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 June 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
o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈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 oNo x




As
of August 10, 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 June 30, 2009 (unaudited) and December
      31, 2008 (audited)
                
                3Condensed
      Consolidated Statements of Operations, for the three and six months ended
      June 30, 2009 and 2008 (unaudited)
                
                4Condensed
      Consolidated Statement of Changes in Stockholders’ Equity for the six
      months ended June 30, 2009 (unaudited)
                
                5Condensed
      Consolidated Statements of Cash Flows, for the six months ended June 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.
                
                31Item
      4. Controls and Procedures.
                
                32PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings.
                
                32Item 1A. Risk
      Factors.
                
                32Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
                
                33Item
      3. Defaults Upon Senior Securities.
                
                33Item
      4. Submission of Matters to a Vote of Security Holders.
                
                33Item
      5. Other Information.
                
                33Item
      6. Exhibits.
                
                33


2


Telestone
Technologies Corporation





Condensed
Consolidated Balance Sheets


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





(Unaudited)
                  As of June 30,
                
                
                As of
                  December 31,2009
                
                
                2008Note
                
                
                US$’000
                
                
                US$’000ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                
                
                
                
                3,902
                
                
                
                7,866Accounts
      receivable, net of allowance
                
                
                
                
                
                70,780
                
                
                
                62,136Due
      from related parties
                
                
                8
                
                
                
                1,428
                
                
                
                1,826Inventories
                
                
                6
                
                
                
                10,577
                
                
                
                7,843Prepayment
                
                
                
                
                
                
                5,090
                
                
                
                2,347Other
      current assets
                
                
                
                
                
                
                857
                
                
                
                1,352Total
      current assets
                
                
                
                
                
                
                92,634
                
                
                
                83,370Goodwill
                
                
                
                
                
                
                3,119
                
                
                
                3,119Property,
      equipments and software, net
                
                
                
                
                
                
                1,178
                
                
                
                1,0504,297
                
                
                
                4,169Total
      assets
                
                
                
                
                
                
                96,931
                
                
                
                87,539LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short-term
      bank loans
                
                
                8,9
                
                
                
                3,652
                
                
                
                2,918Accounts
      payable – Trade
                
                
                
                
                
                
                19,101
                
                
                
                11,776Customer
      deposits for sales of equipment
                
                
                
                
                
                
                908
                
                
                
                739Due
      to related parties
                
                
                8
                
                
                
                1,707
                
                
                
                1,673Taxes
      payable
                
                
                
                
                
                
                5,483
                
                
                
                6,805Accrued
      expenses and other accrued liabilities
                
                
                
                
                
                
                10,399
                
                
                
                11,197Total
      current liabilities
                
                
                
                
                
                
                41,250
                
                
                
                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 June 30, 2009 and December 31,
    2008
                
                
                
                
                
                
                -
                
                
                
                -Issued
      and outstanding - 10,404,550 shares as ofJune
      30, 2009 and December 31, 2008
                
                
                
                
                
                
                11
                
                
                
                11Additional
      paid-in capital
                
                
                
                
                
                
                18,989
                
                
                
                18,989Dedicated
      reserves
                
                
                
                
                
                
                4,133
                
                
                
                3,787Other
      comprehensive income
                
                
                
                
                
                
                5,704
                
                
                
                5,573Retained
      earnings
                
                
                
                
                
                
                26,844
                
                
                
                24,071Total
      stockholders’ equity
                
                
                
                
                
                
                55,681
                
                
                
                52,431Total
      liabilities and stockholders’ equity
                
                
                
                
                
                
                96,931
                
                
                
                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
                  June
      30,
                
                
                Six
      months ended
                  June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Note
                
                
                US$’000
                
                
                US$’000
                
                
                US$’000
                
                
                US$’000Operating
      revenues:Net
      sales of equipment
                
                
                
                
                
                7,142
                
                
                
                2,385
                
                
                
                10,405
                
                
                
                6,315Service
      income
                
                
                
                
                
                4,988
                
                
                
                3,663
                
                
                
                9,621
                
                
                
                6,222Total
      operating revenues
                
                
                
                
                
                12,130
                
                
                
                6,048
                
                
                
                20,026
                
                
                
                12,537Cost
      of operating revenues:Cost
      of net sales
                
                
                
                
                
                (4,741
                )
                
                
                (1,427
                )
                
                
                (6,639
                )
                
                
                (3,530
                )Cost
      of service
                
                
                
                
                
                (2,382
                )
                
                
                (1,170
                )
                
                
                (3,680
                )
                
                
                (2,402
                )Total
      cost of operating revenues
                
                
                
                
                
                (7,123
                )
                
                
                (2,597
                )
                
                
                (10,319
                )
                
                
                (5,932
                )Gross
      income
                
                
                
                
                
                5,007
                
                
                
                3,451
                
                
                
                9,707
                
                
                
                6,605Operating
      expenses:Sales
      and marketing
                
                
                
                
                
                1,847
                
                
                
                1,083
                
                
                
                4,028
                
                
                
                2,598General
      and administrative
                
                
                
                
                
                478
                
                
                
                580
                
                
                
                1,321
                
                
                
                1,253Research
      and development
                
                
                
                
                
                193
                
                
                
                123
                
                
                
                329
                
                
                
                253Depreciation
      and amortization
                
                
                
                
                
                84
                
                
                
                84
                
                
                
                174
                
                
                
                161Total
      operating expenses
                
                
                
                
                
                2,602
                
                
                
                1,870
                
                
                
                5,852
                
                
                
                4,265Operating
      income
                
                
                
                
                
                2,405
                
                
                
                1,581
                
                
                
                3,855
                
                
                
                2,340Interest
      expense
                
                
                
                
                
                (89
                )
                
