UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)



|S | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30,
2012



|£ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



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 Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



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  ̈



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 x No  ̈



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



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



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



As of August 14, 2012, 12,333,264 shares of the Issuer’s
$0.001 par value common stock were outstanding.











TELESTONE TECHNOLOGIES CORPORATION



INDEX



|                                                                                                                                                     | Page
|---------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                                                     |     
|PART I. FINANCIAL INFORMATION                                                                                                                        |     
|                                                                                                                                                     |     
|Item 1. Condensed Financial Statements.                                                                                                              |     
|                                                                                                                                                     |     
|Condensed Consolidated Statements of Operationsand Other Comprehensive Income, for the three and six months ended June 30, 2012 and 2011 (unaudited) | 1   
|                                                                                                                                                     |     
|Condensed Consolidated Balance Sheets, as of June 30, 2012 (unaudited) and December 31, 2011                                                         | 2   
|                                                                                                                                                     |     
|Condensed Consolidated Statements of Cash Flows, for the six months ended June 30, 2012 and 2011 (unaudited)                                         | 3   
|                                                                                                                                                     |     
|Notes to Condensed Consolidated Financial Statements (unaudited)                                                                                     | 4   
|                                                                                                                                                     |     
|Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.                                                       | 24  
|                                                                                                                                                     |     
|Item 3. Quantitative and Qualitative Disclosures About Market Risk.                                                                                  | 38  
|                                                                                                                                                     |     
|Item 4. Controls and Procedures.                                                                                                                     | 38  
|                                                                                                                                                     |     
|PART II. OTHER INFORMATION                                                                                                                           |     
|                                                                                                                                                     |     
|Item 1. Legal Proceedings.                                                                                                                           | 39  
|Item 1A. Risk Factors.                                                                                                                               | 39  
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.                                                                                 | 39  
|Item 3. Defaults Upon Senior Securities.                                                                                                             | 39  
|Item 4. Mine Safety Disclosures.                                                                                                                     | 39  
|Item 5. Other Information.                                                                                                                           | 39  
|Item 6. Exhibits.                                                                                                                                    | 39  



Except as otherwise indicated by the context, references in
this Form 10-Q to:



“TSTC,” the “Company,” “we,”
“our,” or “us” are references to Telestone Technologies Corporation

“U.S. Dollar,” “$” and “US$”
mean the legal currency of the United States of America.

“RMB” means Renminbi, the legal currency of China.

“China” or the “PRC” are references
to the People’s Republic of China.

“U.S.” is a reference to the United States of America.

“SEC” is a reference to the Securities & Exchange
Commission of the United States of America.













Telestone Technologies Corporation





Condensed Consolidated Statements of Operations and Other
Comprehensive Income



Six months ended June 30, 2012 and 2011












|                                                                                                         |  |      |   |  | Three months ended June 30, |  |            | Six months ended June 30, | 
|-------------------------------------------------------------------------------------------------------- |  | ---- | - |  | --------------------------- |  | ---------- | ------------------------- | 
|                                                                                                         |  |      |   |  | 2012                        |  |            | 2011                      | 
|                                                                                                         |  | Note |   |  | US$’000                     |  |            | US$’000                   | 
|                                                                                                         |  |      |   |  | (Unaudited)                 |  |            | (Unaudited)               | 
|Operating revenues:                                                                                      |  |      |   |  |                             |  |            |                           | 
|Net sales of equipment                                                                                   |  |      |   |  |                             |  | 5,953      |                           | 
|Service income                                                                                           |  |      |   |  |                             |  | 11,913     |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Total operating revenues                                                                                 |  |      |   |  |                             |  | 17,866     |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Cost of operating revenues:                                                                              |  |      |   |  |                             |  |            |                           | 
|Cost of net sales                                                                                        |  |      |   |  |                             |  | 3,497      |                           | 
|Cost of service                                                                                          |  |      |   |  |                             |  | 7,749      |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Total cost of operating revenues                                                                         |  |      |   |  |                             |  | 11,246     |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Gross profit                                                                                             |  |      |   |  |                             |  | 6,620      |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Operating expenses:                                                                                      |  |      |   |  |                             |  |            |                           | 
|Sales and marketing                                                                                      |  |      |   |  |                             |  | 3,032      |                           | 
|General and administrative                                                                               |  |      |   |  |                             |  | 3,782      |                           | 
|Research and development                                                                                 |  |      |   |  |                             |  | 567        |                           | 
|Depreciation and amortization                                                                            |  |      |   |  |                             |  | 192        |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Total operating expenses                                                                                 |  |      |   |  |                             |  | 7,573      |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Operating (loss)/income                                                                                  |  |      |   |  |                             |  | (953       | )                         | 
|Interest expense                                                                                         |  |      |   |  |                             |  | (259       | )                         | 
|Other income, net                                                                                        |  |      |   |  |                             |  | 236        |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|(Loss)/Income before income taxes                                                                        |  |      |   |  |                             |  | (976       | )                         | 
|Income taxes                                                                                             |  |      |   |  |                             |  | (326       | )                         | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Net (loss)/income                                                                                        |  |      |   |  |                             |  | (1,302     | )                         | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Net income attributable to non-controlling interests                                                     |  |      |   |  |                             |  | (12        | )                         | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Net (loss)/income attributable to Telestone Technologies Corporation common stockholders                 |  |      |   |  |                             |  | (1,314     | )                         | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Other comprehensive (loss)/income                                                                        |  |      |   |  |                             |  |            |                           | 
|Foreign currency translation                                                                             |  |      |   |  |                             |  | (77        | )                         | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Total comprehensive (loss)/income attributable to Telestone Technologies Corporation common stockholders |  |      |   |  |                             |  | (1,391     | )                         | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|(Loss)/Earnings per share:                                                                               |  |      | 3 |  |                             |  |            |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Weighted average number of common stock outstanding                                                      |  |      |   |  |                             |  |            |                           | 
|Basic                                                                                                    |  |      |   |  |                             |  | 14,133,264 |                           | 
|Effect of dilutive warrants and stock options                                                            |  |      |   |  |                             |  | -          |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|Diluted                                                                                                  |  |      |   |  |                             |  | 14,133,264 |                           | 
|                                                                                                         |  |      |   |  |                             |  |            |                           | 
|                                                                                                         |  |      |   |  |                             |  | US$        |                           | 
|Net (loss)/income per share of common stock                                                              |  |      |   |  |                             |  |            |                           | 
|Basic                                                                                                    |  |      |   |  |                             |  | (0.09      | )                         | 
|Diluted                                                                                                  |  |      |   |  |                             |  | (0.09      | )                         | 



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



Page 1 of 40









Telestone Technologies Corporation







Condensed Consolidated Balance Sheets



As of June 30, 2012 and
December 31, 2011










|                                                                                                   |  |      |        |  | As of  June 30, |  |         | As of  December 31, | 
|-------------------------------------------------------------------------------------------------- |  | ---- | ------ |  | --------------- |  | ------- | ------------------- | 
|                                                                                                   |  |      |        |  | 2012            |  |         | 2011                | 
|                                                                                                   |  | Note |        |  | US$’000         |  |         | US$’000             | 
|                                                                                                   |  |      |        |  | (Unaudited)     |  |         |                     | 
|ASSETS                                                                                             |  |      |        |  |                 |  |         |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Current assets:                                                                                    |  |      |        |  |                 |  |         |                     | 
|Cash and cash equivalents                                                                          |  |      |        |  |                 |  | 7,674   |                     | 
|Accounts receivable, net of allowance                                                              |  |      | 5      |  |                 |  | 259,562 |                     | 
|Due from related parties                                                                           |  |      | 14     |  |                 |  | 1,543   |                     | 
|Inventories, net of allowance                                                                      |  |      | 10     |  |                 |  | 10,707  |                     | 
|Prepayments                                                                                        |  |      |        |  |                 |  | 2,351   |                     | 
|Other current assets                                                                               |  |      |        |  |                 |  | 3,945   |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Total current assets                                                                               |  |      |        |  |                 |  | 285,782 |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Goodwill                                                                                           |  |      | 6      |  |                 |  | 4,268   |                     | 
|Property, plant and equipment, net                                                                 |  |      | 7      |  |                 |  | 10,335  |                     | 
|Lease prepayment                                                                                   |  |      | 8      |  |                 |  | 2,559   |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|                                                                                                   |  |      |        |  |                 |  | 17,162  |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Total assets                                                                                       |  |      |        |  |                 |  | 302,944 |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                               |  |      |        |  |                 |  |         |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Current liabilities:                                                                               |  |      |        |  |                 |  |         |                     | 
|Short-term bank loans                                                                              |  |      | 9 & 14 |  |                 |  | 11,232  |                     | 
|Accounts payable – Trade                                                                           |  |      |        |  |                 |  | 51,481  |                     | 
|Service cost payable                                                                               |  |      |        |  |                 |  | 40,115  |                     | 
|Customer deposits for sales of equipment                                                           |  |      |        |  |                 |  | 2,501   |                     | 
|Due to related parties                                                                             |  |      | 14     |  |                 |  | 1,821   |                     | 
|Income tax payable                                                                                 |  |      |        |  |                 |  | 19,204  |                     | 
|Accrued expenses and other accrued liabilities                                                     |  |      |        |  |                 |  | 33,192  |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Total current liabilities                                                                          |  |      |        |  |                 |  | 159,546 |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Commitments and contingencies                                                                      |  |      | 15     |  |                 |  |         |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Stockholders’ equity:                                                                              |  |      |        |  |                 |  |         |                     | 
|Preferred stock, US$0.001 par value, 10,000,000 shares authorized, no shares issued                |  |      |        |  |                 |  | -       |                     | 
|Common stock and paid-in-capital, US$0.001 par value:                                              |  |      |        |  |                 |  |         |                     | 
|Authorized – 100,000,000 shares as of June 30, 2012 and December 31, 2011                          |  |      |        |  |                 |  |         |                     | 
|Issued and outstanding – 12,333,264 shares as of June 30, 2012 and December 31, 2011, respectively |  |      | 13     |  |                 |  | 12      |                     | 
|Additional paid-in capital                                                                         |  |      |        |  |                 |  | 49,420  |                     | 
|Dedicated reserves                                                                                 |  |      |        |  |                 |  | 6,871   |                     | 
|Other comprehensive income                                                                         |  |      |        |  |                 |  | 13,072  |                     | 
|Retained earnings                                                                                  |  |      |        |  |                 |  | 72,571  |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Total Telestone Technologies Corporation stockholder’s equity                                      |  |      |        |  |                 |  | 141,946 |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Non-controlling interests                                                                          |  |      |        |  |                 |  | 1,452   |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Total equity                                                                                       |  |      |        |  |                 |  | 143,398 |                     | 
|                                                                                                   |  |      |        |  |                 |  |         |                     | 
|Total liabilities and stockholders’ equity                                                         |  |      |        |  |                 |  | 302,944 |                     | 



