UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


Securities
Exchange Act of 1934





For the
quarterly period ended September 30, 2010





Commission
File Number: 001-32503




TELESTONE
TECHNOLOGIES CORPORATION


(Exact
Name of Registrant as Specified in Its Charter)




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





Floor 10,
China Ruida Plaza


No. 74
Lugu Road


Shi
Jingshan District


Beijing,
People’s Republic of China 100040


(Address
of Principal Executive Offices)





(86 10)
6860-8335


(Registrant’s
Telephone Number, Including Area Code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
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 oNo o





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





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





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




As
of November 12, 2010, 10,558,264  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.
            
            3Condensed Consolidated Statements
      of Operationsand Other Comprehensive Income,
      for the three and nine months ended September 30, 2010  and 2009
      (unaudited)
            
            3Condensed
      Consolidated Balance Sheets, as of September 30, 2010 (unaudited) and
      December 31, 2009
            
            4Condensed
      Consolidated Statements of Cash Flows, for the nine months ended September
      30, 2010 and 2009 (unaudited)
            
            5Notes
      to Condensed Consolidated Financial Statements (unaudited)
            
            6Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.
            
            18Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
            
            34Item
      4. Controls and Procedures.
            
            34PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings.
            
            35Item 1A. Risk
      Factors.
            
            35Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
            
            35Item
      3. Defaults Upon Senior Securities.
            
            35Item
      4. (Removed and Reserved).
            
            35Item
      5. Other Information.
            
            35Item
      6. Exhibits.
            
            35





2




ITEM
1. FINANCIAL STATEMENTS





Telestone
Technologies Corporation





Condensed
Consolidated Statements of Operations and Other Comprehensive
Income
 Three
months and nine months ended September 30, 2010 and 2009





(Unaudited)
            
            
            (Unaudited)Three
      months ended September 30,
            
            
            Nine
      months ended September 30,2010
            
            
            2009
            
            
            2010
            
            
            2009Note
            
            
            US$’000
            
            
            US$’000
            
            
            US$’000
            
            
            US$’000Operating
      revenues:Net
      sales of equipment
            
            
            
            
            
            17,518
            
            
            
            11,099
            
            
            
            29,678
            
            
            
            21,504Service
      income
            
            
            
            
            
            25,583
            
            
            
            7,792
            
            
            
            41,174
            
            
            
            17,413Total
      operating revenues
            
            
            
            
            
            43,101
            
            
            
            18,891
            
            
            
            70,852
            
            
            
            38,917Cost
      of operating revenues:Cost
      of net sales
            
            
            
            
            
            9,841
            
            
            
            7,099
            
            
            
            16,709
            
            
            
            13,738Cost
      of service
            
            
            
            
            
            13,719
            
            
            
            2,878
            
            
            
            22,165
            
            
            
            6,558Total
      cost of operating revenues
            
            
            
            
            
            23,560
            
            
            
            9,977
            
            
            
            38,874
            
            
            
            20,296Gross
      income
            
            
            
            
            
            19,541
            
            
            
            8,914
            
            
            
            31,978
            
            
            
            18,621Operating
      expenses:Sales
      and marketing
            
            
            
            
            
            4,445
            
            
            
            2,007
            
            
            
            11,349
            
            
            
            6,035General
      and administrative
            
            
            
            
            
            714
            
            
            
            1,182
            
            
            
            4,530
            
            
            
            2,503Research
      and development
            
            
            
            
            
            216
            
            
            
            138
            
            
            
            631
            
            
            
            467Depreciation
      and amortization
            
            
            
            
            
            75
            
            
            
            79
            
            
            
            227
            
            
            
            253Total
      operating expenses
            
            
            
            
            
            5,450
            
            
            
            3,406
            
            
            
            16,737
            
            
            
            9,258Operating
      income
            
            
            
            
            
            14,091
            
            
            
            5,508
            
            
            
            15,241
            
            
            
            9,363Interest
      expense
            
            
            
            
            
            (122
            )
            
            
            (40
            )
            
            
            (382
            )
            
            
            (170
            )Other
      income, net
            
            
            
            
            
            282
            
            
            
            83
            
            
            
            811
            
            
            
            372Income
      before income taxes
            
            
            
            
            
            14,251
            
            
            
            5,551
            
            
            
            15,670
            
            
            
            9,565Income
      taxes
            
            4
            
            
            
            (2,199
            )
            
            
            (1,308
            )
            
            
            (3,028
            )
            
            
            (2,203
            )Net
      income
            
            
            
            
            
            12,052
            
            
            
            4,243
            
            
            
            12,642
            
            
            
            7,362Other
      comprehensive incomeForeign
      currency translation adjustment
            
            
            
            
            
            -
            
            
            
            (27
            )
            
            
            -
            
            
            
            104Total
      comprehensive income
            
            
            
            
            
            12,052
            
            
            
            4,216
            
            
            
            12,642
            
            
            
            7,466Earnings
      per share:
            
            3Weighted
      average number of common stock outstandingBasic
            
            
            
            
            
            10,558,264
            
            
            
            10,404,550
            
            
            
            10,540,390
            
            
            
            10,404,550Dilutive
      effect of warrants
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            12,061
            
            
            
            -Diluted
            
            
            
            
            
            10,558,264
            
            
            
            10,404,550
            
            
            
            10,552,451
            
            
            
            10,404,550Net
      income per share of common stockBasic
      (US$)
            
            
            
            
            
            1.14
            
            
            
            0.41
            
            
            
            1.20
            
            
            
            0.71Diluted
      (US$)
            
            
            
            
            
            1.14
            
            
            
            0.41
            
            
            
            1.20
            
            
            
            0.71


3
  Telestone
Technologies Corporation





Condensed
Consolidated Balance Sheets


As
of  September 30, 2010 and December 31, 2009




(Unaudited)
              As
      of
              September
      30,
            
            
            As
      of
              December
      31,2010
            
            
            2009ASSETS
            
            Note
            
            
            US$’000
            
            
            US$’000Current
      assets:Cash
      and cash equivalents
            
            
            
            
            
            9,805
            
            
            
            11,233Accounts
      receivable, net of allowance
            
            6
            
            
            
            134,051
            
            
            
            89,005Due
      from related parties
            
            13
            
            
            
            1,963
            
            
            
            1,963Inventories,
      net of allowance
            
            10
            
            
            
            2,701
            
            
            
            4,442Prepayments
            
            
            
            
            
            798
            
            
            
            1,223Other
      current assets
            
            
            
            
            
            4,436
            
            
            
            4,574Total
      current assets
            
            
            
            
            
            153,754
            
            
            
            112,440Goodwill
            
            7
            
            
            
            3,119
            
            
            
            3,119Property,
      plant and equipment, net
            
            8
            
            
            
            1,279
            
            
            
            1,1814,398
            
            
            
            4,300Total
      assets
            
            
            
            
            
            158,152
            
            
            
            116,740LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short-term
      bank loans
            
            9,
      13
            
            
            
            8,776
            
            
            
            5,850Accounts
      payable – Trade
            
            
            
            
            
            21,341
            
            
            
            15,678Customer
      deposits for sales of equipment
            
            
            
            
            
            1,722
            
            
            
            1,582Due
      to related parties
            
            13
            
            
            
            5,599
            
            
            
            4,947Income
      tax payable
            
            
            
            
            
            10,288
            
            
            
            7,132Accrued
      expenses and other accrued liabilities
            
            
            
            
            
            30,005
            
            
            
            16,473Total
      current liabilities
            
            
            
            
            
            77,731
            
            
            
            51,662Commitments
      and contingencies
            
            14Stockholders’
      equity:Preferred
      stock, US$0.001 par value, 10,000,000 shares authorized, no shares
      issuedCommon
      stock and paid-in-capital, US$0.001 par value:Authorized
      – 100,000,000 shares as of September 30, 2010 and December 31,
      2009Issued
      and outstanding – 10,558,264 shares as of September 30, 2010 and
      10,404,550 shares as of December 31, 2009
            
            12
            
            
            
            11
            
            
            
            11Additional
      paid-in capital
            
            
            
            
            
            21,690
            
            
            
            18,989Dedicated
      reserves
            
            
            
            
            
            5,836
            
            
            
            4,807Accumulated
      other comprehensive income
            
            
            
            
            
            5,682
            
            
            
            5,682Retained
      earnings
            
            
            
            
            
            47,202
            
            
            
            35,589Total
      stockholders’ equity
            
            
            
            
            
            80,421
            
            
            
            65,078Total
      liabilities and stockholders’ equity
            
            
            
            
            
            158,152
            
            
            
            116,740


4
  Telestone
Technologies Corporation





Condensed
Consolidated Statements of Cash Flows
 Nine
months ended September 30, 2010 and 2009


(Unaudited)Nine
      months ended
              September
      30,2010
            
            
            2009US$’000
            
            
            US$’000Cash
      flows from operating activitiesNet
      income
            
            
            12,642
            
            
            
            7,362Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation and
      amortization
            
            
            227
            
            
            
            253(Reversal
      of) Allowance for doubtful accounts
            
            
            (352
            )
            
            
            1,163Loss
      on disposal of property, plant and equipment
            
            
            2
            
            
            
            -Stock-based
      compensation
            
            
            2,701
            
            
            
            -Changes
      in assets and liabilities:Accounts
receivable
            
            
            (44,694
            )
            
            
            (17,009
            )Due from related
      parties
            
            
            -
            
            
            
            164Inventories
            
            
            1,741
            
            
            
            913Prepayments
            
            
            425
            
            
            
            577Other current
    assets
            
            
            138
            
            
            
            1,253Accounts payable
            
            
            5,663
            
            
            
            3,562Customer
      deposits for sales of equipment
            
            
            140
            
            
            
            493Due
      to related parties
            
            
            652
            
            
            
            35Income tax payable
            
            
            3,156
            
            
            
            (105
            )Accrued expenses and other accrued
      liabilities
            
            
            13,532
            
            
            
            (1,718
            )Net
      cash used in operating activities
            
            
            (4,027
            )
            
            
            (3,057
            )Cash
      flows from investing activitiesProceeds
      from disposal of property, plant and equipment
            
            
            1
            
            
            
            -Purchase
      of property, plant and equipment
            
            
            (328
            )
            
            
            (366
            )Net
      cash used in investing activities
            
            
            (327
            )
            
            
            (366
            )Cash
      flows from financing activitiesRepayment
      of short-term bank loans
            
            
            (3,656
            )
            
            
            (2,918
            )Short-term
      bank loans raised
            
            
            6,582
            
            
            
            3,656Net
      cash from financing activities
            
            
            2,926
            
            
            
            738Net
      decrease in cash and cash equivalents
            
            
            (1,428
            )
            
            
            (2,685
            )Cash
      and cash equivalents, beginning of the period
            
            
            11,233
            
            
            
            7,866Effect
      on exchange rate changes
            
            
            -
            
            
            
            107Cash
      and cash equivalents, end of the period
            
            
            9,805
            
            
            
            5,288Supplemental
      disclosure of cash flow informationInterest
      received
            
            
            79
            
            
            
            7Interest
      paid
            
            
            (294
            )
            
            
            (76
            )Tax
      paid
            
            
            (227
            )
            
            
            (2,587
            )


5
  Telestone
Technologies Corporation


Notes
to Condensed Consolidated Financial Statements
 Nine
months ended September 30, 2010 and 2009




1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES





Telestone
Technologies Corporation (“TSTC”), formerly known as Milestone Capital, Inc.,
was organized under the laws of the State of Colorado in February 1987 under the
name Shield Enterprises, Inc. In August 2004, TSTC reincorporated in the State
of Delaware under the name Telestone Technologies Corporation.