                
                (107
                )
                
                
                (130
                )
                
                
                (143
                )Other
      income, net
                
                
                
                
                
                22
                
                
                
                625
                
                
                
                289
                
                
                
                943Income
      before income taxes
                
                
                
                
                
                2,338
                
                
                
                2,099
                
                
                
                4,014
                
                
                
                3,140Income
      taxes
                
                
                4
                
                
                
                (366
                )
                
                
                (319
                )
                
                
                (895
                )
                
                
                (522
                )Net
      income
                
                
                
                
                
                
                1,972
                
                
                
                1,780
                
                
                
                3,119
                
                
                
                2,618Other
      comprehensive incomeForeign
      currency translation adjustment
                
                
                
                
                
                
                (114
                )
                
                
                29
                
                
                
                131
                
                
                
                1,489Comprehensive
      income
                
                
                
                
                
                
                1,858
                
                
                
                1,809
                
                
                
                3,250
                
                
                
                4,107Earnings
      per share:
                
                
                3Weighted
      average number of common stock outstandingBasic
                
                
                
                
                
                
                10,404
                
                
                
                10,404
                
                
                
                10,404
                
                
                
                10,404Dilutive
      effect of warrants
                
                
                
                
                
                
                -
                
                
                
                62
                
                
                
                -
                
                
                
                72Diluted
                
                
                
                
                
                
                10,404
                
                
                
                10,466
                
                
                
                10,404
                
                
                
                10,476Net
      income per share of common stockBasic
      and diluted (US$)
                
                
                
                
                
                
                0.19
                
                
                
                0.17
                
                
                
                0.30
                
                
                
                0.25


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
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,119
                
                
                
                3,119Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                131
                
                
                
                -
                
                
                
                131Transfer
      to dedicated reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                346
                
                
                
                -
                
                
                
                (346
                )
                
                
                -Balance
      at June 30, 2009
                
                
                10,404,550
                
                
                
                11
                
                
                
                18,989
                
                
                
                4,133
                
                
                
                5,704
                
                
                
                26,844
                
                
                
                55,681





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)





Six
      months ended June 30,2009
                    
                    
                    2008US$’000
                    
                    
                    US$’000Cash
      flows from operating activitiesNet
      income
                    
                    
                    3,119
                    
                    
                    
                    2,618Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Loss
      on disposal of property, plant and equipment
                    
                    
                    -
                    
                    
                    
                    1Depreciation
      and amortization
                    
                    
                    174
                    
                    
                    
                    161Allowance
      for doubtful accounts
                    
                    
                    283
                    
                    
                    
                    200Changes
      in assets and liabilities:Accounts
receivable
                    
                    
                    (8,644
                    )
                    
                    
                    (5,216
                    )Due from related
      parties
                    
                    
                    398
                    
                    
                    
                    34Inventories
                    
                    
                    (2,734
                    )
                    
                    
                    636Prepayment
                    
                    
                    (2,743
                    )
                    
                    
                    (397
                    )Other current
    assets
                    
                    
                    444
                    
                    
                    
                    149Accounts payable
                    
                    
                    7,325
                    
                    
                    
                    383Customer
      deposits for sales of equipment
                    
                    
                    169
                    
                    
                    
                    530Due
      to related parties
                    
                    
                    34
                    
                    
                    
                    (579
                    )Taxes payable
                    
                    
                    (1,321
                    )
                    
                    
                    491Accrued expenses and other accrued
      liabilities
                    
                    
                    (798
                    )
                    
                    
                    (340
                    )Net
      cash used in operating activities
                    
                    
                    (4,294
                    )
                    
                    
                    (1,329
                    )Cash
      flows from investing activitiesPurchase
      of property, plant and equipment
                    
                    
                    (371
                    )
                    
                    
                    (27
                    )Proceeds
      from disposal of property, plant and equipment
                    
                    
                    -
                    
                    
                    
                    23Net
      cash used in investing activities
                    
                    
                    (371
                    )
                    
                    
                    (4
                    )Cash
      flows from financing activitiesRepayment
      of short-term bank loans
                    
                    
                    (2.918
                    )
                    
                    
                    (16
                    )Proceeds  from
      short-term bank loan
                    
                    
                    3,652
                    
                    
                    
                    714Net
      cash used in financing activities
                    
                    
                    734
                    
                    
                    
                    698Net
      decrease in cash and cash equivalents
                    
                    
                    (3,931
                    )
                    
                    
                    (635
                    )Cash
      and cash equivalents, beginning of the period
                    
                    
                    7,866
                    
                    
                    
                    5,473Effect
      on exchange rate changes
                    
                    
                    (33
                    )
                    
                    
                    15Cash
      and cash equivalents, end of the period
                    
                    
                    3,902
                    
                    
                    
                    4,853Supplemental
      disclosure of cash flows informationInterest
      received
                    
                    
                    7
                    
                    
                    
                    2Interest
      paid
                    
                    
                    (65
                    )
                    
                    
                    (59
                    )Tax
      paid
                    
                    
                    (2,486
                    )
                    
                    
                    (50
                    )





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 June 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 June 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-10Q for
the year ended December 31, 2008 filed on March 31, 2009. The results of
operations for the three and six months ended June 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 ("USGAAP") 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.





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”.