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



Page 2 of 40









Telestone Technologies Corporation









Condensed Consolidated Statements of Cash Flows







Six months ended June 30, 2012 and 2011
















|                                                                                     |  | Six months ended June 30, |        
|------------------------------------------------------------------------------------ |  | ------------------------- | -------
|                                                                                     |  | 2012                      |        
|                                                                                     |  | US$’000                   |        
|                                                                                     |  | (Unaudited)               |        
|Cash flows from operating activities                                                 |  |                           |        
|Net (loss)/income                                                                    |  |                           | (823   
|Adjustments to reconcile net (loss)/income to net cash used in operating activities: |  |                           |        
|Depreciation and amortization                                                        |  |                           | 393    
|Loss on disposal of property, plant and equipment                                    |  |                           | 4      
|Provision for doubtful debt                                                          |  |                           | 1,870  
|Stock-based compensation                                                             |  |                           | 316    
|Changes in assets and liabilities:                                                   |  |                           |        
|Accounts receivable                                                                  |  |                           | (8,477 
|Inventories                                                                          |  |                           | (3,918 
|Prepayments                                                                          |  |                           | 11     
|Other current assets                                                                 |  |                           | (1,133 
|Accounts payable                                                                     |  |                           | 4,770  
|Customer deposits for sales of equipment                                             |  |                           | (199   
|Due to related parties                                                               |  |                           | (152   
|Income tax payable                                                                   |  |                           | 398    
|Service cost payable, accrued expenses and other accrued liabilities                 |  |                           | (587   
|                                                                                     |  |                           |        
|Net cash used in operating activities                                                |  |                           | (7,527 
|                                                                                     |  |                           |        
|Cash flows from investing activities                                                 |  |                           |        
|Proceeds from disposal of property, plant and equipment                              |  |                           | 8      
|Purchase of property, plant and equipment                                            |  |                           | (383   
|                                                                                     |  |                           |        
|Net cash used in investing activities                                                |  |                           | (375   
|                                                                                     |  |                           |        
|Cash flows from financing activities                                                 |  |                           |        
|Capital injection by non-controlling interests                                       |  |                           | 395    
|Repayment of short-term bank loans                                                   |  |                           | (3,798 
|Short-term bank loans raised                                                         |  |                           | -      
|                                                                                     |  |                           |        
|Net cash (used in) from financing activities                                         |  |                           | (3,403 
|                                                                                     |  |                           |        
|Net decrease in cash and cash equivalents                                            |  |                           | (11,305
|                                                                                     |  |                           |        
|Cash and cash equivalents, beginning of the period                                   |  |                           | 18,850 
|                                                                                     |  |                           |        
|Effect on exchange rate changes                                                      |  |                           | 129    
|                                                                                     |  |                           |        
|Cash and cash equivalents, end of the period                                         |  |                           | 7,674  
|                                                                                     |  |                           |        
|Supplemental disclosure of cash flow information                                     |  |                           |        
|Interest received                                                                    |  |                           | 51     
|Interest paid                                                                        |  |                           | (500   
|Tax paid                                                                             |  |                           | (138   



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



Page 3 of 40









Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011












| | 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).



In December 2011 and March 2012,
Beijing Telestone contributed RMB10,000,000 and RMB40,000,000 to the registered capital of BTWTC, respectively, which made Beijing
Telestone one of the direct owners of BTWTC. The capital contribution is intended to be temporary and the capital contributed by
Beijing Telestone was transferred to the Owners in April 2012. Management, having consulted the legal counsel in the PRC, is of
the opinion that such temporary shareholding structure would not have any significant impact on the business and operations of
BTWTC.



During the period, BTWTC has
applied for a project management fund from the local government. On April 20, 2012, Zhongguancun Development Group (“Zhongguancun”)
entered into a Capital Injection Agreement (the “Agreement”) with BTWTC and its owners. Pursuant to the Agreement,
Zhongguancun agreed to contribute additional capital of RMB15,000,000 to BTWTC by several installments. Zhongguancun has injected
the first installment of the additional capital of RMB2,500,000 to BTWTC and relevant registration procedures were completed on
June 4, 2012. After the completion of the above-mentioned capital injection, Zhongguancun owns 4% of the paid-in capital of BTWTC
and is considered to be the non-controlling interest in the Company as at June 30, 2012. The difference between the amount by which
the non-controlling interests are adjusted and the fair value of the consideration received of RMB6.6 million, equivalent to approximately
US$1.0 million, is recognised in additional paid-in capital attributed to the owners to parent.



Page 4 of 40









Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 1. | ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
| | -- | -------------------------------------------------



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



On December 14, 2009, Beijing
Telestone established a wholly-owned subsidiary, Guan Telestone Telecommunication Technologies Company Limited (“Guan Telestone”)(note)
in Guan, Hebei Province, the PRC with operating period of 20 years until December 13, 2029. Guan Telestone has been inactive since
its incorporation and management plans to develop a research and development center and a manufacturing plant of telecommunication
equipment in Guan County through Guan Telestone. Currently, Guan Telestone holds a land use right in Guan County for future development.



On October 25, 2010, Beijing
Telestone and BTWTC established a wholly-owned subsidiary, Guan Bopu Network Equipment Company Limited (“Guan Bopu”)(note) in Guan, Hebei Province, the PRC with operating period of 20 years until October 24, 2030. Guan Bopu is engaged in
the trading of wireless telecommunication equipment.



On November 7, 2011, BTWTC and
the owners of Sichuan Ruideng Telecom Corporation (“SRTC”) entered into a definitive agreement. Under the agreement,
100% equity ownership interests in SRTC have been transferred by the owners of SRTC to BTWTC in exchange of a cash consideration
of $2 million and 1.8 million restricted common shares of TSTC. The acquisition was completed on December 30, 2011. SRTC was founded
in 1993 and based in Chengdu, Sichuan Province, the PRC. It develops and provides telecommunication local access networks and system-integration
services mainly in Sichuan, Yunnan, Guizhou, Hubei and Qinghai provinces.



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



| | Note: | These are direct translations of names in Chinese for identification purposes only and are not
the official names in English.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------



Page 5 of 40









Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| | -- | ------------------------------------------



Basis of presentation



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 June 30,
2012 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. The balance sheet as of December 31, 2011 has been derived
from the audited financial statements at that date but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. 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, 2011 filed on March 30, 2012. The results of operations for the three-month and six-month periods ended June
30, 2012 are not necessarily indicative of the operating results to be expected for the year ending December 31, 2012.



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.



Revenue recognition



Net
sales of equipment represent the contracted 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, equipment is received
and accepted by the customer, the fee is fixed or determinable, and collectibility is probable.Service revenue is recognized
when the service is performed and accepted by the customer. The Company has a policy of including handling
costs incurred for finished goods, which are not significant, in the sales and marketing expenses.



The Company provides installation
services for certain sales of equipment under fixed-price contracts. Revenues 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.



Page 6 of 40









Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| | -- | ------------------------------------------------------



Income taxes



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.