Success
Million International Limited (“SMI”), a company established in the Hong Kong
Special Administrative Region of the People’s Republic of China (the “PRC”) on
August 23, 2004, is a wholly owned subsidiary of TSTC and had no business
operations since incorporation. Beijing Telestone Technology Company Limited
(“Beijing Telestone”), a wholly-owned subsidiary of SMI established in Beijing,
the PRC with an operating period until April 12, 2024, is engaged in the
business of design, development, installation and trading of wireless
telecommunication coverage system equipment.





Beijing
Telestone Wireless Telecommunication Company Limited (“BTWTC”)(note), a company
established in Beijing, the PRC with tenure of 20 years from June 17, 2005 to
June 16, 2025 for provision of wireless telecommunication networking and system
integration services, is owned by certain key management personnel of the
Company (the “Owners”). Contractual agreements have been entered into between
the Owners and Beijing Telestone so as to give effect that Beijing Telestone is
the beneficial owner of BTWTC. Beijing Telestone does not hold the ownership
interests in BTWTC directly 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 networking services in
the PRC, Beijing Telestone, through loans to the Owners, established BTWTC with
a view to conduct such operations without violating the relevant PRC rules and
regulations. As a result of the above contractual arrangement, Beijing Telestone
has obtained control and interest over BTWTC. Beijing Telestone is considered as
the primary beneficiary of BTWTC and therefore BTWTC is considered as a variable
interest entity (“VIE”) of Beijing Telestone so that the financial statements of
BTWTC are consolidated into the financial statements of Beijing Telestone for
all periods presented in accordance with ASC Topic 810 – Consolidation (ASC
810).





On July
5, 2007, BTWTC, Shandong Guolian Telecommunication Technology Limited
(“Guolian”)(note) and owners of Guolian entered into a Share Transfer Agreement
(the “Agreement”). Under the Agreement, 100% equity ownership interests in
Guolian and its wholly owned subsidiary, Pan-pacific Telecommunication Company
Limited (“Pan-pacific”)(note), had been transferred by the owners of Guolian to
BTWTC. Guolian and Pan-pacific were established in Jinan, Shandong Province, the
PRC on February 9, 1999 and October 22, 1999 respectively. The principal
business activities of Guolian and Pan-pacific are design, development,
production and installation and trading of wireless telecommunication coverage
system equipment.





On
October 8, 2007, BTWTC has established a wholly-owned subsidiary, Beijing
Telestone Communication Technology Corporation Limited (“BTCTC”)(note), with
operating period of 20 years until October 7, 2027. The principal activity of
BTCTC is developing and managing the business operation of the Company outside
the PRC.




6




In this
report, TSTC, SMI, Beijing Telestone, BTWTC, Guolian, Pan-pacific and BTCTC are
collectively referred to as the “Company”.





Note:
              These
      are direct translation of name in Chinese for identification purpose only
      and are not the official name in
English.





2.
            PREPARATION
      OF INTERIM FINANCIAL STATEMENTS





Basis
of presentations




These
unaudited condensed consolidated financial statements have been prepared based
upon Securities and Exchange Commission ("SEC") rules that permit reduced
disclosure for interim periods and include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments and reclassifications)
necessary to present fairly the financial position, results of operations and
cash flows as of  September 30, 2010 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 unaudited
condensed consolidated financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
Form-10K for the year ended December 31, 2009 filed on March 31, 2010. The
results of operations for the three-month and nine-month periods ended September
30, 2010 are not necessarily indicative of the operating results to be expected
for the year ending December 31, 2010.





The
unaudited condensed consolidated financial statements and accompanying notes are
presented in United States dollars and prepared in accordance with generally
accepted accounting principles 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
unaudited condensed consolidated financial statements include the accounts of
TSTC, its subsidiaries and a VIE. All significant intercompany accounts and
transactions have been eliminated upon consolidation.





3.
            EARNINGS
      PER SHARE





The
Company reports earnings per share in accordance with ASC Topic 260 – Earnings Per Share(ASC 260).
ASC 260 requires presentation of basic and diluted earnings per share in
conjunction with the disclosure of the methodology used in computing such
earnings per share.





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





Diluted
earnings per share is computed based on net income to stockholders and the
weighted average number of shares of common stock outstanding during each period
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 outstanding during the
periods ended September 30, 2010 and 2009 was reflected in the calculation of
diluted earnings per share by applying the treasury stock method. Any
anti-dilutive effect of the warrants is excluded from calculation of the
earnings per share.





7





4.
            INCOME
      TAXES





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





TSTC had
net operating losses carry-forward for income tax reporting purposes that might
be offset against future taxable income. These net operating losses
carry-forward 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 tax loss carry-forward will finally expire and therefore cannot be
used. Accordingly, the potential tax benefits of the loss carry-forward 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 made 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. All these entities are subject to the
enterprise income tax (“EIT”) in the PRC at the following applicable
rates:





Unified
      EIT rate
            
            
            25
            %Small
      scale / low profit enterprises
            
            
            20
            %High
      / new technology enterprises (“Hi-tech enterprises”)
            
            
            15
            %





Beijing
Telestone and BTWTC are qualified as Hi-tech enterprises under the current
Enterprise Income Tax Law in the PRC, so they enjoy the preferential tax rate of
15% in the PRC for a three-year period commencing from the year 2009. All other
entities including BTCTC, Guolian and Pan-pacific are subject to the unified tax
rate of 25% for the 9-month periods ended September 30, 2010 and
2009.





Income
tax expenses, comprising EIT, have been provided at the following rates on the
respective subsidiaries’ / VIE’s estimated assessable income arising from the
PRC during the periods.





(Unaudited)
              Nine
      months ended
              September
      30,2010
            
            
            2009%
            
            
            %Beijing
      Telestone
            
            
            15
            
            
            
            15BTWTC
            
            
            15
            
            
            
            15BTCTC
            
            
            25
            
            
            
            25Guolian
            
            
            25
            
            
            
            25Pan-pacific
            
            
            25
            
            
            
            25




8




5.
            OPERATING
      RISK





(a)
              Concentration
      of major customers and suppliers


(Unaudited)
              Nine
      months ended September 30,2010
            
            
            2009US$’000
            
            
            US$’000Major
      customers with revenues of more than 10% of the Company’s total operating
      revenuesRevenues from major
      customers
            
            
            69,940
            
            
            
            35,180Percentage of operating
      revenues
            
            
            99
            %
            
            
            91
            %Number
            
            
            3
            
            
            
            2Major
      suppliers with purchases of more than 10% of the Company’s
      purchasesPurchases from major
      suppliers
            
            
            3,075
            
            
            
            4,907Percentage of
      purchases
            
            
            39
            %
            
            
            37
            %Number
            
            
            3
            
            
            
            3





Accounts
receivable related to the Company’s major customers comprised 99% and 91% of the
total accounts receivables as of September 30, 2010 and December 31, 2009
respectively.





Credit
      risk represents the accounting loss that would be recognized at the
      reporting date if counter parties fail to perform as contracted.
      Concentrations of credit risk (whether on or off balance sheet) 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.





(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.




9




6.
            ACCOUNTS
      RECEIVABLE




(Unaudited)
              As
      of
              September
      30,
              2010
            
            
            As
      of
              December
      31,
              2009US$’000
            
            
            US$’000Completed
      contracts
            
            
            131,222
            
            
            
            89,835Retentions
            
            
            8,651
            
            
            
            5,344139,873
            
            
            
            95,179Allowance
      for doubtful accounts
            
            
            (5,822
            )
            
            
            (6,174
            )134,051
            
            
            
            89,005





Of the
retentions balance as of September 30, 2010 and December 31, 2009, approximately
US$3,023,000 and US$903,000 respectively are expected to be collected after one
year.





7.
            GOODWILL





Goodwill
acquired in connection with the acquisition of Guolian and Pan-pacific by BTWTC
on July 5, 2007 represented the excess of the purchase cost over the fair value
of identifiable net assets acquired at acquisition date. Goodwill is tested at
least annually for impairment in accordance with ASC Topic 350 – Goodwill and Other
Intangible.





8.
            PROPERTY,
      PLANT AND EQUIPMENT, NET





Property, plant and equipment are
summarized as follows:




Estimated
              useful
      life
            
            
            (Unaudited)
              As
      of
              September
      30,
              2010
            
            
            As
      of
              December
      31,
              2009(in
      years)
            
            
            US$’000
            
            
            US$’000Buildings
            
            
            30
            
            
            
            312
            
            
            
            312Leasehold
      improvement
            
            
            5
            
            
            
            87
            
            
            
            87Plant
      and machinery
            
            
            5
            
            
            
            757
            
            
            
            734Office
      equipment
            
            
            5
            
            
            
            1,222
            
            
            
            1,087Motor
      vehicles
            
            
            5
            
            
            
            822
            
            
            
            6673,200
            
            
            
            2,887Accumulated
      depreciation
            
            
            
            
            
            
            (1,921
            )
            
            
            (1,706
            )1,279
            
            
            
            1,181





9.
            SHORT-TERM
      BANK LOANS





As of
September 30, 2010 and December 31, 2009, the balance included a bank loan of
RMB15 million, equivalent to approximately US$2.19 million, which bears interest
to be charged quarterly at 20% above the standard short-term borrowing rate as
stipulated by the People’s Bank of China on the date of the first withdrawal and
is wholly repayable within one year. The loan is secured by guarantees provided
by Mr. Han Daqing (“Mr. Han”), a director of TSTC and a third party guaranty
company. The remaining bank loans of RMB45 million, equivalent to approximately
US$6.59 million, which bear interest to be charged annually at the standard
short-term borrowing rate as stipulated by the People’s Bank of China on the
date of the first withdrawal and are wholly repayable within one year. The loans
are secured by guarantee provided by a third party guaranty company. The
guarantee provided by the third party guaranty company is secured by the
followings:





(a)
              Accounts
      receivable of the Company with an aggregate carrying value as of September
      30, 2010 and December 31, 2009 amounting to RMB51 million, equivalent to
      approximately US$7.46 million, and RMB40 million, equivalent to
      approximately US$5.86 million,
respectively;




10




(b)
            Motor
      vehicles of the Company with an aggregate carrying value as of September
      30, 2010 and December 31, 2009 amounting to RMB1.0 million, equivalent to
      approximately US$0.15 million, and RMB1.4 million, equivalent to
      approximately US$0.21 million,
respectively;





(c)
            Personal
      guarantee provided by Mr. Han; and





(d)
            Personal
      real estate property and securities of the Company held by Mr.
      Han.