7


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





3.    EARNINGS
PER SHARE





The
Company reports earnings per share in accordance with the provisions of SFAS
128, “Earnings Per Share”. SFAS 128 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
                          June
      30,
                        
                        
                        Six
      months ended
                          June
      30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008US$’000
                        
                        
                        US$’000
                        
                        
                        US$’000
                        
                        
                        US$’000Numerator:Net
      income in computing basic and diluted net income per share
                        
                        
                        1,972
                        
                        
                        
                        1,809
                        
                        
                        
                        3,119
                        
                        
                        
                        4,107Earnings
      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
                        
                        
                        -
                        
                        
                        
                        62
                        
                        
                        
                        -
                        
                        
                        
                        72Total
      weighted average shares outstanding in computing diluted net income per
      share
                        
                        
                        10,404
                        
                        
                        
                        10,466
                        
                        
                        
                        10,404
                        
                        
                        
                        10,476Net
      income per share of common stockBasic
      net income per share(US$)
                        
                        
                        0.19
                        
                        
                        
                        0.17
                        
                        
                        
                        0.30
                        
                        
                        
                        0.25Diluted
      net income per share(US$)
                        
                        
                        0.19
                        
                        
                        
                        0.17
                        
                        
                        
                        0.30
                        
                        
                        
                        0.25





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.


8


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





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 6 months ended June 30, 2009 is subject to the preferential income
tax rate of 15%


9


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





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)
                              Six
      months ended
                              June
      30,2009
                            
                            
                            2008%
                            
                            
                            %Beijing
      Telestone
                            
                            
                            15
                            
                            
                            
                            24BTWTC
                            
                            
                            25
                            
                            
                            
                            25BTCTC
                            
                            
                            25
                            
                            
                            
                            25Guolian
                            
                            
                            25
                            
                            
                            
                            25Pan-pacific
                            
                            
                            25
                            
                            
                            
                            25





Income
tax expenses comprised the following:


(Unaudited)
                              Six
      months ended
                              June
      30,2009
                            
                            
                            2008US$’000
                            
                            
                            US$’000Current
      taxUnited
      States
                            
                            
                            -
                            
                            
                            
                            -PRC
                            
                            
                            895
                            
                            
                            
                            522895
                            
                            
                            
                            522





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


(Unaudited)
                                Six
      months ended
                                  June
      30,2009
                              
                              
                              2008%
                              
                              
                              %Statutory
      rate – PRC
                              
                              
                              25
                              
                              
                              
                              25.0Difference
      in tax rate of a subsidiary of the Company
                              
                              
                              -
                              
                              
                              
                              (0.6
                              )Tax
      exemption
                              
                              
                              (12
                              )
                              
                              
                              (8.8
                              )Non-deductible
      items
                              
                              
                              3
                              
                              
                              
                              1.4Others
                              
                              
                              6
                              
                              
                              
                              (0.4
                              )Effective
      tax rate
                              
                              
                              22
                              
                              
                              
                              16.6


10


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





4.    INCOME
TAXES (CONTINUED)





Uncertain
Tax Position





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.





By
adoption of FIN 48, 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 June 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 during the three months
ended June 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
June 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 three-month periods
ended June 30, 2009 and 2008, no interest or penalties were
recorded.


11


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





5.    OPERATING
RISK





(a)
            Concentration
      of major customers and suppliers




(Unaudited)
                      Six
      months ended
                      June
      30,2009
                    
                    
                    2008US$’000
                    
                    
                    US$’000Major
      customers with revenues of more than 10% of the Company’s total
      revenuesSales
      to major customers
                    
                    
                    17,547
                    
                    
                    
                    10,905Percentage
      of sales
                    
                    
                    88%
                    
                    
                    
                    87%Number
                    
                    
                    2
                    
                    
                    
                    2Major
      suppliers with purchases of more than 10% of the Company’s
      purchasesPurchases from major
      suppliers
                    
                    
                    1,070
                    
                    
                    
                    2,002Percentage of
      purchases
                    
                    
                    24%
                    
                    
                    
                    63%Number
                    
                    
                    2
                    
                    
                    
                    2





Accounts
receivable related to the Company’s major customers comprised 98% and 96% of all
accounts receivables as of June 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.


12


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





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


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





6.    INVENTORIES




Inventories
consisted of the following:


(Unaudited)
                        As
      of
                        June
      30,
                        2009
                      
                      
                      As
      of
                        December
      31,
                        2008US$’000
                      
                      
                      US$’000Raw
      materials
                      
                      
                      -
                      
                      
                      
                      5Finished
      goods
                      
                      
                      10,577
                      
                      
                      
                      7,83810,577
                      
                      
                      
                      7,843





7.    SEGMENT
INFORMATION





During
the period ended June 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
                                              June
      30,
                                              2009
                                            
                                            
                                            As
      of
                                              December
      31,
                                              2008US$’000
                                            
                                            
                                            US$’000Due
      from related partiesEmployees
                                            
                                            a
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            430Ex-stockholders
      of SMI/Guolian
                                            
                                            b
                                            
                                            
                                            
                                            1,428
                                            
                                            
                                            
                                            1,3961,428
                                            
                                            
                                            
                                            1,826Due
      to related partiesDirectors
                                            
                                            a
                                            
                                            
                                            
                                            200
                                            
                                            
                                            
                                            200Ex-stockholders
      of Beijing Telestone/Guolian
                                            
                                            b
                                            
                                            
                                            
                                            1,505
                                            
                                            
                                            
                                            1,4731,707
                                            
                                            
                                            
                                            1,673Guarantor
      of short term loanA
      director
                                            
                                            c
                                            
                                            
                                            
                                            3,652
                                            
                                            
                                            
                                            2,918


14


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





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 7.47% 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 June 30, 2009,
      the bank loans are charged at interest rate of 7.47% 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


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





10.
            FAIR
      VALUE MEASUREMENTS





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.





11.
            RECENT
      ACCOUNTING PRONOUNCEMENTS





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of
FASB Statement No. 162.” SFAS No. 168 establishes the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
GAAP. SFAS No. 168 is effective for financial statements issued for interim and
annual periods ending after September 15, 2009 and, while it affects references
to accounting standards, it will not have a material impact on the condensed
consolidated financial statements.