Allowance
for doubtful accounts



Accounts receivable are stated
at the amount billed to customers. The Company recognizes an allowance for doubtful accounts to ensure
trade and other receivables are not overstated due to uncollectibility. The Company’s estimate is based on a variety of factors,
including historical collection experience, existing economic conditions and a review of the current status of the receivable.



| | 3. | (LOSS)/EARNINGS PER SHARE
| | -- | -------------------------







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



Basic (loss)/earnings
per share is computed based upon the weighted average number of shares of common stock outstanding during each period presented,
which has been adjusted for the shares of restricted common stock that the Company was obliged to issue as of the balance sheet
date (see note 13).



Diluted (loss)/earnings
per share is computed based on net income attributable to Telestone Technologies Corporation common 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 and stock options to purchase common stock outstanding during the three-month and six-month periods ended June
30, 2012 and 2011 is reflected in the calculation of diluted (loss)/earnings per share by applying the treasury stock method. Any
anti-dilutive effect of the warrants and stock options is excluded from calculation of the (loss)/earnings per share.



Page 7 of 40









Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 3. | EARNINGS PER SHARE (CONTINUED)
| | -- | ------------------------------



For the three-month
and six-month periods ended June 30, 2011, 40,000 shares of warrants are dilutive and included in the weighted-average number of
common stock outstanding for calculation of diluted earnings per share while another 40,000 shares of warrants are anti-dilutive.
For the three-month and six-month periods ended June 30, 2012, 80,000 shares of warrants are anti-dilutive.



The outstanding
stock option of 500,135 shares and 601,663 shares for the periods ended June 30, 2012 and June 30, 2011 are anti-dilutive.



| | 4. | OPERATING RISK
| | -- | --------------







| | (a) | Concentration of major customers and suppliers
| | --- | ----------------------------------------------



|                                                                                         |  | Six months ended June 30, |       
|---------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                         |  | 2012                      |       
|                                                                                         |  | US$’000                   |       
|                                                                                         |  | (Unaudited)               |       
|Major customers with revenues of more than 10% of the Company’s total operating revenues |  |                           |       
|Revenues from major customers                                                            |  |                           | 27,892
|Percentage of operating revenues                                                         |  |                           | 80    
|Number                                                                                   |  |                           | 2     
|                                                                                         |  |                           |       
|Major suppliers with purchases of more than 10% of the Company’s purchases               |  |                           |       
|Purchases from major suppliers                                                           |  |                           | 4,301 
|Percentage of purchases                                                                  |  |                           | 46    
|Number                                                                                   |  |                           | 3     



Accounts receivable
related to the Company’s major customers comprised 88% of the total accounts receivables as of June 30, 2012 and December
31, 2011.



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



Page 8 of 40









Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011








| | 4. | OPERATING RISK (CONTINUED)
| | -- | --------------------------



| | (b) | Country risks
| | --- | -------------



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



| | (c) | Cash and time deposits
| | --- | ----------------------



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



| | 5. | ACCOUNTS RECEIVABLE
| | -- | -------------------



|                                |  | As of June 30, 2012 |         |   | As of December 31, 2011 | 
|------------------------------- |  | ------------------- | ------- | - | ----------------------- | 
|                                |  | US$’000             |         |   | US$’000                 | 
|                                |  | (Unaudited)         |         |   |                         | 
|                                |  |                     |         |   |                         | 
|Completed contracts             |  |                     | 268,237 |   |                         | 
|Retentions                      |  |                     | 9,604   |   |                         | 
|                                |  |                     |         |   |                         | 
|                                |  |                     | 277,841 |   |                         | 
|Allowance for doubtful accounts |  |                     | (18,279 | ) |                         | 
|                                |  |                     |         |   |                         | 
|                                |  |                     | 259,562 |   |                         | 



Of the retentions
balance as of June 30, 2012 and December 31, 2011, approximately US$390,000 and US$633,000, respectively are due to be paid by
the debtors after one year.



| | 6. | GOODWILL
| | -- | --------



Goodwill was arisen from the
acquisition of Guolian and Pan-pacific by BTWTC on July 5, 2008 and the acquisition of SRTC by Beijing Telestone on December 30,
2011. The amount 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 – Intangibles – Goodwill
and other.



Page 9 of 40









Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 7. | PROPERTY, PLANT AND EQUIPMENT, NET
| | -- | ----------------------------------



Property, plant and equipment are summarized as
follows:



|                         |  | Estimated useful life |     |  | As of June 30, 2012 |  |        | As of December 31, 2011 | 
|------------------------ |  | --------------------- | --- |  | ------------------- |  | ------ | ----------------------- | 
|                         |  | (in years)            |     |  | US$’000             |  |        | US$’000                 | 
|                         |  |                       |     |  | (Unaudited)         |  |        |                         | 
|                         |  |                       |     |  |                     |  |        |                         | 
|Buildings                |  |                       | 30  |  |                     |  | 338    |                         | 
|Leasehold improvement    |  |                       | 5   |  |                     |  | 215    |                         | 
|Plant and machinery      |  |                       | 5   |  |                     |  | 2,621  |                         | 
|Office equipment         |  |                       | 5   |  |                     |  | 2,118  |                         | 
|Motor vehicles           |  |                       | 5   |  |                     |  | 2,004  |                         | 
|Construction in progress |  |                       | N/A |  |                     |  | 7,804  |                         | 
|                         |  |                       |     |  |                     |  |        |                         | 
|                         |  |                       |     |  |                     |  | 15,100 |                         | 
|Accumulated depreciation |  |                       |     |  |                     |  | (4,765 | )                       | 
|                         |  |                       |     |  |                     |  |        |                         | 
|                         |  |                       |     |  |                     |  | 10,335 |                         | 



Construction-in-progress
consists of factories and office buildings under construction and includes the costs of construction incurred during the period
of construction or installation. No provision for depreciation is made on construction-in-progress until such time as the relevant
assets are completed and ready for their intended use.



| | 8. | LEASE PREPAYMENTS, NET
| | -- | ----------------------



|                         |  | As of June 30, 2012 |       |   | As of December 31, 2011 | 
|------------------------ |  | ------------------- | ----- | - | ----------------------- | 
|                         |  | US$’000             |       |   | US$’000                 | 
|                         |  | (Unaudited)         |       |   |                         | 
|                         |  |                     |       |   |                         | 
|Prepaid land use rights  |  |                     | 2,695 |   |                         | 
|Accumulated amortization |  |                     | (136  | ) |                         | 
|                         |  |                     |       |   |                         | 
|                         |  |                     | 2,559 |   |                         | 



Lease prepayment as of June 30,
2012 and December 31, 2011 represented the land use rights for a piece of land located in Guan County, Hebei Province, the PRC.
The land use rights will expire in 2059.



The prepaid land use rights have
been pledged to a bank in the PRC as collateral for short-term bank loans (Note 9).



Page 10 of 40









Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 9. | SHORT-TERM BANK LOANS
| | -- | ---------------------



As of June 30, 2012 and December
31, 2011, the balance included bank loans of RMB71 million and RMB95 million respectively, equivalent to approximately US$11.23
million and US$14.94 million respectively, which bear interest to be charged quarterly at the standard short-term borrowing rate
as stipulated by the People’s Bank of China on the date of the first withdrawal. The loans are wholly repayable within one
year and secured by guarantees provided by a third party guaranty company.



The guarantee provided by the
independent guaranty company is secured by the following:



| | (a) | Accounts receivable of the Company with an aggregate carrying value as of June 30, 2012 and December
31, 2011 amounting to RMB235.7 million, equivalent to approximately US$37.3 million;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Land use rights of the Company with a carrying value as of June 30, 2012 and December 31, 2011
amounting to RMB16.2 million and RMB16.4 million, equivalent to approximately US$2.56 million and US$2.57 million, respectively;
and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Personal guarantee provided by Mr. Daqing Han, TSTC Chairman and Chief Executive Officer.
| | --- | -----------------------------------------------------------------------------------------



| | 10. | INVENTORIES
| | --- | -----------



Inventories consisted of the
following:



|                                             |  | As of June 30, 2012 |        |   | As of December 31, 2011 | 
|-------------------------------------------- |  | ------------------- | ------ | - | ----------------------- | 
|                                             |  | US$’000             |        |   | US$’000                 | 
|                                             |  | (Unaudited)         |        |   |                         | 
|                                             |  |                     |        |   |                         | 
|Raw materials                                |  |                     | 1      |   |                         | 
|Finished goods and parts                     |  |                     | 11,178 |   |                         | 
|                                             |  |                     |        |   |                         | 
|                                             |  |                     | 11,179 |   |                         | 
|Provision for slow-moving and obsolete items |  |                     | (472   | ) |                         | 
|                                             |  |                     |        |   |                         | 
|                                             |  |                     | 10,707 |   |                         | 



Page 11 of 40







Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 11. | 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
carried forward for income tax reporting purposes that might be offset against future taxable income. The use of these net operating
losses carried forward is 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, Guan Telestone, Guolian and Pan-pacific. All these entities
are subject to 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, enjoy the preferential tax rate of
15% in the PRC for a three-year period commencing from 2011 and 2009, respectively. BTWTC is applying for extension of grace period
commencing from 2012 to enjoy the preferential tax rate. All other entities are subject to the unified tax rate of 25% for the
six-month and three-month periods ended June 30, 2012 and 2011.