10.
            INVENTORIES





Inventories consisted of the
followings:




(Unaudited)
              As
      of
              September
      30,
              2010
            
            
            As
      of
              December
      31,
              2009US$’000
            
            
            US$’000Raw
      materials
            
            
            1
            
            
            
            1Finished
      goods and parts
            
            
            3,136
            
            
            
            4,8773,137
            
            
            
            4,878Provision
      for slow-moving and obsolete items
            
            
            (436
            )
            
            
            (436
            )2,701
            
            
            
            4,442





11.
            SEGMENT
      INFORMATION





During
the periods ended September 30, 2010 and 2009, 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 99% and 98% of its revenue and
operating income during the periods ended September 30, 2010 and 2009
respectively are from the PRC, no geographical segment is
presented.





12.
            COMMON
      STOCK





On
January 20, 2010 and June 22, 2010, TSTC issued 100,000 and 10,000 shares of
common stock respectively for zero consideration. The common stock was granted
to certain senior officers of the Company as an incentive stock-based
compensation for their services rendered in previous years in improving the
business result of the Company and their contribution to the success of the
Company. Details of the stock-based compensation are set out in note 16 to the
condensed consolidated financial statements.





TSTC had
10,558,264 and 10,404,550 shares of outstanding common stock as of September 30,
2010 and December 31, 2009 respectively.




11




The
following table summarizes activities of the warrants:




Number
      of sharesWarrants
      outstanding as of January 1, 2009
            
            
            192,403Expired on March 24, 2009
      (i)
            
            
            (15,000
            )Warrants
      outstanding as of December 31, 2009
            
            
            177,403Cashless exercised on January
      26, 2010 (ii)
            
            
            (65,515
            )Cashless exercised on January
      27, 2010 (ii)
            
            
            (26,222
            )Issued on March 18, 2010
      (iii)
            
            
            40,000Warrants
      outstanding and exercisable as of September 30, 2010 (iv)
            
            
            125,666









(i)
              On
      March 24, 2009, 15,000 shares of warrants
  expired.





(ii)
              On
      January 26, 2010 and January 27, 2010, certain warrant holders elected to
      exercise 65,515 and 26,222 shares of warrants respectively pursuant to the
      cashless exercise provision of the warrants. Consequently, 30,590 and
      13,124 shares of common stock were issued on a net share settlement basis
      to these warrant holders on January 26, 2010 and January 27, 2010
      respectively.





(iii)
              On
      March 18, 2010, TSTC issued a total of 40,000 shares of warrants to a
      third party service provider as stock-based compensation for part of the
      cost of services. Details of the stock-based compensation are set out in
      note 16 to the condensed consolidated financial
  statements.





(iv)
              As
      of September 30, 2010, the 85,666 shares of outstanding warrants issued in
      connection with the February 20, 2007 private placement are exercisable
      over a 4-year period to year 2011 at a per share exercise price of US$11.6
      and the remaining 40,000 shares of outstanding warrants are exercisable
      over a three-year period from September 9, 2010 at a per share exercise
      price of US$18.73. The warrants are classified as equity and the amounts
      attributable to the warrants are recognized within additional paid-in
      capital.





The
following table sets forth the outstanding warrants as of September 30, 2010 and
changes during the 9-month period ended September 30, 2010.





Vested
            
            
            Unvested
            
            
            Total
            
            
            Weighted-average
                exercise
      priceShares
            
            
            Shares
            
            
            Shares
            
            
            US$As
      of January 1, 2010
            
            
            177,403
            
            
            
            -
            
            
            
            177,403
            
            
            
            11.60Cashless
      exercise
            
            
            (91,737
            )
            
            
            -
            
            
            
            (91,737
            )
            
            
            11.60Granted
            
            
            -
            
            
            
            40,000
            
            
            
            40,000
            
            
            
            18.73As
      of September 30, 2010
            
            
            85,666
            
            
            
            40,000
            
            
            
            125,666
            
            
            
            13.87Weighted-average
      remaining life (years)
            
            
            0.39
            
            
            
            2.94
            
            
            
            1.20




12




13.
            RELATED
      PARTY TRANSACTIONS





Summary
of related party transactions




Note
            
            (Unaudited)
              As
      of
              September
      30,
              2010
            
            
            As
      of
              December
      31,
              2009US$’000
            
            
            US$’000Due
      from related partiesEmployees
            
            a
            
            
            536
            
            
            
            536Ex-stockholders
      of SMI/Guolian
            
            b
            
            
            1,427
            
            
            
            1,4271,963
            
            
            
            1,963Due
      to related partiesDirectors
            
            a
            
            
            4,127
            
            
            
            3,475Ex-stockholders
      of Beijing Telestone/Guolian
            
            b
            
            
            1,472
            
            
            
            1,4725,599
            
            
            
            4,947Guarantor
      of short term loansA
      director
            
            9
            
            
            8,776
            
            
            
            5,850




Note:





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





(b)
            The
      amounts due to ex-stockholders of Beijing Telestone 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 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”)
      announcing that the verdict from the Second Intermediate People’s Court of
      Beijing was kept and SMI was not required to compensate for the
      ex-shareholder.





14.
            COMMITMENTS
      AND CONTINGENCIES





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 as 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, the PRC subsidiaries of the Company recognizes 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.




13




15.
            STOCK
      OPTION PLAN





On
September 27, 2005, a Stock Option Plan (the “Plan”) was approved at the 2005
annual meeting of stockholders. The purpose of the Plan is to promote the growth
and general prosperity of the Company by permitting the Company to grant options
to purchase common stock and restricted stock of the Company to key employees,
non-employee directors, and advisors. The Plan is designed to help the Company
and its subsidiaries and affiliates attract and retain superior personnel for
positions of substantial responsibility and to provide key employees,
non-employee directors, and advisors with an additional incentive to contribute
to the success of the Company.





No
options have been granted to any parties during the nine-month periods ended
September 30, 2010 and 2009 and as of the date of these condensed consolidated
financial statements.





16.
            STOCK-BASED
      COMPENSATION





The
Company applies the fair value recognition and measurement provisions of ASC
Topic 718 Compensation – Stock
Compensation (“ASC 718”) to account for stock-based compensation to
employee. ASC 718 requires a public entity to measure the cost of services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. The cost of services is recorded at fair value as of
the grant date and recognized as an expense over the employee’s requisite
service period (generally the vesting period) or at the grant date when it is
fully vested.





Stock-based
compensation for stock or similar instruments granted to non-employee is
determined in accordance with ASC Topic 505-50 Equity-Based Payments to
Non-Employees (“ASC 505-50”). ASC 505-50 addresses transactions in which
equity instruments are issued in exchange for the receipt of goods or services
when the counterparty to the transaction is other than an employee. Stock-based
compensation to non-employees shall be measured at the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. The measurement date shall be the earlier
of the date at which a commitment for performance by the counterparty to earn
the equity instruments is reached or the date at which the counterparty’s
performance is complete.





Stock-based
compensation to employee





On
January 20, 2010 and June 22, 2010, the Board of Directors of TSTC approved to
grant 100,000 and 10,000 shares of restricted common stock with three years
restriction for sale and one year restriction for sale respectively to certain
senior officers of the Company as an incentive compensation for their services
rendered in previous years in improving the business result of the Company and
their contribution to the success of the Company.





The
issuance of common stock is accounted for as equity instruments issued in
exchange for receipt of services. The stock-based compensation costs are
recognized and measured at the quoted price on the date of grant.





For the
9-month periods ended September 30, 2010 and 2009, the Company recognized
stock-based compensation to employees of US$2,209,000 and US$Nil
respectively.





Stock-based
compensation to non-employee





On
September 9, 2009, TSTC entered into an investor relation consulting agreement
(the “Agreement”) with a third party service provider. The Agreement covers a
period of twelve months from date of the Agreement to September 9, 2010. Under
the Agreement, TSTC agreed to grant a total of 80,000 shares of warrants to the
services provider as part of the cost of services. The 80,000 shares of warrants
is vested on September 9, 2010 and carry a 3-year term from the date of vesting
to September 9, 2013.





On March
1, 2010, TSTC entered into another consulting agreement (the “Second Agreement”)
with the third party service provider. Under the Second Agreement, the remaining
40,000 shares of warrants to be granted upon completion of the second stage of
services were amended to 30,000 shares of warrants to be granted upon completion
of the second stage of services with other terms remain unchanged.




14




Following
the completion of the first stage of services as stipulated in the Agreement,
TSTC granted 40,000 shares of warrants with an exercise price of US$18.73 to the
service provider on March 18, 2010. These warrants are accounted for as equity
instruments issued in exchange for receipt of services. Costs are measured at
the estimated fair value of the equity instruments issued on the completion date
of the services. The remaining 30,000 shares of warrants shall be granted upon
the completion of the second stage of services which is expected to be in the
fourth quarter of 2010.





According
to a valuation report dated May 11, 2010 issued by an independent professional
valuer, the estimated per share fair value of the warrants is US$12.3. The
following table presents the assumptions used by the valuer to estimate the fair
value of the warrants using the Binomial Lattice option pricing
model:





Expected
      life
            
            3.5
      yearsExpected
      dividend yield
            
            
            0.00
            %Expected
      volatility
            
            
            96.38
            %Risk-free
      interest risk
            
            
            1.62
            %





Expected
volatility is based on historical volatility of the Company’s common stock.
Historical volatility was computed using daily pricing observations for recent
periods that correspond to the term of the warrants. The expected life is based
on the remaining term of the warrants. The risk-free interest rate is based on
U.S. Treasury yields in effect at the time of grant for periods corresponding
with the expected life of the warrants.





For the
9-month periods ended September 30, 2010 and 2009, the Company recognized
stock-based compensation to non-employees of US$492,000 and US$Nil,
respectively.





The
following table presents the total stock-based compensation included in the
condensed consolidated statements of operations and other comprehensive income
for the 3-month and 9-month periods ended September 30, 2010 and
2009.





(Unaudited)
              Three
      months ended September 30,
            
            
            (Unaudited)
              Nine
      months ended September 30,2010
            
            
            2009
            
            
            2010
            
            
            2009US$’000
            
            
            US$’000
            
            
            US$’000
            
            
            US$’000Sales
      and marketing
            
            
            -
            
            
            
            -
            
            
            
            492
            
            
            
            -General
      and administrative
            
            
            -
            
            
            
            -
            
            
            
            2,209
            
            
            
            -Total
      stock-based compensation
            
            
            -
            
            
            
            -
            
            
            
            2,701
            
            
            
            -





No tax
benefit was recognized for the stock-based compensation recorded for the nine
months ended September 30, 2010.