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.


16


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
SFAS No. 165 is effective prospectively for interim and annual periods ending
after June 15, 2009 and did not have a material impact on the 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.





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.


17


Telestone
Technologies Corporation





Notes
to Condensed Consolidated Financial Statements (Unaudited)


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





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 coverage solutions provider in the People’s Republic of
China (the “PRC”). We principally provide mobile telecommunication coverage
solutions in service networks to our customers in the PRC.





Our
wireless 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 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 15, 2008. As a result, our
main customers currently are China Mobile, China Unicom and China
Telecom.





19




During
the three months ended June 30, 2009, we improved our business relationships
with our wireless system equipment vendors within China. We have been exploring
the wireless system equipment industry 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 June 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
development.





Second,
we have improved our WFDSTM
technology and products. As a result, the Company technology center compiles a
catalogue of WFDSTM
products which has achieved the transition from our advanced research
achievements to actual productivity. Due to our advanced technology, we have
gained some outstanding achievements: six products of Telestone have been
selected into Chinese government’s purchase list of Zhongguancun self-developed
products. In addition, our trademark has been recognized as a well-known
trademark of Beijing by local Industry and Commerce Bureau.  Also, We
have won the title of A-Rate Good Credit enterprise which entitles us to credits
guarantied by Beijing Zhongguancun Sci-tech Guaranty Co. funded by the Chinese
government.





Third,
from management’s point of view, especially financially, we have achieved a good
result. We have been taking a variety of measures to collect accounts
receivables. During the reporting period, more than RMB 22 million of overdue
accounts receivables had been collected and compared with the first quarter of
2009, accounts receivable turnover has improved by nearly 30%. We also have
enhanced our expense management. As a result, our general and administrative
expenses decreased by 18%, as compared to previous fiscal quarter of
2008.





BUSINESS
STRATEGY





Being one
of the leading companies in the PRC’s wireless coverage solution sector is our
business strategy. 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 investment in the 3G
  networks.




20


2.
            On
      our marketing strategy, besides building strong relationships with Chinese
      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. We believe we will raise
      our domestic market shares and promote our new
  solutions.





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.





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 $ 60 billion over the next three years, an average of
approximately $20 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 impressive 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 June 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 June 30, 2009, our total revenue increased by 100.56%; cost
of equipment and services increased by 174.28%; net income increased by 10.79%;
compared to the same periods of 2008.





21




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





Item
                                                    
                                                    2009 Q2
                                                    
                                                    
                                                    2008Q2
                                                    
                                                    Comparisons$'000
                                                    
                                                    
                                                    % of revenue
                                                    
                                                    
                                                    $'000
                                                    
                                                    
                                                    % of revenue
                                                    
                                                    $'000
                                                    
                                                    
                                                    %Revenue
                                                    
                                                    
                                                    12,130
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    6,048
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    6,082
                                                    
                                                    
                                                    
                                                    100.56
                                                    %Cost
      of equipment and services
                                                    
                                                    
                                                    7,123
                                                    
                                                    
                                                    
                                                    58.72
                                                    %
                                                    
                                                    
                                                    2,597
                                                    
                                                    
                                                    
                                                    42.94
                                                    %
                                                    
                                                    
                                                    4,526
                                                    
                                                    
                                                    
                                                    174.28
                                                    %Gross
      profit
                                                    
                                                    
                                                    5,007
                                                    
                                                    
                                                    
                                                    41.28
                                                    %
                                                    
                                                    
                                                    3,451
                                                    
                                                    
                                                    
                                                    57.06
                                                    %
                                                    
                                                    
                                                    1,556
                                                    
                                                    
                                                    
                                                    45.09
                                                    %Sales
      and marketing expenses
                                                    
                                                    
                                                    1,847
                                                    
                                                    
                                                    
                                                    15.23
                                                    %
                                                    
                                                    
                                                    1,083
                                                    
                                                    
                                                    
                                                    17.91
                                                    %
                                                    
                                                    
                                                    764
                                                    
                                                    
                                                    
                                                    70.54
                                                    %General
      and administrative
                                                    
                                                    
                                                    478
                                                    
                                                    
                                                    
                                                    3.94
                                                    %
                                                    
                                                    
                                                    580
                                                    
                                                    
                                                    
                                                    9.59
                                                    %
                                                    
                                                    
                                                    -102
                                                    
                                                    
                                                    
                                                    -17.59
                                                    %Research
      and development
                                                    
                                                    
                                                    193
                                                    
                                                    
                                                    
                                                    1.59
                                                    %
                                                    
                                                    
                                                    123
                                                    
                                                    
                                                    
                                                    2.03
                                                    %
                                                    
                                                    
                                                    70
                                                    
                                                    
                                                    
                                                    56.91
                                                    %Depreciation
      and Amortization
                                                    
                                                    
                                                    84
                                                    
                                                    
                                                    
                                                    0.69
                                                    %
                                                    
                                                    
                                                    84
                                                    
                                                    
                                                    
                                                    1.39
                                                    %
                                                    
                                                    
                                                    0
                                                    
                                                    
                                                    
                                                    0.00
                                                    %Interest
      expenses
                                                    
                                                    
                                                    89
                                                    
                                                    
                                                    
                                                    0.73
                                                    %
                                                    
                                                    
                                                    107
                                                    
                                                    
                                                    
                                                    1.77
                                                    %
                                                    
                                                    
                                                    -18
                                                    
                                                    
                                                    
                                                    -16.82
                                                    %Other
      income
                                                    
                                                    
                                                    22
                                                    
                                                    
                                                    
                                                    0.18
                                                    %
                                                    
                                                    
                                                    625
                                                    
                                                    
                                                    
                                                    10.33
                                                    %
                                                    
                                                    
                                                    -603
                                                    
                                                    
                                                    