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



| | 12. | SEGMENT INFORMATION
| | --- | -------------------



During the six-month and three-month
periods ended June 30, 2012 and 2011, all revenues of the Company are from its network installation and optimization services and
trading of wireless telecommunication equipment. No financial information by business segment is presented.



As the Company operates mainly
in the PRC and over 99% of its revenue during the six-month periods ended June 30, 2012 and 2011 are from the PRC and almost all
of the Company’s assets are located in the PRC, no geographical segment analysis is presented.



Page 12 of 40









Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 13. | COMMON STOCK
| | --- | ------------



TSTC had 12,333,264 shares
of issued and outstanding common stock as of June 30, 2012 and December 31, 2011.



On December 31, 2010, the Board
of Directors of TSTC approved a grant of 100,000 shares of restricted common stock with two years restriction for sale to certain
senior officers of the Company as 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 and these shares were issued on August 8, 2011.



As of June 30, 2012, the Company
was obliged to issue 1,800,000 shares of restricted common stock of TSTC as part of the consideration for the acquisition of SRTC
on December 30, 2011 (see note 1).



| | 14. | RELATED PARTY TRANSACTIONS
| | --- | --------------------------



Summary of related party transactions





|                                             |  | Note |   |  | As of June 30,  2012 |  |        | As of  December 31, 2011 | 
|-------------------------------------------- |  | ---- | - |  | -------------------- |  | ------ | ------------------------ | 
|                                             |  |      |   |  | US$’000              |  |        | US$’000                  | 
|                                             |  |      |   |  | (Unaudited)          |  |        |                          | 
|                                             |  |      |   |  |                      |  |        |                          | 
|Due from related parties                     |  |      |   |  |                      |  |        |                          | 
|Ex-stockholders of SMI/Guolian               |  |      | b |  |                      |  | 1,543  |                          | 
|                                             |  |      |   |  |                      |  |        |                          | 
|Due to related parties                       |  |      |   |  |                      |  |        |                          | 
|Directors                                    |  |      | a |  |                      |  | 230    |                          | 
|Ex-stockholders of Beijing Telestone/Guolian |  |      | b |  |                      |  | 1,591  |                          | 
|                                             |  |      |   |  |                      |  |        |                          | 
|                                             |  |      |   |  |                      |  | 1,821  |                          | 
|                                             |  |      |   |  |                      |  |        |                          | 
|Guarantor of short term loan                 |  |      |   |  |                      |  |        |                          | 
|A director                                   |  |      | 9 |  |                      |  | 11,232 |                          | 



Note:



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



Page 13 of 40







Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 14. | RELATED PARTY TRANSACTIONS (CONTINUED)
| | --- | --------------------------------------



Note:
(continued)



| | (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. However, an ex-stockholder of Beijing Telestone has initiated a lawsuit against SMI alleging that the consideration
amount has not been settled. The court hearing commenced on May 10, 2006 and finalized on December 19, 2006. A 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 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 upheld and SMI was not required to
compensate the ex-shareholder.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 15. | COMMITMENTS AND CONTINGENCIES
| | --- | -----------------------------



| | (a) | Capital commitments
| | --- | -------------------



As of June 30, 2012, the Company
had outstanding capital expenditure commitments on construction contracts of approximately RMB16 million, equivalent to approximately
US$2.5 million.



| | (b) | Operating lease commitments
| | --- | ---------------------------



The following table summarizes
the approximate future minimum rental payments under non-cancelable operating leases in effect as of June 30, 2012:



|                                   |  | As of June 30, 2012 |      
|---------------------------------- |  | ------------------- | -----
|                                   |  | US$’000             |      
|For the period ending December 31, |  |                     |      
|2012                               |  |                     | 1,071
|2013                               |  |                     | 899  
|2014                               |  |                     | 149  
|2015                               |  |                     | 66   
|2016                               |  |                     | 49   
|                                   |  |                     |      
|Total                              |  |                     | 2,234



Page 14 of 40







Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 15. | COMMITMENTS AND CONTINGENCIES (CONTINUED)
| | --- | -----------------------------------------



| | (c) | Contingencies
| | --- | -------------



The Company recognizes its revenue
upon the completion of contracts 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 recognize revenue on
an “invoice basis” instead of when goods are delivered and services are rendered. This is not in strict compliance
with the relevant laws and regulations. Accordingly, despite the fact that 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 interest and/or penalties cannot be estimated with any reasonable degree of certainty. The board of directors
considers it is more-likely-than-not that interest and/or tax penalties will not be imposed.



| | 16. | STOCK OPTION PLAN
| | --- | -----------------



On June 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 incentive and nonqualified stock 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.



On November 30, 2010, stock
options to subscribe a total of 601,663 shares were granted to certain eligible employees of the Company as incentive compensation
to attract and retain superior personnel for positions of substantial responsibility and to provide them with an additional incentive
to contribute to the success of the Company.



As at June 30, 2012, certain
of these eligible employees of the Company resigned and 101,528 shares of stock options were forfeited accordingly.



Page 15 of 40







Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 16. | STOCK OPTION PLAN (CONTINUED)
| | --- | -----------------------------



The following table sets forth
the details of the stock options as of June 30, 2012 and December 31, 2011.



|Number of shares of options  |  |  |                   |  |  |  |                   |   |  |  |                   |  
|---------------------------- |  |  | ----------------- |  |  |  | ----------------- | - |  |  | ----------------- | -
|As of December 31,  2011     |  |  | 72,000            |  |  |  | 432,600           |   |  |  | 45,435            |  
|Forfeited during the period  |  |  | -                 |  |  |  | (34,700           | ) |  |  | (15,200           | )
|As of June 30, 2012          |  |  | 72,000            |  |  |  | 397,900           |   |  |  | 30,235            |  
|                             |  |  |                   |  |  |  |                   |   |  |  |                   |  
|Exercise price               |  |  | US$12.00          |  |  |  | US$10.91          |   |  |  | US$10.91          |  
|Vesting date                 |  |  |                   |  |  |  |                   |   |  |  |                   |  
|- 1/3 on the 1st installment |  |  | November 30, 2010 |  |  |  | November 30, 2010 |   |  |  | December 31, 2011 |  
|- 1/3 on the 2nd installment |  |  | December 31, 2011 |  |  |  | December 31, 2011 |   |  |  | December 31, 2012 |  
|- 1/3 on the 3rd installment |  |  | December 31, 2012 |  |  |  | December 31, 2012 |   |  |  | December 31, 2013 |  
|Expiry date                  |  |  | November 29, 2020 |  |  |  | November 29, 2020 |   |  |  | November 29, 2020 |  



| | 17. | STOCK-BASED COMPENSATION
| | --- | ------------------------



The following table sets forth
a summary of the nature of stock-based compensation recognized for the three-month and six-month periods ended June 30, 2012 and
2011.



|                  |  | Three months ended  June 30, |     |  | Six months ended  June 30, | 
|----------------- |  | ---------------------------- | --- |  | -------------------------- | 
|                  |  | 2012                         |     |  | 2011                       | 
|                  |  | US$’000                      |     |  | US$’000                    | 
|                  |  | (Unaudited)                  |     |  | (Unaudited)                | 
|                  |  |                              |     |  |                            | 
|Stock options (i) |  |                              | 158 |  |                            | 



The table below sets forth the
functional classification of stock-based compensation recognized for the three-month and six-month periods ended June 30, 2012
and 2011.



|                           |  | Three
    months ended  June 30, |     |  | Six months ended  June 30, | 
|-------------------------- |  | -------------------------------- | --- |  | -------------------------- | 
|                           |  | 2012                             |     |  | 2011                       | 
|                           |  | US$’000                          |     |  | US$’000                    | 
|                           |  | (Unaudited)                      |     |  | (Unaudited)                | 
|                           |  |                                  |     |  |                            | 
|General and administrative |  |                                  | 158 |  |                            | 



No tax benefit was recognized
for the stock-based compensation recorded for the six-month periods ended June 30, 2012 and 2011.



Page 16 of 40







Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 17. | STOCK-BASED COMPENSATION (CONTINUED)
| | --- | ------------------------------------



Stock-based compensation to
employees



| | (i) | On November 30, 2010, 601,663 shares of stock options were granted to certain eligible employees
of the Company as incentive compensation to attract and retain superior personnel for positions of substantial responsibility and
to provide them with an additional incentive to contribute to the success of the Company.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The 601,663 shares of stock options
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 and recognized as an expense over the employee’s requisite service period.



During the six-month periods ended
June 30, 2012 and 2011, no stock option was granted by the Company.



For the six-month periods ended
June 30, 2012 and 2011, the Company recognized stock-based compensation in relation to stock options granted to employees of US$316,000
and US$904,000, respectively.