17.
            RECENT
      ACCOUNTING PRONOUNCEMENTS





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




15




In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10
that requires new disclosure as follows: 1) Transfers in and out of Levels
1 and 2. A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers. 2)  Activity in Level 3 fair
value measurements. In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should present
separately information about purchases, sales, issuances, and settlements (that
is, on a gross basis rather than as one net number). This update provides
amendments to Subtopic 820-10 that clarify existing disclosures as follows:
1) Level of disaggregation. A reporting entity should provide fair value
measurement disclosures for each class of assets and liabilities. A class is
often a subset of assets or liabilities within a line item in the statement of
financial position. A reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities. 2) Disclosures about inputs
and valuation techniques. A reporting entity should provide disclosures about
the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements. Those disclosures are
required for fair value measurements that fall in either Level 2 or Level 3. The
new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company is currently evaluating
the impact this update will have on its consolidated financial
statements.





In
February 2010, the FASB issued ASU 2010-09, Subsequent event. This ASC
amends certain recognition and disclosure requirements to FASB ASC 855. ASU
2010-09 requires an entity that is an SEC filter or is a conduit bond obligor
for conduit debt securities that are traded in a public market to evaluate
subsequent events through the date that the financial statements are issued but
remove the requirement for an SEC filer to disclose a date in both issued and
revised financial statements. These amendments are effective upon issuance of
the final Update, except of the use of the issued date for conduit debt
obligors. That amendment is effective for interim or annual periods ending after
September 15, 2010. The adoption of this ASU does not have a material impact on
the Company’s consolidated financial statements.





In April
2010, the FASB issued ASU 2010-13, Compensation – Stock
Compensation. This ASC provides amendments to FASB ASC 718 to clarify
that an employee share-based payment award with an exercise price denominated in
the currency of a market in which a substantial portion of the entity’s equity
securities trade should not be considered to contain a condition that is not a
market, performance, or service condition. As a result, an entity would not
classify such an award as a liability if it otherwise qualifies as equity. The
amendments are effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2010. The adoption of this ASU
is not expected to have a material impact on the Company’s consolidated
financial statements.





In April
2010, the FASB issued ASU 2010-18,Receivables. The ASC
provides amendments to FASC ASC 310. As a result, modifications of loans that
are accounted for within a pool under Subtopic 310-30 do not result in the
removal of those loans from the pool even if the modification of those loans
would otherwise be considered a troubled debt restructuring. Effective for
modifications of loans accounted for within pools under Subtopic 310-30
occurring in the first interim or annual period ending on or after July 15,
2010. The amendments are to be applied prospectively. Early application is
permitted. The adoption of this ASU has no material impact on the Company’s
consolidated financial statements.




16




In May,
2010, the FASB issued ASU No. 2010-19, Foreign Currency (Topic 830), which
provides guidance for disclosures where there are multiple exchange rates. A
Venezuelan official rate and a parallel Bolivar exchange rate may result in a
difference between actual US Dollar-denominated balances and reported balances.
This update guides the required disclosure. This update has no effect on the
Company’s current accounting practices or financial reporting.





In July,
2010, the FASB issued ASU 2010-20, Receivables (Topic 310). The ASC provides
updates to FASC ASC 310 to enhance disclosures about the credit quality of
financing receivables and the allowance for credit losses. Existing disclosure
guidance is amended to require an entity to provide a greater level of
disaggregated information about the credit quality of its financing receivables
and its allowance for credit losses. In addition, the amendments in this Update
require an entity to disclose credit quality indicators, past due information,
and modifications of its financing receivables. For public entities, the
disclosures as of the end of a reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010. The adoption of
this ASU is not expected to have material impact on the Company’s consolidated
financial statements.





In
September, 2010, the FASB issued ASU 2010-25, Defined Contribution Pension Plans
(Topic 962). The ASC provides amendments to require that participant loans be
classified as notes receivable from participants, which are segregated from plan
investments and measured at their unpaid principal balance plus any accrued but
unpaid interest. The amendments in this Update should be applied retrospectively
to all prior periods presented, effective for fiscal years ending after December
15, 2010. Early adoption is permitted. This update has no effect on the
Company’s current accounting practices or financing reporting.




18.
            SUBSEQUENT
      EVENT REVIEW





The
Company has evaluated subsequent events up to the date that these consolidated
financial statements were approved and authorized for issue by the Board of
Directors.




17




ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.




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 "believe,"
"anticipate," "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 SEC
from time to time, which could cause actual results or outcomes to differ
materially from those projected.  Undue reliance should not be place
on these forward-looking statements which speak only as of the date
hereof.  We undertake no obligation to update these forward-looking
statements, except to the extent required by law.




The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Quarterly Report on Form
10-Q.





Overview





We are a
leading supplier of local access network solutions for communications networks
in China. We design, engineer and sell RF-based local access network solutions
for indoor and outdoor wireless coverage, IP-based products for Internet access,
and unified local access network, or ULAN, solutions based on our Wireless and
Fiber-Optics Distribution System, or WFDS, technology.  Our local
access network solutions integrate and enhance communication coverage and
improve the signal quality of reception for wireless, Internet, wireline, cable
television and other end user applications.  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 rural areas.  As part of our comprehensive
network solution, we provide professional services, including upfront system
design, implementation and network maintenance.  Our primary customers
are China Mobile, China Unicom and China Telecom, or the Big 3, and commercial
and residential property owners in China.  We have 30 branches
throughout China, six international sales offices and an international network
of system integrator partners.  We believe our solutions offer a
compelling value proposition to our customers as our solutions offer lower costs
of ownership and increase overall efficiency.





Since our
establishment in 1997, we have maintained business relationships with China
Mobile, China Unicom and China Telecom (the “Big 3”), who combined currently
account for over 95% of our annual revenue.  Although we expect
customer concentration to decrease as we expand internationally outside of
China, we expect to increase our penetration within the Big 3 by leveraging our
state-of-the-art technology solutions.  WFDS currently is the only
commercially available solution fully compatible with the service platforms of
the Big 3, and offering voice, video, data, wireless LAN, FTTH, Internet,
digital cable TV networks and video surveillance.  Due to our
performance, cost savings to carriers, easy installation and minimal intrusion
to property owners, we expect to continue to expand our market share within
China.




Our
ability to continue to increase product revenue will depend significantly on the
growth of the Chinese telecommunications market, continued adoption of our WFDS
technologies, our ability to maintain relationships with China’s Big 3 carriers,
our ability to capitalize on China’s recent 3G government initiatives, and our
ability to expand our presence internationally.  Our growth in
professional services revenue will depend upon increasing our installed base of
customers along with the pace at which our existing customers continue to
migrate from 2G to 3G services.





Our
future profitability and rate of growth will be directly affected by the
continued acceptance of our products in the marketplace, as well as the timing
and size of orders, average selling prices, costs of our products and general
economic conditions.  Our ability to scale profitability will be
affected by our ability to effectively generate incremental business within
China for our higher-margin WFDS technology.




18




In
addition to China, we currently market to 29 countries, including Argentina,
Bangladesh, Brazil, Canada, Colombia, Costa Rica, Ecuador, Hong Kong, Iceland,
India, Indonesia, Ireland, Kazakhstan, Malaysia, Mexico, Mongolia, New Zealand,
Philippines, Russia, Saudi Arabia, Singapore, South Africa, South Korea,
Thailand, Turkey, the United States, the United Arab Emirates, Ukraine, and
Vietnam.  Continuous expansion outside of China is one of our core
strategies.  We believe that the quality of our products and services
will allow us to become increasingly competitive internationally.





We
believe that the high technology content in our business and our continued
effort to develop market leading next-generation technology have led to
recognition by China’s local and central government agencies and
organizations.  In 2009, we received various technology awards,
certifications and honors.  Most recently we were certified as a “High
and New Technology Enterprise” by the Beijing municipal
government.  In addition, our trademark was recognized as a well-known
trademark of Beijing by the local Industry and Commerce Bureau.  In
addition, we have won the title of “A-Rated Good Credit Enterprise” which
entitles us to credit guarantees by Beijing Z-Park Sci-tech Guarantee
Co.





Industry
Background





As the
mobile market in China continues to mature, mobile operators have begun to
invest in the future.  In particular, the Chinese telecommunications
industry has witnessed accelerated development in recent years with a rapid
rollout of 3G network investments and commitments to introduce 4G technology by
2011. Such is also evidenced by China Mobile, China Telecom, and China Unicom’s
€1.178 billion EUR ($1.625 billion USD) purchase of network and application
solutions, and integration and maintenance services from Alcatel-Lucent on
November 5, 2010 during the France visit of Chinese President Hu
Jintao.





We also
believe that disparate technologies used by mobile carriers in the United
States, the continued roll-out of 3G, and the future roll-out of 4G also
provides a conducive environment and creates potential demand for our
WFDS-enabled equipments and solutions in the United States.




The
Rapid Growth of Wireless Subscribers in China





China has
repeatedly expressed a commitment to continuing economic growth, aimed at
improving the living standards of its population and at expanding its middle
class.  This growth has led to increasing urbanization among the
Chinese population with migrant workers moving to cities.  There is
now a growing demand among both enterprises and households in China for improved
wireless bandwidth and network performance.  China is the largest
wireless market in the world with approximately 747 million mobile subscribers
in China.  While this number is large, there is still opportunity to
expand as the mobile user penetration rate in China is currently relatively
low.





The
number of wireless subscribers in China across both 2G and 3G platforms is
projected to grow from 747 million at the end of 2009 to 925 million by the end
of 2011, a Compound Annual Growth Rate (CAGR) of 11%.  According to
the Ministry of Industry and Information Technology, or MIIT, the number of 3G
wireless subscribers is expected to grow at a 216% CAGR, increasing from 15
million to 150 million during the same period.





Wireless
Infrastructure Growth Drivers in China





During
the 2G era, a majority of mobile traffic was voice, and hence network coverage
mainly focused on breadth rather than on depth.  However, as we enter
into the 3G era in China, approximately 70% of the 3G traffic has focused on
data.  As a result, in-depth network coverage has become 3G operators’
first priority and we believe that the demand for wireless enhancement equipment
has become much more important than in the past.  We believe that the
room for growth in such demand is evident as the population coverage levels of
existing 3G networks are still below 70% in most cities currently covered, and
less than half of China’s 650 major cities are supported by 3G.




19




Chinese
Government Sponsored 3G Build-Out





Telecommunication
capital expenditure is expected in the coming years as the Big 3 plan to build
out their 3G coverage networks through Chinese government support and
incentives.  According to MIIT, the Chinese government announced plans
to contribute $58.6 billion in 3G upgrades from 2009 to 2011, with $23.6 billion
already contributed in 2009, in an effort to extend 3G wireless coverage across
nearly all of China.  With the Chinese government’s assistance, the
Big 3 have budgeted $70 billion of spending from 2009 to 2011 to deploy 3G
networks.





Significant
Construction of New Residential and Commercial Properties





Real
estate in China has exhibited growth with little slow down; total real estate
investment increased at a CAGR of 23% from 1998 – 2009.  Demand for
new real estate construction is expected to remain healthy going forward as
evidenced by an anticipated shortage of supply in 2010.  For example,
according to China’s National Bureau of Statistics, in 2009, 702 million square
meters of commercial and residential properties were constructed, while 937
million square meters of new property rights were sold.