                                                    -96.48
                                                    %Income
      before tax
                                                    
                                                    
                                                    2,338
                                                    
                                                    
                                                    
                                                    19.28
                                                    %
                                                    
                                                    
                                                    2,099
                                                    
                                                    
                                                    
                                                    34.70
                                                    %
                                                    
                                                    
                                                    239
                                                    
                                                    
                                                    
                                                    11.39
                                                    %Income
      tax
                                                    
                                                    
                                                    366
                                                    
                                                    
                                                    
                                                    3.02
                                                    %
                                                    
                                                    
                                                    319
                                                    
                                                    
                                                    
                                                    5.27
                                                    %
                                                    
                                                    
                                                    47
                                                    
                                                    
                                                    
                                                    14.73
                                                    %Net
      income
                                                    
                                                    
                                                    1,972
                                                    
                                                    
                                                    
                                                    16.26
                                                    %
                                                    
                                                    
                                                    1,780
                                                    
                                                    
                                                    
                                                    29.43
                                                    %
                                                    
                                                    
                                                    192
                                                    
                                                    
                                                    
                                                    10.79
                                                    %





For the
six months ended June 30, 2009, our total revenue increased by 59.74%; cost of
equipment and services increased by 73.95%; net income increased by 19.14%;
compared to the same periods of 2008.





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




Item
                
                2009six months
                
                
                2008six months
                
                
                Comparisons$'000
                
                
                % of revenue
                
                
                $'000
                
                
                % of revenue
                
                
                $'000
                
                
                %Revenue
                
                
                20,026
                
                
                
                
                
                
                12,537
                
                
                
                
                
                
                7,489
                
                
                
                59.74
                %Cost
      of equipment and services
                
                
                10,319
                
                
                
                51.53
                %
                
                
                5,932
                
                
                
                47.32
                %
                
                
                4,387
                
                
                
                73.95
                %Gross
      profit
                
                
                9,707
                
                
                
                48.47
                %
                
                
                6,605
                
                
                
                52.68
                %
                
                
                3,102
                
                
                
                46.96
                %Sales
      and marketing expenses
                
                
                4,028
                
                
                
                20.11
                %
                
                
                2,598
                
                
                
                20.72
                %
                
                
                1,430
                
                
                
                55.04
                %General
      and administrative
                
                
                1,321
                
                
                
                6.60
                %
                
                
                1,253
                
                
                
                10.00
                %
                
                
                68
                
                
                
                5.43
                %Research
      and development
                
                
                329
                
                
                
                1.64
                %
                
                
                253
                
                
                
                2.02
                %
                
                
                76
                
                
                
                30.04
                %Depreciation
      and Amortization
                
                
                174
                
                
                
                0.87
                %
                
                
                161
                
                
                
                1.28
                %
                
                
                13
                
                
                
                8.07
                %Interest
      expenses
                
                
                130
                
                
                
                0.65
                %
                
                
                143
                
                
                
                1.14
                %
                
                
                -13
                
                
                
                -9.09
                %Other
      income
                
                
                289
                
                
                
                1.44
                %
                
                
                943
                
                
                
                7.52
                %
                
                
                -654
                
                
                
                -69.35
                %Income
      before tax
                
                
                4,014
                
                
                
                20.04
                %
                
                
                3,140
                
                
                
                25.04
                %
                
                
                874
                
                
                
                27.83
                %Income
      tax
                
                
                895
                
                
                
                4.47
                %
                
                
                522
                
                
                
                4.16
                %
                
                
                373
                
                
                
                71.46
                %Net
      income
                
                
                3,119
                
                
                
                15.57
                %
                
                
                2,618
                
                
                
                20.88
                %
                
                
                501
                
                
                
                19.14
                %


22





Our
revenues during the three months ended June 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 six months ended June 30, 2009, our revenues were $ 12,130,000
and $20,026,000, representing increases of 100.56% and $59.74% 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.





Breakdown
by Nature





Three
months ended June 30, 2009 and 2008




2009 Q2
                                                                              
                                                                              
                                                                              2008 Q2
                                                                              
                                                                              
                                                                              Growth$'000
                                                                              
                                                                              
                                                                              % of revenue
                                                                              
                                                                              
                                                                              $'000
                                                                              
                                                                              
                                                                              % ofrevenue
                                                                              
                                                                              
                                                                              $'000
                                                                              
                                                                              
                                                                              %Product
      sales
                                                                              
                                                                              
                                                                              7,142
                                                                              
                                                                              
                                                                              
                                                                              58.88
                                                                              %
                                                                              
                                                                              
                                                                              2,385
                                                                              
                                                                              
                                                                              
                                                                              39.43
                                                                              %
                                                                              
                                                                              
                                                                              4,757
                                                                              
                                                                              
                                                                              
                                                                              199.45
                                                                              %Service
      sales
                                                                              
                                                                              
                                                                              4,988
                                                                              
                                                                              
                                                                              
                                                                              41.12
                                                                              %
                                                                              
                                                                              
                                                                              3,663
                                                                              
                                                                              
                                                                              
                                                                              60.57
                                                                              %
                                                                              
                                                                              
                                                                              1,325
                                                                              
                                                                              
                                                                              
                                                                              36.17
                                                                              %Total
                                                                              
                                                                              
                                                                              12,130
                                                                              
                                                                              
                                                                              
                                                                              100
                                                                              %
                                                                              
                                                                              
                                                                              6,048
                                                                              
                                                                              
                                                                              
                                                                              100
                                                                              %
                                                                              
                                                                              
                                                                              6,082
                                                                              
                                                                              
                                                                              
                                                                              100.56
                                                                              %