A summary
of stock option activity as of June 30, 2012 and changes during the six-month period ended June 30, 2012 is presented below:



|                                               |  | Number of shares |         |   | Weighted average exercise price | 
|---------------------------------------------- |  | ---------------- | ------- | - | ------------------------------- | 
|                                               |  |                  |         |   | US$                             | 
|                                               |  |                  |         |   |                                 | 
|Outstanding as of December 31, 2011            |  |                  | 550,035 |   |                                 | 
|Forfeited during the period                    |  |                  | (49,900 | ) |                                 | 
|                                               |  |                  |         |   |                                 | 
|Outstanding as of June 30, 2012                |  |                  | 500,135 |   |                                 | 
|                                               |  |                  |         |   |                                 | 
|Vested and exercisable as of December 31, 2011 |  |                  | 351,558 |   |                                 | 
|                                               |  |                  |         |   |                                 | 
|Vested and exercisable as of June 30, 2012     |  |                  | 323,358 |   |                                 | 



Page 17 of 40







Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 17. | STOCK-BASED COMPENSATION (CONTINUED)
| | --- | ------------------------------------



Stock-based compensation
to employees (continued)



| | (i) | (continued)
| | --- | -----------



The following
tables set forth the details of stock options outstanding, vested and exercisable as of June 30, 2012 and December 31, 2011.



|                    |  | Outstanding      |         |  | Vested and exercisable          | 
|------------------- |  | ---------------- | ------- |  | ------------------------------- | 
|Exercise price      |  | Number of shares |         |  | Weighted average exercise price | 
|                    |  |                  |         |  | US$                             | 
|As of June 30, 2012 |  |                  |         |  |                                 | 
|                    |  |                  |         |  |                                 | 
|10.91               |  |                  | 428,135 |  |                                 | 
|12.00               |  |                  | 72,000  |  |                                 | 
|                    |  |                  |         |  |                                 | 
|                    |  |                  | 500,135 |  |                                 | 



|                        |  | Outstanding      |         |  | Vested and exercisable          | 
|----------------------- |  | ---------------- | ------- |  | ------------------------------- | 
|Exercise price          |  | Number of shares |         |  | Weighted average exercise price | 
|                        |  |                  |         |  | US$                             | 
|                        |  |                  |         |  |                                 | 
|As of December 31, 2011 |  |                  |         |  |                                 | 
|10.91                   |  |                  | 478,035 |  |                                 | 
|12.00                   |  |                  | 72,000  |  |                                 | 
|                        |  |                  |         |  |                                 | 
|                        |  |                  | 550,035 |  |                                 | 



The aggregate intrinsic value
of all outstanding stock options and exercisable stock options at June 30, 2012 and December 31, 2011 amounted to US$Nil. There
was no options exercised during the six-month periods ended June 30, 2012 and 2011. As of June 30, 2012 and December 31, 2011,
the Company had total unrecognized compensation amounting to US$274,791 and US$668,900, respectively under ASC 718. The unrecognized
compensation will be recognized over a weighted average period of approximately 2 years.



Page 18 of 40







Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 17. | STOCK-BASED COMPENSATION (CONTINUED)
| | --- | ------------------------------------



Stock-based compensation
to employees (Continued)



| | (ii) | During the six-month period ended June 30, 2012, no share of restricted common stock was issued.
| | ---- | ------------------------------------------------------------------------------------------------



For the six-month periods ended
June 30, 2012 and 2011, no stock-based compensation in relation to restricted common stock granted to employees has been recognized.



Stock-based compensation to
non-employees



| | (iii) | During the period ended June 30, 2012, no warrants were
expired or granted by the 	Company.
| | ----- | -------------------------------------------------------------------------------------------



For the six-month periods ended
June 30, 2012 and 2011, no stock-based compensation in relation to warrants granted to non-employee has been recognized.



The following table sets forth
the details of warrants outstanding, vested and exercisable as of June 30, 2012 and December 31, 2011.



|                    |  | Outstanding, Vested and Exercisable |       
|------------------- |  | ----------------------------------- | ------
|Exercise price      |  | Number of shares                    |       
|US$                 |  |                                     |       
|                    |  |                                     |       
|As of June 30, 2012 |  |                                     |       
|4.95                |  |                                     | 40,000
|9.55                |  |                                     | 10,000
|18.47               |  |                                     | 30,000
|                    |  |                                     |       
|                    |  |                                     | 80,000



Page 19 of 40







Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 17. | STOCK-BASED COMPENSATION (CONTINUED)
| | --- | ------------------------------------



Stock-based compensation to
non-employees (continued)



| | (iii) | (Continued)
| | ----- | -----------



|                        |  | Outstanding, Vested and Exercisable |       
|----------------------- |  | ----------------------------------- | ------
|Exercise price          |  | Number of shares                    |       
|US$                     |  |                                     |       
|                        |  |                                     |       
|As of December 31, 2011 |  |                                     |       
|4.95                    |  |                                     | 40,000
|9.55                    |  |                                     | 10,000
|18.47                   |  |                                     | 30,000
|                        |  |                                     |       
|                        |  |                                     | 80,000



| | 18. | RECENT ACCOUNTING PRONOUNCEMENTS
| | --- | --------------------------------



In April 2011, the FASB issued
ASU No. 2011-03, “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements.”
ASU No. 2011-03 removes the transferor’s ability criterion from the consideration of effective control for repurchase
agreements and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their
maturity. It also eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially
all the cost of purchasing replacement financial assets. This guidance is effective for interim and annual periods beginning on
or after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s consolidated financial
statements.



In May 2011, the FASB issued
ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and International Financial Reporting Standards.” ASU No. 2011-04 provides a consistent
definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP
and International Financial Reporting Standards. Some of the amendments clarify the Board’s intent about the application
of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair
value or for disclosing information about fair value measurements. ASU No. 2011-04 is effective for interim and annual periods
beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s consolidated
financial statements.



Page 20 of 40







Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 18. | RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
| | --- | --------------------------------------------



In June 2011, the FASB issued
ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05
eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity.
It requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05
is to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15,
2011. The adoption
of this ASU did not have a material impact on the Company’s consolidated financial statements.



In September 2011, the FASB
issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for impairment.”
The ASU No. 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that
the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform
the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood
of more than 50 percent. The ASU No. 2011-08 are effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment
tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or
interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption
of this ASU did not have a material impact on the Company’s consolidated financial statements.



In September 2011, the FASB
issued ASU No. 2011-09, “Compensation – Retirement benefits – Multiemployer Plans (Subtopic 715-80): Disclosure
about an Employer’s Participation in a Multiemployer Plan. The ASU No. 2011-09 require that employers provide additional
separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans.



The ASU No. 2011-09 are effective
for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. The adoption of this ASU did
not have a material impact on the Company’s consolidated financial statements.



In December 2011, the FASB
issued ASU No. 2011-10, “Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate – a Scope
Clarification (a consensus of the FASB Emerging Issues Task Force). The ASU No. 2011-10 requires that a parent deconsolidate a
subsidiary if the parent ceases to have a controlling financial interest in the subsidiary (except for a sale of in substance real
estate). However, in situations other than a sale of in substance real estate, differing views exist in practice on whether the
parent of an in substance real estate subsidiary must satisfy the criteria in Subtopic 360-20, Property, Plant, and Equipment –
Real Estate Sales, in order to derecognize the in substance real estate. For public entities, the amendments in this Update are
effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted.
The adoption of this ASU is not expected to have a material impact on the Company’s operating results and financial position.



Page 21 of 40







Telestone Technologies Corporation



Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2012 and 2011










| | 18. | RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
| | --- | --------------------------------------------



In December 2011, the FASB issued
ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications
of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”).
ASU 2011-12 deferred certain aspects of ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive
Income” (“ASU 2011-05”). The new guidance is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2011. Other than enhanced disclosures, the adoption of this ASU did not have a material impact on
the Company’s consolidated financial statements.



| | 19. | 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.



Page 22 of 40







| | Condensed Consolidated Financial       
| | ---------------------------------------
| | Statements                             
| |                                        
| | Telestone Technologies Corporation     
| |                                        
| | Six months ended June 30, 2012 and 2011



Page 23 of 40







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 access-network solution
provider serving the Chinese market. Since 1997, we have operated in the Chinese market and in 2006, we expanded our marketing
efforts to include Vietnam, Indonesia, Malaysia, Thailand and India. In 2007, Beijing Telestone Communication Technology Corporation
was established as one of our subsidiaries focusing on developing and managing our overseas businesses. Currently, our marketing
efforts have expanded to 29 countries around the world, including the U.S., Vietnam, Mexico, Brazil, Russia, India, the Philippines,
Thailand, Ireland, Ecuador, Mongolia, South Africa, Turkey, Indonesia, Colombia, Costa Rica, Argentina, Ukraine, Kazakhstan, Singapore,
South Korea, Hong Kong (SAR), Saudi Arabia, New Zealand, Bangladesh, the UAE, Canada and Iceland. Continued expansion outside of
China is one of our core strategies. We believe that the quality of our products and services will allow Telestone to be increasingly
competitive internationally.



Our access-network solutions include the
research and development (“R&D”) and application of access-network technology. In addition to our homegrown access-network
equipment, which includes repeaters, antennas and radio-frequency peripherals, we also offer project design, project management,
installation, maintenance and other after-sales services to our customers. Our access-network solutions are designed to further
enhance the coverage of mobile telecommunications networks, which in turn improves the quality of reception for mobile phone users.
The solutions we provide to the telecommunications industry can be used in indoor and outdoor environments, including hotels, residential
estates, office buildings, airports, exhibition centers, underground stations, highways and tunnels.