The
Chinese government encourages fair competition among the Big 3 and cable service
providers to give consumers viable choices.  As a result, property
owners install hardware platforms for the Big 3’s 2G and 3G technologies, cable
and Internet networks. This often results in numerous devices being deployed
on-site, which is inefficient and costly for property owners.  As a
result, an increasing demand by properties owners for equipment that can
integrate coverage from the Big 3 and also provide integrated services in a
single platform is expected.





Growth
in Mobile Subscribers





Growth in
the wireless infrastructure market is also driven by the significant increase in
the number of mobile subscribers and in the amount of data transmitted over
wireless networks through smart phones in China.  These growths result
in burdens being placed on the carriers’ wireless infrastructure that can
overload the network; overworked wireless networks result in poor wireless
service, slow data transfer rates and dropped calls.  In order to
alleviate the constraints being put on wireless infrastructure and to increase
wireless network capacity, the Big 3 continue to deploy and upgrade wireless
infrastructure equipment.





Integration
of the Three Networks





There is
continued growth in the number of users of Internet, mobile phones and
cable/digital TV in China.  This trend is causing legacy telecom,
Internet, TV/radio networks to become more dependent on each other to provide
services to their respective customers.  For example, TV networks are
integrating with Internet networks to offer IPTV, cable networks are integrating
with Internet networks to offer cable Internet, and TV networks are integrating
with wireless networks to deliver mobile TV.  According to the IChina
Research Center, $15.2 billion is expected to be spent on telecommunication
upgrades to support the integration.





“The
Internet of Things”





In China,
a budding phenomenon has developed, referred to as “The Internet of Things” in
organizations and businesses.  The Internet of Things literally
translates into “the connection of things”, whether they are products,
components or systems, so that individuals can communicate intelligently with
one another and can communicate with their home and office computers and home
appliances remotely.  Everything from home appliances, public
infrastructure and facilities, to logistic process will be assigned an IP
address and connected to the Internet of Things through wireline or wireless
connection.  This demand is expected to increase the need for wireless
infrastructure.




20




Digital
Cable Network Reconstruction





Last year
marked the sixth year in the digitization of cable television in
China.  At the end of 2009, cable subscribers numbered more than 174
million, and digital cable subscribers accounted for about 36% of the total,
reaching 62 million. Concurrent with the technology spending required to deliver
extras such as HDTV and programming on demand, an emphasis has been placed on
innovating cost-effective cables.




Increasing
and Evolving Need for Indoor Wireless Coverage





Historically,
“indoor wireless” meant only Wi-Fi enabled laptops, but currently, mobile users
in China also rely on mobile and smart phones, BlackBerry devices, PDAs, and
two-way radios to communicate.  All of these devices require indoor
wireless coverage to operate effectively.  However, while many
residential and commercial properties in China may have wireless LAN routers,
the vast majority do not have indoor wireless cellular coverage for mobile or
smart phones.  In order to better serve the needs of their tenants, we
expect that property owners are increasingly looking to deploy indoor wireless
coverage solutions.





Recent
Shifts in Chinese Regulations





The
Chinese government is committed to simplifying the telecommunications industry
by standardizing the equipment used in order to create a more competitive market
environment.  In addition to standardization, there is a near
unanimous government support of integration of high-speed Internet, Wi-Fi,
television programming, and voice and data networks.  In order to
accelerate this integration, in January 2010, the State Council issued a
directive for the consolidation of China’s three primary communication networks
(telecommunications, television & radio broadcasting, and the Internet) into
one, within a five year window.  As the number of products and
applications that need to be transmitted continues to compound, this directive
has opened up a great market opportunity for technology solutions capable of
consolidating telecommunications, television and radio broadcasting, and the
Internet into one simple form factor.





Limitations
of Competitive Solutions





We
believe that competitive wireless infrastructure solutions currently do not
comply with the Chinese government’s convergence initiatives and do not fully
meet the needs of the Big 3 and property owners.  In
particular:





·
            No other vendor integrates the
      Big 3’s technology, cable and Internet service into one
      solution.  Historically, there has not been a single
      platform compatible with disparate technology requirements of the Big 3
      that can also provide integrated services.  The lack of
      integration results in eleven hardware deployments (equipment compatible
      with 2G, 3G and internet coverage of each of the Big 3, cable TV, and
      cable internet) to support the various services required by the tenants of
      property owners.





·
            Non-integrated
      services require significant capital expenditure and are labor
      intensive.The Big 3 have
      significant upfront capital expenditures and labor requirements to fulfill
      their respective deployments as competitive solutions do not integrate
      carrier technology or
services.




·
            Non-integrated services
      requires large amount of space.  Deployment of eleven
      on-site hardware devices takes up valuable real estate
    space.





·
            Non-integrated
      services are difficult to maintain.Installing, managing
      and maintaining eleven on-site hardware devices is relatively cumbersome
      and costly for the Big 3 and the property
  owners.




21




Our
Solution





We
design, engineer and sell RF-based local access network solutions for indoor and
outdoor wireless coverage and WFDS solutions for unified local access network
coverage.  In the past, our focus has been on the RF-based local
access network solution, but in the future we expect to leverage our WFDS
technology to transition our customers to a unified local access network
solution.  Our WFDS solutions are designed for use by property owners
of all buildings including enterprises, municipalities, small businesses and
homes.  Our unified local access network WFDS solutions integrate
multiple access services, have a lower total cost of ownership and provide
better wireless coverage.





Unified
Local Access Network WFDS Solution





We plan
to leverage our first-mover advantage with our WFDS technology in order to
increase our penetration in China and to strengthen our relationships with the
Big 3 for whom we believe our WFDS solution is a critical component to remain
aligned with industry trends and government-sponsored initiatives.





Key
benefits of our unified local access network WFDS solution include:





·
            Compatibility with the Big 3’s
      technologies and integrated services.  Our WFDS solution
      is an industry-first solution capable of providing integrated services on
      a single integrated platform.  Our unified solution approach as
      well as our commitment to research and development, have strategically
      positioned us to be a benefactor of the Chinese government’s directive for
      network convergence.





·
            Reduction in capital
      expenditures.  The combination of integrating services
      along with the use of our patented fiber-optic technology should enable
      the Big 3 to significantly reduce their wireless infrastructure capital
      expenditures.





·
            Reduction in space
      required.  Utilizing our WFDS technology, property owners
      can reduce the installation space required for mobile wireless cable and
      Internet service from eleven devices to one.  In a single
      compact, all- optical platform, we offer customers integrated solutions
      streamlined to meet our customer’s
requirements.





·
            Easy to
      install, use and maintain.Our WFDS solution
      enables a property owner to deploy a single multi-functional platform in a
      simple and consolidated form factor.  WFDS is easy to install
      and is centrally managed, is compatible with 2G and 3G services, and is
      forward compatible with 4G
services.





RF-based
Local Access Network Solutions





We
provide RF-based local access network solutions to the telecommunications
industry for environments including hotels, residential estates, office
buildings, airports, exhibition centers, underground stations, highways and
tunnels.  Our suite of products that we deploy as part of these
solutions includes base station and tower mounted amplifiers, antennas, couplers
and splitters.  Our RF-based products support various 2G and 3G
transmission protocols, including CDMA, W-CDMA, GSM and TD-SCDMA.





Our
Competitive Strengths





We
believe the following competitive strengths enable us to compete effectively and
to capitalize on growth opportunities in our markets:




22




Leading
Local Access Network Solution Provider Poised to Benefit from Chinese Government
Initiatives





As an
innovative local access network solution provider, we are uniquely positioned to
benefit from the various Chinese government-sponsored initiatives.  In
addition, we maintain good relations with the Ministry of Science and
Technology, the Ministry of Industry and Information Technology, the Beijing
municipal government and the Administrative Committee of
Z-Park.  These relationships provide us with timely information
regarding opportunities to receive financing support, research and development
reimbursement, and tax incentives, thereby enabling us to plan our activities
timely.  We intend to leverage our existing government support to
build our technology leadership position and to continue to pioneer industry
firsts.





State-of-the-Art
Unified Local Access Network WFDS Solution





We
believe our industry leading WFDS solution is the only commercially available
solution that is fully compatible with the Big 3’s respective technology
requirements and can offer integrated services in a single
platform.  Our WFDS systems can be deployed in various types of
properties.  We currently have received 60 patents for WFDS, and have
an additional 40 filed patent applications for WFDS under review.  In
September 2009, WFDS technology successfully passed all United States Federal
Communications Commission, or FCC, testing procedures.  The FCC
certification will not only apply to the U.S. market, but also to our WFDS
products in Central and South America.  We expect to gain significant
traction in the indoor wireless coverage market through our first mover
advantage.




Leading
Research and Development Capabilities





We have
leading research and development capabilities in China, and we have won awards
from the Ministry of Science and Technology.  We have more than 100
research and development specialists of which over 40% have at least a master’s
degree.  Our research and development staff includes specialists in RF
and WFDS technology; these employees are comparatively difficult to recruit and
we believe our strong staff provides us with a competitive
advantage.  Our research and development laboratory has
state-of-the-art equipment intended to give our personnel the tools to make
significant advances in wireless coverage technologies.  In addition,
we provide our employees with continuing education administered through internal
programs.





Long-Term,
Established Customer Relationships





We have
maintained long-term relationships with the Big 3 as customers for thirteen
years.  Given the conservative nature of the Big 3, we believe that
our long-term relationship with them provides us with a competitive advantage
over new entrants or less mature Chinese companies in selling wireless
infrastructure in China.  Additionally, with the significant ownership
the Chinese government has over the Big 3 and the protected nature of the
wireless equipment infrastructure market in China, we believe that it would be
difficult for international competitors to gain traction with the Big
3.





Extensive
Branch Network Providing Strong Sales Network and Customer Service





We employ
a group of experienced and technologically savvy sales and marketing staff in
China.  Selling local access network solutions is a relationship
driven business and therefore requires extensive touch points.  As our
business is based on a direct sales model, and covers a broad and diverse
customer base, we have 30 branches across all but one province in
China.  Through this branch network, we have a strong sales effort and
can deliver timely customer service.





Experienced
Management Team with a Proven Track Record





Our
management team has a track record of success at both public and private
companies, including extensive experience within the Chinese wireless
communications market.  Mr. Daqing Han, our founder, Chairman and
President, has extensive knowledge of the telecommunications industry in China
through over 25 years of experience.  Mr. Han and most of our senior
management have worked together as a team for over 13 years and have
successfully built our business and increased revenue from $21.7 million in 2006
to $71.9 million in 2009.




23




Our
Growth Strategy





Our
strategic focus is to build on our position as a leading provider of local
access network solutions in China and increase our international market
presence.  Key elements of our growth strategy include:




Increase
Market Share in China





We have
uniquely positioned ourselves to be a major benefactor of various Chinese
government-sponsored initiatives.  We have built trust and earned
validation from the Big 3 and from the Chinese government, which continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership.  We plan on leveraging our
industry-leading local access network solutions, our track record of successful
deployment of our solutions in projects in various geographical regions in
China, and our strong relationships to increase our market share in
China.