23




Six
months ended June 30, 2009 and 2008




2009 Six months
                  
                  
                  2008 Six months
                  
                  
                  Growth$'000
                  
                  
                  % of revenue
                  
                  
                  $'000
                  
                  
                  % ofrevenue
                  
                  
                  $'000
                  
                  
                  %Product
      sales
                  
                  
                  10,405
                  
                  
                  
                  51.96
                  %
                  
                  
                  6,315
                  
                  
                  
                  50.37
                  %
                  
                  
                  4,090
                  
                  
                  
                  64.77
                  %Service
      sales
                  
                  
                  9,621
                  
                  
                  
                  48.04
                  %
                  
                  
                  6,222
                  
                  
                  
                  49.63
                  %
                  
                  
                  3,399
                  
                  
                  
                  54.63
                  %Total
                  
                  
                  20,026
                  
                  
                  
                  100
                  %
                  
                  
                  12,537
                  
                  
                  
                  100
                  %
                  
                  
                  7,489
                  
                  
                  
                  59.74
                  %





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





For the
three months and six months ended June 30, 2009, revenues generated from product
sales were $7,142,000 and $10,405,000, which represented increases of 199.45%
and 64.77%, respectively, compared to the corresponding periods of 2008. The
increase of product sales is due to the approval of China Unicom to include our
products on a shortlist of Unicom’s equipment centralized purchasing
system.  As a result, business from Unicom increased.  China
Unicom also increased its investment in reforming 2G projects. Additionally, our
customers (such as Shandong Unicom , Liaoning Unicom, and Gansu Unicom)
submitted several large amounts of product sales orders in the second quarter of
2009. For the three months and six months ended June 30, 2009, revenues
generated from service sales were $4,988,000 and $9,621,000, which represented
increases of 36.17% and 54.63%, 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.





For the
three months and six months ended June 30, 2009, revenues generated from product
sales accounted for 58.88% and 51.96% of total revenues, respectively, compared
to 39.43% and 50.37% for the corresponding periods of 2008. For the
aforementioned periods, revenues generated from system integration service sales
accounted for 41.12% and 48.04% of total revenues, respectively, compared to
60.57% and 49.63% for the same periods of 2008.





Breakdown
by Customers





Three
months ended June 30, 2009 and 2008:




2009 Q2
                                          
                                          
                                          2008 Q2
                                          
                                          
                                          Growth$’000
                                          
                                          
                                          % of revenue
                                          
                                          
                                          $'000
                                          
                                          
                                          % ofrevenue
                                          
                                          
                                          $'000
                                          
                                          
                                          %China
      Mobile
                                          
                                          
                                          4,196
                                          
                                          
                                          
                                          34.59
                                          %
                                          
                                          
                                          4,031
                                          
                                          
                                          
                                          66.65
                                          %
                                          
                                          
                                          165
                                          
                                          
                                          
                                          4.09
                                          %China
      Unicom
                                          
                                          
                                          7,392
                                          
                                          
                                          
                                          60.94
                                          %
                                          
                                          
                                          1,696
                                          
                                          
                                          
                                          28.04
                                          %
                                          
                                          
                                          5,696
                                          
                                          
                                          
                                          335.85
                                          %China
      Telecom
                                          
                                          
                                          303
                                          
                                          
                                          
                                          2.50
                                          %
                                          
                                          
                                          187
                                          
                                          
                                          
                                          3.09
                                          %
                                          
                                          
                                          116
                                          
                                          
                                          
                                          62.03
                                          %Overseas
                                          
                                          
                                          159
                                          
                                          
                                          
                                          1.31
                                          %
                                          
                                          
                                          54
                                          
                                          
                                          
                                          0.89
                                          %
                                          
                                          
                                          105
                                          
                                          
                                          
                                          194.44
                                          %Others
                                          
                                          
                                          80
                                          
                                          
                                          
                                          0.66
                                          %
                                          
                                          
                                          80
                                          
                                          
                                          
                                          1.33
                                          %
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Total
                                          
                                          
                                          12,130
                                          
                                          
                                          
                                          100.00
                                          %
                                          
                                          
                                          6,048
                                          
                                          
                                          
                                          100.00
                                          %
                                          
                                          
                                          6,082
                                          
                                          
                                          
                                          100.56
                                          %





24





Six
months ended June 30, 2009 and 2008:




2009 Six months
                
                
                2008 Six months
                
                
                Growth$' 000
                
                
                % of Revenue
                
                
                $'000
                
                
                % ofrevenue
                
                
                $'000
                
                
                %China
      Mobile
                
                
                6,973
                
                
                
                34.82
                %
                
                
                6,698
                
                
                
                53.43
                %
                
                
                275
                
                
                
                4.11
                %China
      Unicom
                
                
                10,575
                
                
                
                52.81
                %
                
                
                4,776
                
                
                
                38.10
                %
                
                
                5,799
                
                
                
                121.42
                %China
      Telecom
                
                
                1,789
                
                
                
                8.93
                %
                
                
                319
                
                
                
                2.54
                %
                
                
                1,470
                
                
                
                460.82
                %Overseas
                
                
                330
                
                
                
                1.65
                %
                
                
                223
                
                
                
                1.78
                %
                
                
                107
                
                
                
                47.98
                %Others
                
                
                359
                
                
                
                1.79
                %
                
                
                521
                
                
                
                4.15
                %
                
                
                -162
                
                
                
                -31.09
                %Total
                
                
                20,026
                
                
                
                100
                %
                
                
                12,537
                
                
                
                100.00
                %
                
                
                7,489
                
                
                
                59.74
                %





Revenues
from telecom carriers was 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 six months ended June 30,
2009, our revenues generated from China Mobile were $4,196,000and 6,973,000,
representing revenue percentages of 34.59% and 34.82%, respectively. Our
revenues generated from China Unicom were $7,392,000 and $10,575,000,
representing revenue percentages of 60.94% and 52.81%,
respectively.