In 2008, we launched WFDS (as defined below),
a next generation wireless distribution system. WFDS is an all-optical network that combines the technologies of both wireless
and optical telecommunications. This system supports all mobile telecom networks and various other networks, including WLAN, FTTH,
traditional telephone, and video surveillance systems. In 2010, we began generating revenues from WFDS installations. For the six
months ended June 30, 2012, we have completed 332 WFDS installations.



In addition, our WFDS technology provides
several important benefits to Telestone and its investors: WFDS offers an opportunity for us to diversify our customer base; WFDS
generates 40.85% of the gross margin of the company; WFDS also targets a different customer base — property developers and
managers — rather than the large telecom carriers targeted by some of our other products, and these customers tend to make
payments more quickly, which should reduce our accounts-receivable days’ sales outstanding (“DSOs”) over time.
Finally, WFDS is a technology platform, and we have a pipeline of WFDS technologies slated for launch over the next several years.



While we expanded our sales from purely
consisting of a RF-based wireless product portfolio to one including sales from our Unified Local-Access Solution (“WFDS”)
products, our traditional RF-based products still remain a strong growth driver for Telestone and we received more than 68.57%
of our revenues from RF-based products in the second quarter of 2012.



We are committed to the research and development
of wireless communication related technology. Over 90% of our technology is developed in-house at our R&D center. We employ
an experienced and highly trained professional staff of scientists and engineers that concentrate on the invention and further
advancement of wireless communication technology. We have over 100 R&D specialists, many of whom are industry experts in telecommunications
— all have at least a bachelor’s degree, and 40% have a master’s degree or above. As a result of our commitment
to R&D, our innovative WFDS technology, since its introduction, has received recognition in the telecommunications industry
and has won awards and praise from several telecommunications carriers.



Page 24 of 40







Also, in order to provide fast and high
quality service to our customers, we have established more than 30 locations throughout China. These locations offer sales, project
survey, design, project management and installation and maintenance services. We believe that this sales and service strategy enhances
our ability to increase our existing customer base in the PRC and enables us to provide timely responses to customers’ inquires
as well as technical and maintenance service upon our customers’ requests. Our sales efforts are not focused in nor dependent
upon any particular region or province of the PRC.



As the mobile market in China has matured,
mobile operators have been continuing to invest for the future. For example, since 2011, the Chinese telecommunications industry
has witnessed accelerated development in the form of a rapid rollout of 3G network investments as well as commitments to introduce
4G technology. Such was also evidenced by China Mobile, China Telecom, and China Unicom’s €1.178 billion ($1.625 billion)
purchase of network and application solutions, and integration and maintenance services from Alcatel-Lucent on November 5, 2010
during the visit of Chinese President Hu Jintao to France.



We also believe that disparate technologies
used by mobile carriers in the United States, and the continued roll-out of 3G and 4G also provide a conducive environment for
creating potential demand for our equipment and solutions in the United States.



Telecom Carriers’ Layout for Next-generation Communications
Market



The industry trend amongst international
mainstream telecom carriers is to accelerate the shift towards the construction of next-generation communications networks, such
as LTE. At the 2012 World Mobile Communications Conference, held in Barcelona, China Mobile and its partners jointly published
plans to construct more than 500,000 TD-LTE base stations over the next three years. These base stations will service up to 2 billion
people. In China, nine cities, including Shenzhen and Hangzhou, and over 20,000 base stations will be involved in commercial testing
of this plan. Also, in Hong Kong, China Mobile will begin to provide LTE-TD/FDD services. China Unicom also has plans to build
a LTE Trial Network. These investments are expected to create new opportunities in our industry.



To speed up China’s Wireless
City, Smart City Construction



In recent years Chinese large and medium-sized
cities have actively constructed “wireless cities” using a variety of wireless access technologies to provide on-demand
anytime, anywhere wireless network access. These networks offer a full range of information, government, business and public services,
to promote the development of tourism and other industries and to enhance the image of the city.



The “Big 3” carriers have used
Wi-Fi to accelerate the development of such wireless cities. At present, the extent to which the Big 3 have publicized the efforts
to develop wireless cities clearly demonstrates that wireless cities represent not only a “flagship” product of the
carriers but also the future of the telecom industry in China.



As a result of the demands of rapid urban
population growth and in order to efficiently use resources, a growing number of cities have begun implementing “smart city”
building strategies. Such smart cities will focus on the integration of technology into a strategic approach to sustainability,
citizen well-being, and economic development. Such integration will enhance the functionality of buildings, the provision of utilities,
the convenience of transportation, and the effectiveness of government. It is expected that the telecommunications industry will
be a major beneficiary of these activities. In 2012, China will focus on building smart cities. In building smart cities, the government
will promote the use of wireless, digital, and intelligent buildings which will inevitably become an important part of such construction.
Also, at present, China has hundreds of cities proposing to begin construction of smart cities and/or wireless cities.



Growth in Mobile Subscribers



Growth in the wireless infrastructure market has
also been driven by the significant increase in the number of mobile subscribers and in the amount of data transmitted over wireless
networks by smart phones in China. This growth has resulted in increasing burdens being placed on the carriers’
wireless infrastructure. Overworked wireless networks result in poor wireless service, slow data transfer rates and dropped calls. In
order to alleviate the burdens being put on the wireless infrastructure and to increase wireless network capacity, the Big-3 continue
to deploy and upgrade their wireless infrastructure equipment.



“The Internet of Things”



In Chinese organizations and businesses,
a budding phenomenon referred to as “The Internet of Things” has developed. 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 remotely with their home and office computers, home appliances and other electronic
devices. Everything from home appliances, public infrastructure and facilities to logistic processes will be assigned an IP
address and connected to the Internet of Things through a wired or wireless connection. This demand is expected to increase
the need for wireless infrastructure.



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 phones 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 local-area networks (LAN networks), 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 will increasingly look to deploy indoor wireless coverage solutions.



Page 25 of 40







The state has decided the integration of
telecommunications networks, TV and radio broadcasting networks, and the internet to be the next step in the evolution of these
industries. Such integration shall include telecommunications, broadcasting, internet communications, broadband, digital TV, next-generation
internet, network interoperability and resource sharing, voice, data and broadcasting, etc. This integration does not mean unification
of these industries, but rather integration of services provided by players in each of the respective industries. This broad extension
of the market space will create more development opportunities.



Integration involves systems, management,
business and other complex distribution of benefits problems. In order to overcome these integration issues, the potential monopoly
issues must be overcome. A comprehensive integration can only be achieved when true peer-to-peer access becomes possible, in other
words, true distribution of business content and business interests in order to form an effective mode of operation.



It is crucial to break the barriers created
by potential monopolies to ensure coordination between the broadcasting businesses and telecommunications services. Users should
be able to select networks to access the internet, watch TV, communicate over the phone and use other telecommunications value-added
services through the network. As a result, traditional monopolies will be diminished, and gradually new industry standards will
be established. We expect this integration will play a significant role in benefitting the ecology of the telecommunications and
broadcasting industries.



The Broadband Strategy Project will Benefit the Entire
Communications Industry



The 12th Five-Year National Strategic Emerging Industries Development
Plan (“the 12th Five-Year Plan”) issued by the State Council, for the first time stated the implementation of the
“Broadband Strategy Project” and included it in the “20 major projects”.
The Broadband Strategy Project demands that by the end of the “12th Five-Year Plan” city and rural households’
broadband should have more than 20 megabits and 4 megabits access capability, respectively. It also demands wide promotion of
the integration of telecommunications networks, TV and radio broadcasting networks, and the internet.



The Broadband Strategy Project will be
included in “20 major projects” in strategic emerging industries. It will accelerate the construction of next generation
information networks, using ultra-high-speed fiber and wireless communications technology, and therefore be beneficial for both
telecommunication and IP network equipment providers.



The main methods of the Broadband Strategy Project are to accelerate the construction of the broadband optical access
network to promote coverage of the third generation mobile communication (3G) network, and to carry out large-scale commercial
demonstrations of TD-LTE. It also promotes the implementation of next-generation internet, full implementation of the radio and
television digital transformation, network integration, organization of key technologies, equipment, intelligent terminal research
and development and industrialization.



4G development in China



The 4G wireless network development is
led by the China Mobile TD-LTE. In 2012, China Mobile’s TD-LTE scale technology pilot cities have been expanded from 6 cities
at the early stage, including Shanghai, Nanjing, Hangzhou, Guangzhou, Shenzhen and Xiamen, to 13 cities, with Beijing, Tianjin,
Qingdao, Shenyang, Ningbo, Chengdu and Fuzhou being newly covered.



Due to the competitive disadvantage of
3G, China Mobile has been urged to develop TD-LTE, and mobile companies from different cities compete for inclusion in the scale
technology pilot cities. The bidding process for TD-LTE terminals will begin in the second half of 2012. China Mobile plans to
complete 20,000, 200,000 and 350,000 TD- LTE base stations by the end of 2012, 2013 and 2014, respectively.