Leverage
First Mover Advantage for WFDS





The
Chinese government recently issued a directive to integrate 2G and 3G wireless
signal coverage, Internet, TV and radio, and voice and data services into a
single platform.  To help encourage the integration, the Chinese
government has committed to provide financial incentives in order to increase
competition and meet its projected timetable, which is expected to be completed
over the next five years.  We believe our WFDS product is currently
the only solution in the market that can deliver an integrated
service.





Continue
to explore and capitalize on WFDS Leasing Model





We have
recently pioneered a new WFDS leasing model.  As opposed to selling
our WFDS equipment to carriers, we are testing a leasing model in which we
maintain ownership of the equipment installed on the property
premise.  The Big 3 pays us a monthly fee to “lease” bandwidth on the
WFDS solution in order to deliver integrated services to the property
tenants.  We would in turn share a portion of the monthly leasing fee
with the property owners in return for them providing us with space on the
property to install our equipment.  The Big 3 benefit as well as they
will no longer need to pay upfront for the equipment.





The
leasing model would not only provide a steady revenue stream, it would also
yield higher gross margins, and we expect it will be attractive to property
owners and the Big 3.





Extend
Our Research and Development Leadership and Product Development





We plan
to continue to invest in research and development and product development for
our solutions to enhance our leadership position for unified local access
network solutions. We have a dedicated team of over 60 research and development
specialists to continue the development of solutions and we expect to maintain
meaningful investments in research and development on a going-forward
basis.





Seek
Selective Acquisitions and Strategic Investments





We have
in-depth knowledge of smaller equipment vendors or solutions providers in the
Chinese local access network market.  We may selectively acquire
smaller participants in the sector to expand our product offering or market
presence.  Potential targets are companies that have strong traction
with the Big 3 in their local markets or have technologies to bolster our
product offering.




24




Strengthen
International Market Presence





We intend
to increase our international presence over the next few years.  We
have already established partnerships with, and will continue to find and train
value-added resellers and systems integrators in international markets to sell
our solutions.  We currently have six sales offices outside of China
and intend to increase this number in the near-term.  While we
currently generate less than 5% of our revenue from sources outside of China, we
expect the international market, especially the U.S., will represent a
significant growth opportunity for us in the future.





Revenue,
Cost of Revenue and Operating Expenses





We derive
our revenue from sales of our RF-based local access network solutions for indoor
and outdoor wireless coverage, IP-based products for Internet access, and ULAN
solutions based on our WFDS systems, and professional
services.  Professional services revenue consists of upfront system
design, implementation and network maintenance.





Our
revenue growth has been driven primarily by an expansion of our provincial-level
Big 3 customer base in China, an expansion of our product portfolio from
RF-based products to our newer WFDS product, and continued international
expansion.  We believe the market for our products is very large as
China is the world’s largest mobile market.





Cost
of Products and Professional Services





Cost of
product revenue consists primarily of manufacturing costs for our products,
shipping and logistics costs, and expenses for warranty
obligations.  We have outsourced the substantial majority of our
manufacturing to Shijiazhuang Spectrum Digital Communication Company, our
contract manufacturer who manufactures exclusively for us. Accordingly, the
substantial majority of our cost of revenue consists of payments to Shijiazhuang
Spectrum and our component suppliers.





Cost of
professional services revenue is primarily comprised of related personnel costs
and technical support costs, including personnel costs associated with our
internal support organization.





Gross
Margin





Our gross
margin has been, and will continue to be, affected by a variety of factors,
including:





product mix and average selling
prices;





new product introductions and
enhancements both by us and by our competitors;





demand for our products and
services;





our ability to attain volume
manufacturing pricing from Shijiazhuang Spectrum and our component
suppliers;





losses associated with excess and
obsolete inventory; and





growth in our headcount and other
related costs incurred in our professional services
organization.





Operating
Expenses





Operating
expenses consist of sales and marketing expenses, general and administrative
expenses, and research and development expenses.  The largest
component of our operating expenses is personnel costs.  Personnel
costs consist of salaries, benefits and other compensation for our
employees.  We have approximately 1097 full-time employees as of
September 30, 2010.




25




Sales and
marketing expenses represent the largest component of our operating expenses and
primarily consist of sales and marketing expenses, including all related
expenses and compensation for sales personnel and travel expenses related to
sales of products and market development.  We expense sales and
marketing expenses as incurred.





We plan
to continue to invest strategically in sales and marketing with the intent to
add new customers and increase penetration within our existing customer base,
expand our China and international sales and marketing activities, build brand
awareness and sponsor additional marketing events.  We expect future
sales and marketing expenses to continue to be our most significant operating
expense.





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





Research
and development expenses primarily consist of compensation for research and
development staff, material expenses, travel expenses and facility
expense.  We expense research and development expenses as incurred. We
are devoting substantial resources to the continued development of additional
functionality for existing products and the development of new
products.  We intend to continue to invest in our research and
development efforts because we believe it is essential to maintaining our
competitive position.  The dollar amount invested in our research and
development activities will increase as we continue to increase our
revenue.  However, as a percentage of revenue, research and
development costs are expected to remain relatively low.





Interest
Expense





Interest
expense includes interest we pay on our short-term bank loans.




Other
Income (Expense), net





Other
income (expense), net includes interest income on cash balances, gain or loss
from disposal of assets, gains or losses on conversion of non-Renminbi
transactions into Renminbi, and gains from governmental subsidy.  Cash
has historically been invested in highly liquid investments with original
maturities of three months or less.





Income
Tax Expense





Income
tax expense is computed based on pre-tax income included in the consolidated
statement of operations.  Income taxes have been provided, using the
liability method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and tax bases assets and liabilities and their
reported amounts.  The tax consequences of those differences are
classified as current or non-current based upon the classification of the
related assets or liabilities in the consolidated financial
statements.





Critical
Accounting Policies





Our
consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”).  These accounting principles
require us to make estimates and judgments that affect the reported amounts of
assets and liabilities as of the date of the consolidated financial statements,
as well as the reported amounts of revenue and expenses during the periods
presented.  We believe that the estimates and judgments upon which we
rely are reasonable based upon information available to us at the time that
these estimates and judgments are made.  To the extent there are
material differences between these estimates and actual results, our
consolidated financial statements will be affected.  The accounting
policies that reflect our more significant estimates and judgments and which we
believe are the most critical to aid in fully understanding and evaluating our
reported financial results include revenue recognition, foreign currency
translation, inventory valuation, allowances for doubtful accounts, and
goodwill.




26




Revenue
Recognition





Our
revenue is derived primarily from two sources: (1) product revenue and
 (2)  professional services revenue.





Product
revenue represents the invoiced value of goods, net of value-added tax (“VAT”)
and returns.  The Company generally recognizes product revenue when
persuasive evidence of an arrangement exists, delivery occurs, the fee is fixed
or determinable, and collectability is probable.  Professional service
revenue is recognized when the service is performed and accepted by the
customer.





As part
of professional services, the Company provides installation services for certain
sales of equipment under fixed-price contracts.  Revenue from these
fixed-price service contracts are recognized on the completed-contract
method.  Under the completed-contract method, revenue and costs of
individual contracts are included in operations in the year during which they
are completed.  Losses expected to be incurred on contracts in
progress are recognized in the period such losses are
determined.  This method is used because the contract is completed
within a short period of time, and the financial position and results of
operations do not vary significantly from those that would result from using the
percentage-of-completion method.  A contract is considered completed
upon completion of all essential contract work and the installation has been
accepted by the customer.





Foreign
Currency Translation





All major
subsidiaries of the Company consider Renminbi as their functional currency as
a substantial portion of their business activities is based in
Renminbi.  However, the Company has chosen the United States dollar as
its reporting currency.





Transactions
in currencies other than the functional currency during the year are translated
into the functional currency at the applicable rates of exchange prevailing at
the time of the transactions.  Monetary assets and liabilities
denominated in currencies other than the functional currency are translated into
the functional currency at the applicable rates of exchange in effect at the
balance sheet date.  Exchange gains and losses are recorded in the
consolidated statements of operations.





For
translation of financial statements into the reporting currency, assets and
liabilities are translated at the exchange rate at the balance sheet date,
equity accounts are translated at historical exchange rates, and revenue,
expenses, gains and losses are translated at the weighted average rates of
exchange prevailing during the period.  A translation adjustment, when
material, resulting from this process is recorded in accumulated other
comprehensive income within stockholders’ equity.





Inventory
Valuation





Inventory
consists of equipment and related component parts and is stated at the lower of
weighted average cost or market. We record inventory write-downs for potentially
excess inventory based on forecasted demand, economic trends and technological
obsolescence of our products.  If future demand or market conditions
are less favorable than our projections, additional inventory write-downs could
be required and would be reflected in cost of product revenue in the period the
revision is made.  At the point of the loss recognition, a new,
lower-cost basis for that inventory is established, and subsequent changes in
facts and circumstances do not result in the restoration or increase in that
newly established cost basis.  Provision for slow moving and obsolete
items amounted to $0.4 million both for September 30, 2010 and December 31,
2009.




27




Allowances
for Doubtful Accounts





We record
a provision for doubtful accounts based on historical experience and a detailed
assessment of the collectability of our accounts receivable.  In
estimating the allowance for doubtful accounts, our management considers, among
other factors, (1) the aging of the accounts receivable, including trends
within and ratios involving the age of the accounts receivable, (2) our
historical write-offs, (3) the credit-worthiness of each customer,
(4) the economic conditions of the customer’s industry, and
(5) general economic conditions.  In cases where we are aware of
circumstances that may impair a specific customer’s ability to meet their
financial obligations to us, we record a specific allowance against amounts due
from the customer, and thereby reduce the net recognized receivable to the
amount we reasonably believe will be collected. The allowance for doubtful
accounts was $5.8 million as of September 30, 2010.





Goodwill





We apply
ASC Topic 350 – Goodwill and Other Intangibles and perform an annual goodwill
impairment test, or test more frequently if events or changes in circumstances
indicate that the carrying value may be impaired.  Goodwill is
allocated to cash-generating units for the purpose of impairment test and
determination of gain or loss on disposal.





Goodwill
on acquisition of businesses, being the excess of the cost of the acquisition
over the Company’s share of the fair value of the identifiable assets,
liabilities and contingent liabilities, is recognized as a separate asset.
Goodwill is carried at cost less accumulated impairment losses.  An
impairment loss on goodwill is not reversed.  We did not recognize
impairment charges in any of the periods presented.





RESULTS
OF OPERATION





Our
operating results are presented for the quarter ended September 30, 2010, as
compared to the quarter ended September 30, 2009.





The
following is the statement of our operations for the three months ended
September 30, 2010 and 2009.





