest priority to quoted prices in active markets (Level 1) and the lowest
priority to unobservable inputs (Level 3).  The three levels are
defined as follows:




Level 1:
              Observable inputs, such as
      unadjusted quoted market prices in active markets for the identical asset
      or liability.
 
 Level 2:
              Inputs that are observable for
      the asset or liability, either directly or indirectly through market
      corroboration, for substantially the full term of the financial
      instrument.
 
 Level
      3:
              Unobservable inputs reflecting
      the entity’s own assumptions in measuring the asset or liability at fair
      value.


The
Company’s financial instruments consist principally of cash deposits, accounts
and other receivables, accounts payable, certain accrued liabilities, and
short-term debt that generally approximate their fair values based on the
short-term nature of these instruments.





Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
required for smaller reporting company.




Item
4. Controls and Procedures





(a)
Evaluation of disclosure controls and procedures.




Under
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of the end of the period covered by this
Quarterly Report on Form 10-Q (the “Evaluation Date”); and whether any change
has occurred in the Company’s internal control over financial reporting pursuant
to Exchange Act Rules 13a-15(d) and 15d-15(d). Based on this evaluation, our
principal executive officer and principal financial officer concluded as of the
Evaluation Date that our disclosure controls and procedures were
effective.




28


It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Because of these
and other inherent limitations of control systems, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.




(b)
Changes in internal control over financial reporting.





During
the quarter ended September 30, 2009, there were no changes to our internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





PART
II




OTHER
INFORMATION




Item
1.  Legal Proceedings.




None.




Item
1A. Risk Factors.





Not
required.





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




None





Item
3.  Defaults Upon Senior Securities.




None.




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




None.




Item
5.   Other Information.




None.





Item
6.   Exhibits.




The
following documents are filed as part of this report:




31.1
            Chief
      Executive Officer Certification furnished pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002




31.2
            Chief
      Financial Officer Certification furnished pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002





32.1
            Chief
      Executive Officer Certification furnished pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002




32.2
            Chief
      Financial Officer Certification furnished pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002




29


SIGNATURES





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




TELESTONE
      TECHNOLOGIES
              CORPORATIONDate:
      November  12, 2009
            By:
            /s/ Han
      DaqingHan
      Daqing, Chief Executive Officer(Principal
      Executive Officer)Date:
      November  12, 2009
            By:
            /s/ Li
      HongLi
      Hong, Chief Financial Officer(Principal
      Financial Officer)




30