In early 2012, China Unicom conducted a
test of LTE-FDD technology in Shanghai. According to releases from the Ministry of Industry and Information Technology, China 4G
licenses will be issued in China within the next two to three years.



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 RF-based local access-network solutions, 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 types of 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.



Page 26 of 40







We plan to leverage our WFDS technology
in order to increase our penetration into the Chinese market 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 the industry’s 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 beneficiary 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.Thanks to our WFDS technology, property owners can reduce the installation space required for mobile wireless cable and internet service by consolidating eleven devices into one. In a single compact and completely optical platform, we offer integrated solutions streamlined to meet our customers’ 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. WFDS is easy to install, centrally managed, 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 various venues and premises 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 stations and tower mounted amplifiers, antennas, couplers and splitters. Our RF-based products
support various 2G and 3G transmission standards, including CDMA, W-CDMA, GSM and TD-SCDMA.



We provide the public mobile communication
access resident wireless access network U-DAS solution to our customers. U-DAS applications include transportation hubs (airports
, railway stations ), large venues (sports stadiums , convention centers), office and commercial buildings (office buildings, hotels,
shopping centers), hospitals, campuses, residential quarters, etc., where it provides signal access and coverage for the operators
of 2G, 3G, and even LTE-FDD and LTE-TDD networks.



TIPS Solutions



Telestone Intelligence Premises System
(“TIPS”) is a groundbreaking technology based on Telestone’s WFDS technology. The core of TIPS is Telestone’s
Unified Premises Information Network System (“UPINS”) technology, which, in real-time, distributes all information
generated or required at any time and at any location within a premises network. TIPS networks are characterized by ultra-wide
bandwidth, long transmission distances, and multi-cascading technology. As of June 30, 2012, we have completed the theoretical
research and development of the core technology for TIPS.



TIPS is expected to be used in a broad
range of applications including municipal projects, airports, railways, highways, streets, communities, buildings, houses, and
medical facilities, etc. For internal communications capabilities, the functions of TIPS can be divided into IP fiber optic networks
and wireless telephony features, office computing optical networks and wireless access capabilities, and wireless access teleconferencing,
etc. For external public communications services, the functions of TIPS can be divided into wireless signal coverage for public
communications, WLAN coverage for telecommunications carriers, and cable TV access functions, etc. For network management and maintenance,
the functions of TIPS can be divided into network monitoring and traffic management, information security management, and behavior
management, etc. For security management, the functions of TIPS can be divided into entrance guard and attendance management, video
intercom management, and multimedia publishing, etc.



TIPS is closely related to the integration
of telecommunications, TV and radio broadcasting and internet access into one unified network, a project initiated by the State
Council. TIPS also provides reliable solutions to developing “smart cities” via its comprehensive network integration
capabilities, intelligent management, cost-saving materials and unique energy-saving features.



Our Competitive Strengths



We believe that the following competitive
strengths enable us to compete effectively and to take advantage of the growth opportunities in our markets:



Page 27 of 40







Strong Research and Development Capabilities



Our R&D capabilities rank among the
best in the PRC’s telecommunications industry. We have a robust engineering project management system and an experienced
engineering team. Our research and development center is equipped with the latest equipment and testing facilities, which give
our research and development personnel the tools they require to make significant advances in access-network technologies. In addition,
we provide our employees with continuing education which is administered through internal programs.



Our R&D capabilities are recognized
and approved by the PRC government and have won accolades such as the Project Certificate of National-level Torch Program and the
Project Certificate of Nation-level Spark Program. In addition, a number of our products and systems, several of which have been
patented or are patent pending, have been awarded various science and technology honors by PRC provincial and municipal governments.
We focus on increasing our research and development efforts to develop superior and proprietary technologies.



Our proprietary WFDS, which is a result
of our R&D efforts, is one of the leading indoor access-network products in China. Compared with other traditional wireless
distribution systems, our WFDS system has many advantages. Firstly, WFDS uses fiber optic cable to transmit signals. Because of
the low signal-loss characteristic of fiber optic cable, signals can be transmitted over long distances, the main unit (“MU”)
can be placed closer to the signal source and the remote unit (“RU”) can be placed closer to the subscribers. Therefore,
a micro-power signal source can be used, which reduces interference and noise, generates low electromagnetic interference, and
expands the coverage area. Secondly, due to the input port of the MU connecting to the signal combiner, WFDS systems can support
multiple signals’ access and network integration. WFDS can provide all broadband communication services access in the 500
kHz ~ 3 GHz band for subscribers. Thirdly, due to the fact that each node of the system has the same bandwidth and flow characteristics,
WFDS can provide the same communication services for every subscriber. Finally, WFDS systems are easy to manage and flexible for
implementing expansion and system upgrades with minimum cost.



Broad and Diverse Market Base



Our business covers a wide region. We have
30 branches throughout China and our business covers approximately 29 countries worldwide.



Experienced Marketing Staff



We employ a group of experienced telecommunications
experts and an experienced and technologically savvy marketing staff in China.



Strong Customer Relations



We have maintained long-term relationships with China Unicom,
China Mobile, China Telecom and China Netcom as customers for approximately 14 years.



Governmental Support



As a high-tech enterprise with an established
track record, our company enjoys the stimulus plans offered by China’s industry governmental authorities and by local authorities,
including the Ministry of Science and Technology, the Ministry of Industry and Information Technology, the Beijing municipal government
and the Administrative Committee of Z-Park.



Our Growth Strategy



In order to maintain our position as one of the leading companies
in the PRC’s access-network solutions sector, and to expand and diversify our revenue streams, we have adopted the following
strategies:



Continue to Focus on Research and Development



We plan to continue to invest in research
and development for our key technologies and products to enhance our leading position in the access network technology market and
take full advantage of the PRC’s investment in 3G and 4G networks. We have dedicated research and development programs to
advance access-network solutions for the continuous development of our business.



Seek Selective Acquisitions and Strategic Investments



In the domestic market, we intend to maintain
strong relationships with Chinese mobile telecommunications carriers and potentially make selective acquisitions in major provincial
markets where we do not have a leading market share. Our potential targets are companies that enjoy a leading market position and
have strong business networks in their provincial markets, have strong production capabilities, own applicable value added products
and whose customer network platforms adapt to WFDS. We believe that we will further our penetration into provincial markets and
raise our overall market share through selective acquisitions and the promotion of new solutions.



Page 28 of 40







Strengthen International Market Presence



We plan to focus on increasing our presence
in markets outside of the PRC. We will continue to strengthen our presence abroad by leveraging our expertise and our leading access-network
products and solutions. In the United States, we plan to seek cooperation with peers that have strong research and development
abilities and develop technology and products that are suitable for the PRC market. We also seek partners within the integration
business to sell our products. In developing countries, we only seek cooperation with local integration partners to deliver our
access network solution technologies. We then work with these partners to set up our local product distribution channels.



Description of Products and Engineering Services



We design and sell electronic equipment
used to provide access-network solutions to our customers. Many of these types of equipment, including WFDS products, RFPA products,
passive components and base station antennas as well as engineering supporting fiber optic cable, cable and other auxiliary materials
for 2G, 3G, 4G, Broadband access and CATV networks, are highly specialized active microwave components designed to meet the needs
of our customers.



In addition to designing and selling our
products, we also provide systems integration services to our customers. The primary systems integration services provided to our
customers are project design and engineering, specifically, the development and design of indoor (living quarters, hospital systems,
and hotels) and outdoor (expressways, railways and no coverage zones) wireless signal complementary coverage solutions and their
applied products. This includes the design of the required equipment, implementation, project quality evaluation as well as after-sale
maintenance and optimization for system integration products, constructive products for engineering design projects and wireless
network optimization products.



Research & Development



We maintain a research and development
center where the majority of our products are designed by our staff of engineers and scientists. Our research and development center
is equipped with the latest equipment and testing facilities, which give our research and development personnel the tools they
require to make significant advances in access-network technologies. The center is comprised of three research centers including
(i) the Premises Neural Network Research and Development Center, (ii) the Joint Development center, and (iii) the System Product
Research Center, and seven professional research departments including: (i) the Resident Neural Network Research and Development
Department, (ii) the Radio Station Network Development Department, (iii) the Equipment R&D Department, (iv) the Parts Development
Department, (v) the IP Resident Network Research and Development Department, (vi) the Government Intelligent Systems Research and
Development Department, and (vii) the Business Intelligent Systems Research Department.



We seek to remain at the forefront of current
and future technologies, paying close attention to evolving development trends in domestic and international technologies. Our
R&D capabilities are recognized and affirmed by the PRC government and have won awards such as the Project Certificate of National-level
Torch Program and the Project Certificate of Nation-level Spark Program. In addition, a number of our products and systems, several
of which have been patented or are patent pending, have been awarded various science and technology honors by PRC provincial and
municipal governments.