Item
            
            2010
      Q3
            
            
            2009
      Q3
            
            Comparisons$'000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %
      of revenue
            
            $'000
            
            
            %Revenue
            
            
            43,101
            
            
            
            
            
            
            18,891
            
            
            
            
            
            
            24,210
            
            
            
            128.2
            %Cost
      of products and professional services
            
            
            23,560
            
            
            
            54.7
            %
            
            
            9,977
            
            
            
            52.8
            %
            
            
            13,583
            
            
            
            136.1
            %Gross
      profit
            
            
            19,541
            
            
            
            45.3
            %
            
            
            8,914
            
            
            
            47.2
            %
            
            
            10,627
            
            
            
            119.2
            %Sales
      and marketing expenses
            
            
            4,445
            
            
            
            10.3
            %
            
            
            2,007
            
            
            
            10.6
            %
            
            
            2,438
            
            
            
            121.5
            %General
      and administrative expenses
            
            
            714
            
            
            
            1.7
            %
            
            
            1,182
            
            
            
            6.3
            %
            
            
            -468
            
            
            
            -39.6
            %Research
      and development expenses
            
            
            216
            
            
            
            0.5
            %
            
            
            138
            
            
            
            0.7
            %
            
            
            78
            
            
            
            56.5
            %Depreciation
      and amortization
            
            
            75
            
            
            
            0.2
            %
            
            
            79
            
            
            
            0.4
            %
            
            
            -4
            
            
            
            -5.1
            %Interest
      expenses
            
            
            122
            
            
            
            0.3
            %
            
            
            40
            
            
            
            0.2
            %
            
            
            82
            
            
            
            205.0
            %Other
      income
            
            
            282
            
            
            
            0.7
            %
            
            
            83
            
            
            
            0.4
            %
            
            
            199
            
            
            
            239.8
            %Income
      before tax
            
            
            14,251
            
            
            
            33.1
            %
            
            
            5,551
            
            
            
            29.4
            %
            
            
            8,700
            
            
            
            156.7
            %Income
      tax
            
            
            2,199
            
            
            
            5.1
            %
            
            
            1,308
            
            
            
            6.9
            %
            
            
            891
            
            
            
            68.1
            %Net
      income
            
            
            12,052
            
            
            
            28.0
            %
            
            
            4,243
            
            
            
            22.5
            %
            
            
            7,809
            
            
            
            184.0
            %




28




The
following is the statement of our operations for the nine months ended September
30, 2010 and 2009.





Item
            
            2010
      Nine months
            
            
            2009
      Nine months
            
            Comparisons$'000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %
      of revenue
            
            $'000
            
            
            %Revenue
            
            
            70,852
            
            
            
            
            
            
            38,917
            
            
            
            
            
            
            31,935
            
            
            
            82.1
            %Cost
      of products and professional services
            
            
            38,874
            
            
            
            54.9
            %
            
            
            20,296
            
            
            
            52.2
            %
            
            
            18,578
            
            
            
            91.5
            %Gross
      profit
            
            
            31,978
            
            
            
            45.1
            %
            
            
            18,621
            
            
            
            47.8
            %
            
            
            13,357
            
            
            
            71.7
            %Sales
      and marketing expenses
            
            
            11,349
            
            
            
            16.0
            %
            
            
            6,035
            
            
            
            15.5
            %
            
            
            5,314
            
            
            
            88.1
            %General
      and administrative expenses
            
            
            4,530
            
            
            
            6.4
            %
            
            
            2,503
            
            
            
            6.4
            %
            
            
            2,027
            
            
            
            81.0
            %Research
      and development expenses
            
            
            631
            
            
            
            0.9
            %
            
            
            467
            
            
            
            1.2
            %
            
            
            164
            
            
            
            35.1
            %Depreciation
      and amortization
            
            
            227
            
            
            
            0.3
            %
            
            
            253
            
            
            
            0.7
            %
            
            
            -26
            
            
            
            -10.3
            %Interest
      expenses
            
            
            382
            
            
            
            0.5
            %
            
            
            170
            
            
            
            0.4
            %
            
            
            212
            
            
            
            124.7
            %Other
      income
            
            
            811
            
            
            
            1.1
            %
            
            
            372
            
            
            
            1.0
            %
            
            
            439
            
            
            
            118.0
            %Income
      before tax
            
            
            15,670
            
            
            
            22.1
            %
            
            
            9,565
            
            
            
            24.6
            %
            
            
            6,105
            
            
            
            63.8
            %Income
      tax
            
            
            3,028
            
            
            
            4.3
            %
            
            
            2,203
            
            
            
            5.7
            %
            
            
            825
            
            
            
            37.4
            %Net
      income
            
            
            12,642
            
            
            
            17.8
            %
            
            
            7,362
            
            
            
            18.9
            %
            
            
            5,280
            
            
            
            71.7
            %





Revenue





Our
revenue during the nine months ended September 30, 2010 was derived from sales
of products and professional services primarily to domestic telecom carriers,
and to a lesser extent, direct product sales to system integrators and overseas
customers.  Our major customers include provincial-level subsidiaries
of China Mobile, China Unicom, and China Telecom.





For the
three months and nine months ended September 30, 2010, our revenue was $43.1
million and $70.9 million, respectively, representing increases of 128.2% and
82.1%, respectively, from the same periods in 2009.  The increase was
primarily attributable to the enhanced A catagory supplier status for all
of our main products by the big-3 operators and the increase in sales
of our WFDS-enabled solutions. For the three months ended September 30, 2010,
our WFDS-enabled solutions roughly accounted for 23.5% of our sales
revenue.





Revenue
Breakdown





Three
months ended September 30, 2010 and 2009




2010 Q3
            
            
            2009 Q3
            
            
            Change$'000
            
            
            % of revenue
            
            
            $'000
            
            
            % of
      revenue
            
            
            $'000
            
            
            %Product
      revenue
            
            
            17,518
            
            
            
            40.6
            %
            
            
            11,099
            
            
            
            58.8
            %
            
            
            6,419
            
            
            
            57.8
            %Professional
      services revenue
            
            
            25,583
            
            
            
            59.4
            %
            
            
            7,792
            
            
            
            41.2
            %
            
            
            17,791
            
            
            
            228.3
            %Total
            
            
            43,101
            
            
            
            100.0
            %
            
            
            18,891
            
            
            
            100.0
            %
            
            
            24,210
            
            
            
            128.2
            %





29





Nine
months ended September 30, 2010 and 2009




2010 Nine
      months
            
            
            2009
      Nine months
            
            
            Change$'000
            
            
            % of
              revenue
            
            
            $'000
            
            
            % of
              revenue
            
            
            $'000
            
            
            %Product
      revenue
            
            
            29,678
            
            
            
            41.9
            %
            
            
            21,504
            
            
            
            55.3
            %
            
            
            8,174
            
            
            
            38.0
            %Professional
      services revenue
            
            
            41,174
            
            
            
            58.1
            %
            
            
            17,413
            
            
            
            44.7
            %
            
            
            23,761
            
            
            
            136.5
            %Total
            
            
            70,852
            
            
            
            100.0
            %
            
            
            38,917
            
            
            
            100.0
            %
            
            
            31,935
            
            
            
            82.1
            %





For the
three months and nine months ended September 30, 2010, revenue generated from
product sales was $17.5 million and $29.7 million, respectively, representing an
increase of 57.8% and an increase of 38.0%, respectively, from the same periods
in 2009.





For the
three months and nine months ended September 30, 2010, revenue generated from
professional services was $25.6 million and $41.2 million, respectively,
representing increases of 228.3% and 136.5%, respectively, from the same periods
in 2009.  The increase in professional services revenue was primarily
attributable to t he
securing of a large number of WLAN projects from China Mobile and
contributions from newly-established branches.





For the
three months and nine months ended September 30, 2010, revenue generated from
product sales accounted for 40.6% and 41.9% of total revenue, respectively,
compared to 58.8% and 55.3%, respectively, for the same periods in 2009. For the
three months and nine months ended September 30, 2010, revenues generated from
professional service sales accounted for 59.4% and 58.1% of total revenues,
respectively, compared to 41.2% and 44.7%, respectively, for the same periods of
2009.





Breakdown
by Customers





Three
months ended September 30, 2010 and 2009





2010
      Q3
            
            
            2009
      Q3
            
            
            Change$’000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %China
      Mobile
            
            
            23,264
            
            
            
            54.0
            %
            
            
            9,935
            
            
            
            52.6
            %
            
            
            13,329
            
            
            
            134.2
            %China
      Unicom
            
            
            15,148
            
            
            
            35.1
            %
            
            
            7,696
            
            
            
            40.8
            %
            
            
            7,452
            
            
            
            96.8
            %China
      Telecom
            
            
            4,396
            
            
            
            10.2
            %
            
            
            952
            
            
            
            5.0
            %
            
            
            3,444
            
            
            
            361.8
            %Overseas
            
            
            123
            
            
            
            0.3
            %
            
            
            283
            
            
            
            1.5
            %
            
            
            -160
            
            
            
            -56.5
            %Others
            
            
            170
            
            
            
            0.4
            %
            
            
            25
            
            
            
            0.1
            %
            
            
            145
            
            
            
            580.0
            %Total
            
            
            43,101
            
            
            
            100.0
            %
            
            
            18,891
            
            
            
            100.0
            %
            
            
            24,210
            
            
            
            128.2
            %




Nine
months ended September 30, 2010 and 2009





2010
      Nine months
            
            
            2009
      Nine months
            
            
            Change$’000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %China
      Mobile
            
            
            40,868
            
            
            
            57.7
            %
            
            
            16,908
            
            
            
            43.4
            %
            
            
            23,960
            
            
            
            141.7
            %China
      Unicom
            
            
            20,979
            
            
            
            29.6
            %
            
            
            18,271
            
            
            
            47.0
            %
            
            
            2,708
            
            
            
            14.8
            %China
      Telecom
            
            
            8,093
            
            
            
            11.4
            %
            
            
            2,741
            
            
            
            7.0
            %
            
            
            5,352
            
            
            
            195.3
            %Overseas
            
            
            386
            
            
            
            0.6
            %
            
            
            613
            
            
            
            1.6
            %
            
            
            -227
            
            
            
            -37.0
            %Others
            
            
            526
            
            
            
            0.7
            %
            
            
            384
            
            
            
            1.0
            %
            
            
            142
            
            
            
            37.0
            %Total
            
            
            70,852
            
            
            
            100.0
            %
            
            
            38,917
            
            
            
            100.0
            %
            
            
            31,935
            
            
            
            82.1
            %





Revenue
from the wireless telecom carriers was the Company’s major source of revenue
during the reporting period, and the majority of such revenue was generated from
China Mobile and China Unicom.  The increase of revenue from China
Mobile was attributable to its large-scale increase in investment in wireless
coverage and other areas in 2010. The increase of revenue from China Unicom was
due to the inspection and verification for our projects completed last
year.