For the
three months and six months ended June 30, 2009, our revenues generated from
China Telecom were $303,000 and $1,789,000, representing increases of 62.03% and
460.82%, compared to $ 187,000 and $ 319,000 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. The revenues from China Unicom increased
335.85% and121.42%, compared to $ 1,696,000 and 4,776,000 of the corresponding
period 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 June 30, 2009, our revenue generated from China Mobile
increased 4.09% from $ 4,031,000 of the same period of 2008.




For the
three months and six months ended June 30, 2009, our revenues generated from
overseas were $159,000and $330,000, representing an increase of 194.44% and
47.98%,compared to the same period 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.





For the
three months and six months ended June 30, 2009, the total sales to other
customers were $80,000 and $359,000, as compared to $80,000 and $521,000
generated as of the same period in 2008.


The
revenues from other customers decreased by 31.09% in the six months ended June
30,2009, compared to the same period of 2008.  We try to make the best
use of the 3G construction opportunity which has large market potential and
could bring high return on the investment. Thus, we emphasize the 3G
construction part of our business and the revenues from other areas decreased
accordingly.




25





Cost
Analysis





Three
months ended June 30, 2009 and 2008




2009 Q2
                                    
                                    
                                    2008 Q2
                                    
                                    
                                    Growth$'000
                                    
                                    
                                    % of revenue
                                    
                                    
                                    $'000
                                    
                                    
                                    % ofrevenue
                                    
                                    
                                    $'000
                                    
                                    
                                    %products
      sales cost
                                    
                                    
                                    4,741
                                    
                                    
                                    
                                    39.08
                                    %
                                    
                                    
                                    1,427
                                    
                                    
                                    
                                    23.59
                                    %
                                    
                                    
                                    3,314
                                    
                                    
                                    
                                    232.24
                                    %service
      cost
                                    
                                    
                                    2,382
                                    
                                    
                                    
                                    19.64
                                    %
                                    
                                    
                                    1,170
                                    
                                    
                                    
                                    19.35
                                    %
                                    
                                    
                                    1,212
                                    
                                    
                                    
                                    103.59
                                    %Total
                                    
                                    
                                    7,123
                                    
                                    
                                    
                                    58.72
                                    %
                                    
                                    
                                    2,597
                                    
                                    
                                    
                                    42.94
                                    %
                                    
                                    
                                    4526
                                    
                                    
                                    
                                    174.28
                                    %




Six
months ended June 30, 2009 and 2008


2009 Six months
                
                
                2008 Six months
                
                
                Growth$'000
                
                
                % of revenue
                
                
                $'000
                
                
                % ofrevenue
                
                
                $'000
                
                
                %products
      sales cost
                
                
                6,639
                
                
                
                33.15
                %
                
                
                3,530
                
                
                
                28.16
                %
                
                
                3,109
                
                
                
                88.07
                %service
      cost
                
                
                3,680
                
                
                
                18.38
                %
                
                
                2,402
                
                
                
                19.16
                %
                
                
                1,278
                
                
                
                53.21
                %Total
                
                
                10,319
                
                
                
                51.53
                %
                
                
                5,932
                
                
                
                47.32
                %
                
                
                4,387
                
                
                
                73.95
                %





For the
three months and six months ended June 30, 2009, our total costs were $7,123,000
and $10,319,000, representing an increase of 174.28% and an increase of 73.95%,
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 six months ended June 30, 2009, our costs of product sales were
$4,741,000 and $6,639,000, representing increases of 232.24% and 88.07%,
respectively, as compared to the same periods of 2008. The increase of costs of
product sales was due to the centralized purchasing methods adopted by the
telecom carriers, bringing us large amount of sales orders in the second
quarter.





For the
three months and six months ended June 30, 2009, our costs of service sales were
$2,382,000 and $3,680,000, representing an increase of 103.59% and an increase
of 53.21%, 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.




26





Gross
Profit and Gross Margin





For the
three months and six months ended June 30, 2009, our gross profit was $5,007,000
and $9,707,000, representing an increase of 45.09% and an increase of 46.96%
respectively, as compared to the same periods of 2008. Our gross margin for the
aforementioned periods were 41.28% and 48.47%, respectively, compared to57.06%
and 52.68 % for the same periods of last year.





Our gross
profit increase during the reporting period is attributable 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.





Operating
Expenses




Three
months ended June 30, 2009 and 2008




Item
                                            
                                            2009 Q2
                                            
                                            
                                            2008 Q2
                                            
                                            
                                            Comparisons$’000
                                            
                                            
                                            % ofrevenue
                                            
                                            
                                            $'000
                                            
                                            
                                            % ofrevenue
                                            
                                            
                                            $'000
                                            
                                            
                                            %Sales
      and marketing expenses
                                            
                                            
                                            1,847
                                            
                                            
                                            
                                            15.23
                                            %
                                            
                                            
                                            1,083
                                            
                                            
                                            
                                            17.91
                                            %
                                            
                                            
                                            764
                                            
                                            
                                            
                                            70.54
                                            %General
      and administrative
                                            
                                            
                                            478
                                            
                                            
                                            
                                            3.94
                                            %
                                            
                                            
                                            580
                                            
                                            
                                            
                                            9.59
                                            %
                                            
                                            
                                            -102
                                            
                                            
                                            
                                            -17.59
                                            %Research
      and development
                                            
                                            
                                            193
                                            
                                            
                                            
                                            1.59
                                            %
                                            
                                            
                                            123
                                            
                                            
                                            
                                            2.03
                                            %
                                            
                                            
                                            70
                                            
                                            
                                            