30




Cost
of Products and Professional Services





Three
months ended September 30, 2010 and 2009




2010
      Q3
            
            
            2009
      Q3
            
            
            Change$'000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %Cost
      of products
            
            
            9,841
            
            
            
            22.9
            %
            
            
            7,099
            
            
            
            37.6
            %
            
            
            2,742
            
            
            
            38.6
            %Cost
      of professional services
            
            
            13,719
            
            
            
            31.8
            %
            
            
            2,878
            
            
            
            15.2
            %
            
            
            10,841
            
            
            
            376.7
            %Total
            
            
            23,560
            
            
            
            54.7
            %
            
            
            9,977
            
            
            
            52.8
            %
            
            
            13,583
            
            
            
            136.1
            %




Nine
months ended September 30, 2010 and 2009




2010
      Nine months
            
            
            2009
      Nine months
            
            
            Change$'000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %Cost
      of products
            
            
            16,709
            
            
            
            23.6
            %
            
            
            13,738
            
            
            
            35.3
            %
            
            
            2,971
            
            
            
            21.6
            %Cost
      of professional services
            
            
            22,165
            
            
            
            31.3
            %
            
            
            6,558
            
            
            
            16.9
            %
            
            
            15,607
            
            
            
            238.0
            %Total
            
            
            38,874
            
            
            
            54.9
            %
            
            
            20,296
            
            
            
            52.2
            %
            
            
            18,578
            
            
            
            91.5
            %




For the
three months and nine months ended September 30, 2010, our total cost of
products and professional services were $23.6 million and $38.9 million,
respectively, representing increases of 136.1% and 91.5%, respectively, from the
same periods in 2009.





Gross
Profit and Gross Margin





For the
three months and nine months ended September 30, 2010, our gross profit was
$19.5 million and $32.0 million, respectively, representing increases of 119.2%
and 71.7%, respectively, from the same periods in 2009.  Our gross
margin during the three months and nine months ended September 30, 2010 was
45.3% and 45.1%, respectively, compared to 47.2% and 47.8%, respectively, in the
same periods in 2009.





Product
Gross Margin:


Our
product gross margin increased to 43.8% during the three months ended September
30, 2010, from 36.0% in the same period in 2009.  The increase in
product gross margin was primarily attributable to sales of our WFDS-enabled
products that generally have a higher gross margin.





Professional
Services Gross Margin:


Our
professional services gross margin decreased to 46.4% for the three months ended
September 30, 2010 from 63.1% in the same period in 2009.  The Big 3
have adopted centralized procurement and public bidding processes, which
required us to lower our contract prices in order to secure potential
tenders.  This has resulted in lower gross profit margins in
the three months ended September 30, 2010.





Operating
Expenses




Three
months ended September 30, 2010 and 2009




Item
            
            2010
      Q3
            
            
            2009
      Q3
            
            
            Comparisons$’000
            
            
            %
      of  revenue
            
            
            $'000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %Sales
      and marketing expenses
            
            
            4,445
            
            
            
            10.3
            %
            
            
            2,007
            
            
            
            10.6
            %
            
            
            2,438
            
            
            
            121.5
            %General
      and administrative
            
            
            714
            
            
            
            1.7
            %
            
            
            1,182
            
            
            
            6.3
            %
            
            
            -468
            
            
            
            -39.6
            %Research
      and development
            
            
            216
            
            
            
            0.5
            %
            
            
            138
            
            
            
            0.7
            %
            
            
            78
            
            
            
            56.5
            %Total
            
            
            5,375
            
            
            
            12.5
            %
            
            
            3,327
            
            
            
            17.6
            %
            
            
            2,048
            
            
            
            61.6
            %




31




Nine
months ended September 30, 2010 and 2009





2010
      Nine months
            
            
            2009
      Nine months
            
            
            ComparisonsItem
            
            $’000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %
      of revenue
            
            
            $'000
            
            
            %Sales
      and marketing expenses
            
            
            11,349
            
            
            
            16.0
            %
            
            
            6,035
            
            
            
            15.5
            %
            
            
            5,314
            
            
            
            88.1
            %General
      and administrative
            
            
            4,530
            
            
            
            6.4
            %
            
            
            2,503
            
            
            
            6.4
            %
            
            
            2,027
            
            
            
            81.0
            %Research
      and development
            
            
            631
            
            
            
            0.9
            %
            
            
            467
            
            
            
            1.2
            %
            
            
            164
            
            
            
            35.1
            %Total
            
            
            16,510
            
            
            
            23.3
            %
            
            
            9,005
            
            
            
            23.1
            %
            
            
            7,505
            
            
            
            83.3
            %





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





Sales
and Marketing Expenses





For the
three months and nine months ended September 30, 2010, sales and marketing
expenses were $4.4 million and $11.3 million, respectively, representing
increases of 121.5% and 88.1%, respectively, from the same periods in
2009.  As a percentage of revenue for the three months and nine months
ended September 30, 2010, sales and marketing expenses accounted for 10.3% and
16.0% of total revenue, respectively, as compared to 10.6% and 15.5% of total
revenue, respectively, for the same periods in 2009.  The increase in
sales and marketing expenses was primarily due to our increases in sales and
expanded selling network.





General
and Administrative Expenses





For the
three months and nine months ended September 30, 2010, general and
administrative expenses were $0.7 million and $4.5 million, respectively,
accounting for 1.7% and 6.4%, respectively, of total revenue, as compared to
$1.2 million and $2.5 million of the same periods in 2009, respectively,
accounting for 6.3% and 6.4% of total revenue, respectively, for the
corresponding periods of 2009.  General and administrative expenses
for the three months and nine months ended September 30, 2010 decreased 39.6%
and increased 81.0%, respectively, from the same periods last
year.  The decrease in general and administrative expenses was
primarily attributable to the reverse of the previous period’s bad debt
provision, and the increase in general and administrative was due to stock-based
compensation to Guolian’s directors.





Research
& Development Expenses





For the
three months and nine months ended September 30, 2010, research and development
expenses were $0.2 million and $0.6 million respectively, accounting for 0.5%
and 0.9%, respectively, of total revenue, as compared to $0.1 million and $0.5
million for the same periods in 2009, respectively, accounting for 0.7% and 1.2%
of total revenue, respectively, for the corresponding periods in
2009.





The
slight increase in research and development expenses was due to our development
of new products during the three months ended September 30, 2010.





Interest
Expense and Other Income





For the
three months and nine months ended September 30, 2010, interest expenses were
$0.1 million and $0.4 million, respectively, accounting for 0.3% and 0.5%,
respectively, of total revenue, as compared to $0.04 million and $0.2 million
for the same periods in 2009, respectively.  Interest expenses rose as
a result of increased bank borrowings during the quarter to fund our working
capital needs.





For the
three months and nine months ended September 30, 2010, other income was $0.3
million and $0.8 million, respectively, accounting for 0.7% and 1.1%,
respectively, of total revenue, as compared to $0.1 million and $0.4 million for
the same periods in 2009, respectively, accounting for 0.4% and 1.0%
respectively of total revenue for the same periods in 2009.  Other
income increased as a result of additional government sponsorship income that
was provided during the quarter.





32




Net
Income





For the
three months and nine months ended September 30, 2010, we had net income of
$12.0 million and $12.6 million, respectively, representing increases of
184.0% and 71.7% from the same periods in 2009, respectively.  Net
income increased primarily as a result of our increased operations.





LIQUIDITY
AND CAPITAL RESOURCES





We
generally finance our operations from cash flow generated internally. As of
September 30, 2010, our current assets comprised inventories of $2.7 million,
accounts receivable of $134.1 million, prepayments of $0.8 million, other
receivables of $4.4 million, due from related parties of $2.0 million, and cash
and cash equivalents of $9.8 million.  As of September 30, 2010, our
current liabilities comprised accounts payable of $21.3 million, tax payables of
$10.3 million, a short-term bank loan of $8.8 million, trade deposits received
of $1.7 million, due to related parties of $5.6 million, and other payables and
accruals of $30.0 million.





Our
trading terms with our customers are mainly on credit. As of September 30, 2010,
our accounts receivable were $134.1 million compared to $89.0 million as of
December 31, 2009.





We
experience a longer accounts receivable turnover period than our main
competitors due to our revenue being generated from a higher mix of system
integration projects, which are typically billed in phases throughout the life
of the project.  We believe that our main competitors are more focused
on equipment sales, which tend to have shorter receivable turnover
periods.  Generally, we and our main competitors have traditionally
experienced a longer receivable turnover period due to the fact that our main
customers are the three state-owned telecommunications carriers, which tend to
make payments slower.  Additionally, approximately 10% of our
professional services revenue are settled after 24 months of our warranty
period.  We have not experienced any significant bad debts in the
past.





As of
September 30, 2010, our inventories were $2.7 million, as compared to $4.4
million as of December 31, 2009, representing a decrease of 39.2%.





We
believe that the combination of present capital resources and unused financing
sources are more than adequate to meet cash requirements for 2010 and the
following years. We intend to meet our liquidity requirements, including capital
expenditures related to market expansion, research and development for new
products and technology, through cash flow provided by operations and additional
funds raised by short-term loan. We are an enterprise with good credit and our
relationships with these banks are in good standing. We believe that adequate
cash flow will be available to fund our operations and additional needs in the
future.





As of
September 30, 2010, 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.





On
October 6, 2010, we secured an RMB 300 million (about $44 million) credit
facility from Bank of Beijing for the purpose of working capital
needs.




OFF-BALANCE
SHEET ARRANGEMENTS





We do not
have any off-balance sheet arrangements.




33




CONTINGENT
LIABILITIES





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. Despite the fact that we have made full tax provision in the financial
statements, we may be subject to surcharge and penalty for the deferred
reporting of tax obligations.    The Board of Directors
considers it is unlikely that the surcharge and tax penalty will be
imposed.





Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
required for smaller reporting company.





Item
4. Controls and Procedures




(a)
Evaluation of disclosure controls and procedures





Under
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of the end of the period covered by this
Quarterly Report on Form 10-Q (the “Evaluation Date”); and whether any change
has occurred in the Company’s internal control over financial reporting pursuant
to Exchange Act Rules 13a-15(d) and 15d-15(d).  Disclosure controls
and procedures are designed to ensure that information required to be disclosed
in our reports filed under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms. This information is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. 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 not effective due to the fact that the
material weaknesses in the Company’s internal control over financial reporting
described in the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2009 have not been remediated as of the Evaluation Date,
although steps have been taken toward remediation during the quarter ended
September 30, 2010.





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




(b)
Changes in internal control over financial reporting





During
the quarter ended September 30, 2010, 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.




34




PART
II





OTHER
INFORMATION





Item
1.  Legal Proceedings.





None.





Item
1A. Risk Factors.





Not
required.





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





None.





Item
3.  Defaults Upon Senior Securities.





None.




Item
4.  (Removed and Reserved).




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 200231.2
            
            Chief
      Financial Officer Certification furnished pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            
            Chief
      Executive Officer Certification furnished pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            
            Chief
      Financial Officer Certification furnished pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002




35


SIGNATURES





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




TELESTONE
      TECHNOLOGIES
                CORPORATIONDate:
      November 15, 2010
              By:
              /s/
      Han DaqingHan
      Daqing, Chief Executive Officer(Principal
      Executive Officer)




Date:
      November 15, 2010
              By:
              /s/
      Yu XiaoliYu
      Xiaoli, Chief Financial Officer(Principal
      Financial Officer)




36