                                            56.91
                                            %Total
                                            
                                            
                                            2,518
                                            
                                            
                                            
                                            20.76
                                            %
                                            
                                            
                                            1,786
                                            
                                            
                                            
                                            29.53
                                            %
                                            
                                            
                                            732
                                            
                                            
                                            
                                            40.99
                                            %




Six months ended June 30,
2009 and 2008





2009 Six months
                      
                      
                      2008 Six months
                      
                      
                      ComparisonsItem
                      
                      $’000
                      
                      
                      % of revenue
                      
                      
                      $'000
                      
                      
                      % of revenue
                      
                      
                      $'000
                      
                      
                      %Sales
      and marketing expenses
                      
                      
                      4,028
                      
                      
                      
                      20.11
                      %
                      
                      
                      2,598
                      
                      
                      
                      20.72
                      %
                      
                      
                      1,430
                      
                      
                      
                      55.04
                      %General
      and administrative
                      
                      
                      1,321
                      
                      
                      
                      6.60
                      %
                      
                      
                      1,253
                      
                      
                      
                      10.00
                      %
                      
                      
                      68
                      
                      
                      
                      5.43
                      %Research
      and development
                      
                      
                      329
                      
                      
                      
                      1.64
                      %
                      
                      
                      253
                      
                      
                      
                      2.02
                      %
                      
                      
                      76
                      
                      
                      
                      30.04
                      %Total
                      
                      
                      5,678
                      
                      
                      
                      28.35
                      %
                      
                      
                      4,104
                      
                      
                      
                      32.74
                      %
                      
                      
                      1,574
                      
                      
                      
                      38.35
                      %





27




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 six months ended June 30, 2009, sales and marketing expenses
were $1,847,000 and $4,028,000, accounting for 15.23% and 20.11% of total
revenues, as compared to $1,083,000 and $2,598,000, or 17.91% and 20.72% of
total revenues, respectively, for the corresponding periods of 2008. Sales and
marketing expenses for the aforementioned periods increased 70.54% and 55.04%,
respectively, as compared to the same periods of last year.


The
increase in sales and marketing expenses is due to the following two factors:
first, we invested more in sales and marketing expenses to increase our revenue
in second quarter; second, in order to increase our market share, we recruited
additional sales personnel and increased investment in the first half of 2009.
We expect to perform well in terms of revenue in the next half of
2009.





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 six months ended June 30, 2009, general and administrative
expenses were $478,000 and $1,321,000, accounting for 3.94% and 6.60% of total
revenues, as compared to $580,000 and $1,253,000, or 9.59% and 10.00% of total
revenues, respectively, for the corresponding periods of 2008. General and
administrative expenses for the three months periods ended June 30, 2009
decreased 17.59% and for the six months periods increased 5.43%, as compared to
the same periods of last year. We recruited a number of experienced management
personnel in the first quarter of 2009, increasing general and administrative
expenses. In the second quarter, through effective budgetary control, we reduced
our general and administrative expenses.




28





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 six months ended June 30, 2009, research and development
expenses were $193,000 and $329,000, accounting for 1.59% and 1.64% of total
revenues, as compared to $123,000 and $253,000, or 2.03% and 2.02% of total
revenues, respectively, for the corresponding periods of 2008. Research and
development expenses for the aforementioned periods increased by 56.91% and
30.04% 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 first half of 2009. In order to expand our product lines and
strengthen our expansion ability, we increased our investment in research and
development of new products. Presently, we have approximately seven research and
development projects in progress.





Net
Income





For the
three and six months ended June 30, 2009, our net income was $1,972,000 and
$3,119,000, respectively,  representing increases of 10.79% and 19.14%
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 June
30, 2009, we had current assets of $92,634,000. Current assets are comprised of
inventories of $10,577,000, accounts receivable of $70,780,000, prepayments,
deposits and other receivables of $7,375,000, and cash and cash equivalents of
$3,902,000. Current liabilities are comprised of accounts payable of
$19,101,000, tax payables of $5,483,000, a short-term bank loan of $3,652,000,
and other payables and accruals of $13,014,000.





Our
trading terms with our customers are mainly on credit. As of June 30, 2009, our
accounts receivable were $70,780,000 compared to $62,136,000 as of December 31,
2008. The credit period is generally less than one year. The gradual increase in
the account receivables is mainly due to our growing revenues and longer
collection period.  According to present account receivables turnover,
we need some period of time collect them. Additionally, our customers postponed
project inspection and payment due to their concentration in the 3G network
construction. We will spend additional efforts on collecting accounts
receivables, and expect to perform well in the next half of 2009.




29





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
June 30, 2009, our inventories were $10,577,000, as compared to $7,843,000 as of
December 31, 2008, representing an increase of 34.86%. The increase in the
inventories was mainly attributable to meeting operational requirements in the
domestic market because of new projects under construction.


As of
June 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
experienced negative cash flows from operating activities for the periods ended
June 30, 2009 and 2008, which is primarily the result of extended turnover
periods related to our account  receivables, as mentioned above. A
continuation of this situation could negatively impact our liquidity and in turn
our overall results of operations. In order to address this issue, apart from
the implementation of the above-mentioned measures to reduce the turnover
period, we are also exploring the possibility of obtaining third party financing
and considering raising additional capital through debt or equity
financings.





Our
gearing ratio, calculated as total debts over total assets, was 42.56% as of
June 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.




30





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





None.




31





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.




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 June 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.




32





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




33




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




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:
      August 13, 2009
                      By:
                      /s/
      Han DaqingHan
      Daqing, Chief Executive Officer(Principal
      Executive Officer)Date:
      August 13, 2009
                      By:
                      /s/
      Li HongLi
      Hong, Chief Financial Officer(Principal
      Financial
Officer)




34