Competition



Our main domestic competitors are Guangdong Comba, Wuhan Hongxin
and China GrenTech.



| | · | Guangdong Comba was one of the first Chinese domestic telecom manufacturers. The company is listed on the Hong Kong Stock Exchange under the stock symbol 2342.HK.                                                                                                              
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                 
| | · | Wuhan Hongxin, originally a state-owned enterprise under the management of Wuhan Post & Telecom Academy, has a strong technical background and sales network. Wuhan Hongxin is a large company with a diverse group of products that extend beyond the wireless coverage sector.
| |   |                                                                                                                                                                                                                                                                                 
| | · | China GrenTech, formerly known as Powercom Holdings Limited, was founded in 1999 and is based in Shenzhen. China GrenTech is a leading China based wireless coverage products and services provider, and a leading developer of radio frequency technology and products.        



Our potential international competitors
include Powerwave Technologies and Andrew Corporation. We believe that our overseas competitors are not key threats to Telestone
because they have no competitive advantage with respect to product costs and are not accustomed to the marketplace of the PRC.



| | · | Powerwave Technologies, Inc. is a global provider of end-to-end wireless infrastructure solutions for use in wireless communications networks. They offer original equipment manufacturers (“OEMs”), operators and network providers in the wireless communications industry a portfolio of antenna systems, base station systems and coverage systems.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Page 29 of 40







| | · | Andrew Corporation (“Andrew”) is a global designer, manufacturer, and supplier of communications equipment, services and systems. Andrew’s products and expertise are found in communications systems throughout the world, including devices for wireless and distributed communications, land mobile radio, cellular and personal communications, broadcast, radar and navigation.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Government Regulation



The following is a summary of the principal
governmental laws and regulations that are or may be applicable to our operations in the PRC. The scope and enforcement of many
of the laws and regulations described below are uncertain. We cannot predict the effect of further developments in the Chinese
legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of laws.



The telecommunications industry, including
certain access-network solution provider services, is highly regulated in the PRC. Regulations issued or implemented by the State-owned
Assets Supervision and Administration Commission of the State Council, Ministry of Information Industry of PRC and other relevant
government authorities cover many aspects of telecommunications network operations, including entry into the telecommunications
industry, the scope of permissible business activities, interconnection and transmission line arrangements, tariff policies and
foreign investment.



The principal regulations governing the telecommunications services
business in the PRC include:



| | · | Telecommunications Regulations (2000), (the “Telecom Regulations”). The Telecom Regulations categorize all telecommunications businesses in the PRC as either infrastructure telecommunications businesses or value-added telecommunications businesses. Under the Telecom Regulations, certain services are classified as being of a value-added nature, including telecommunication information services, online data processing and translation processing, call centers and internet access providers, and require the commercial operator of such services to obtain an operating license. The Telecom Regulations also set forth extensive guidelines with respect to different aspects of telecommunications operations in the PRC.                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | · | Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (2002), (the “FI Telecom Regulations”). The FI Telecom Regulations set forth detailed requirements with respect to capitalization, investor qualifications and application procedures in connection with the establishment of a foreign-invested telecom enterprise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | · | Foreign Exchange Controls. The principal regulations governing foreign exchange in the PRC are the Foreign Exchange Control Regulations (1996) and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations (1996), (“the Foreign Exchange Regulations”). Under the Foreign Exchange Regulations, Renminbi (“RMB”) is freely convertible into foreign currency for current account items, including the distribution of dividends. Conversion of RMB for capital account items, such as direct investment, loans and security investment, however, is still subject to the approval of the State Administration of Foreign Exchange (“SAFE”). Under the Foreign Exchange Regulations, foreign-invested enterprises are required to open and maintain separate foreign exchange accounts for capital account items. In addition, foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE.



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 our manufacturers or other component suppliers;
| |   |                                                                                                        
| | · | losses associated with excess and obsolete inventory; and                                              
| |   |                                                                                                        
| | · | growth in our headcount and other related costs incurred in our professional services organization.    



Page 30 of 40







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
had approximately 1410 full-time employees as of June 30, 2012.



Sales and marketing expenses represent
the largest component of our operating expenses and primarily consist of sales and marketing 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 of adding new customers and increasing penetration within our existing customer base, expanding
our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events. We
expect future sales and marketing expenses to continue to be our most significant operating expenses.



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 expenses. We are
devoting substantial resources to the continuous 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 they are essential
for maintaining our competitive edge. The 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, gains or losses on disposal of fixed assets, gains or losses on the conversion of non-Renminbi transactions
into Renminbi, and gains from governmental subsidies. 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 condensed 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 of 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 condensed consolidated financial statements.



Critical Accounting Policies



Our condensed 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 condensed
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 condensed 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.



Revenue Recognition



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



Product revenue represents the contracted
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. Revenues 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 once the installation has been accepted by the customer.



Page 31 of 40







Foreign Currency Translation



All major subsidiaries of the Company consider
Renminbi as their functional currency as a substantial portion of their business activities is conducted 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 on the balance sheet date. Exchange
gains and losses are recorded in the condensed consolidated statements of operations.



For translation of financial statements
into the reporting currency, assets and liabilities are translated at the exchange rate on 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 value. We record inventory write-downs for potential
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 time 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.



Allowances for Doubtful Accounts



We record a provision for doubtful accounts
based on historical results 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.



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 the 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.



Page 32 of 40













Results of Operations



Our operating results are presented for the quarter ended June
30, 2012, as compared to the quarter ended June 30, 2011.



The following is the statement of our operations for the three
months ended June 30, 2012 and 2011:



|Item                                 |  | Three Months Ended June 30, 2012 |        |   | Three Months Ended June 30, 2011 |  |       | Comparisons | 
|------------------------------------ |  | -------------------------------- | ------ | - | -------------------------------- |  | ----- | ----------- | 
|                                     |  | $'000                            |        |   | % of revenue                     |  |       | $'000       | 
|Revenue                              |  |                                  | 17,866 |   |                                  |  |       |             | 
|Equipment and services costs         |  |                                  | 11,246 |   |                                  |  | 62.95 | %           | 
|Gross profit                         |  |                                  | 6,620  |   |                                  |  | 37.05 | %           | 
|Sales and marketing expenses         |  |                                  | 3,032  |   |                                  |  | 16.97 | %           | 
|General and administrative expenses  |  |                                  | 3,782  |   |                                  |  | 21.17 | %           | 
|Research and development expenses    |  |                                  | 567    |   |                                  |  | 3.17  | %           | 
|Depreciation and Amortization        |  |                                  | 192    |   |                                  |  | 1.07  | %           | 
|Interest expenses                    |  |                                  | 259    |   |                                  |  | 1.45  | %           | 
|Other income, net                    |  |                                  | 236    |   |                                  |  | 1.32  | %           | 
|Net (loss)/ Income before income tax |  |                                  | (976   | ) |                                  |  | -5.46 | %           | 
|Income tax                           |  |                                  | 326    |   |                                  |  | 1.82  | %           | 
|                                     |  |                                  |        |   |                                  |  |       |             | 
|Net(loss)/ income                    |  |                                  | (1,302 | ) |                                  |  | -7.29 | %           | 



The following is the statement of our operations for the six
months ended June 30, 2012 and 2011:



|Item                                |  | Six Months Ended June 30, 2012 |        |   | Six Months Ended  June 30, 2011 |  |       | Comparisons | 
|----------------------------------- |  | ------------------------------ | ------ | - | ------------------------------- |  | ----- | ----------- | 
|                                    |  | $'000                          |        |   | % of revenue                    |  |       | $'000       | 
|Revenue                             |  |                                | 34,969 |   |                                 |  |       |             | 
|Equipment and services costs        |  |                                | 21,809 |   |                                 |  | 62.37 | %           | 
|Gross profit                        |  |                                | 13,160 |   |                                 |  | 37.63 | %           | 
|Sales and marketing expenses        |  |                                | 6,649  |   |                                 |  | 19.01 | %           | 
|General and administrative expenses |  |                                | 5,128  |   |                                 |  | 14.66 | %           | 
|Research and development expenses   |  |                                | 1,030  |   |                                 |  | 2.95  | %           | 
|Depreciation and Amortization       |  |                                | 393    |   |                                 |  | 1.12  | %           | 
|Interest expenses                   |  |                                | 530    |   |                                 |  | 1.52  | %           | 
|Other income, net                   |  |                                | 284    |   |                                 |  | 0.81  | %           | 
|Net (loss)/Income before income tax |  |                                | (286   | ) |                                 |  | -0.82 | %           | 
|Income tax                          |  |                                | 537    |   |                                 |  | 1.54  | %           | 
|Net(loss)/ income                   |  |                                | (823   | ) |                                 |  | -2.35 | %           | 



Page 33 of 40







For the three months ended June 30, 2012:
our revenue was $17,866,000, decreased by $6,471,000 or 26.59% when compared to the same period in 2011. For the six months ended
June 30, 2012: our revenue was $34,969,000, decreased by $3,840,000 or 9.89% from the same period in 2011. For the three months
ended June 30, 2012: the gross profit was $6,620,000, gross profit margin was 37.05%. For the six months ended 2012: our gross
profit was $13,160,000, gross profit margin was 37.63%. Our gross profit margin in both three months and six months ended June
30, 2012 decreased when compared to the same periods in 2011. For the three months ended June 30,2012: the net loss was -$1,302,000;
the net loss ratio was -7.29%. For the six months ended June 30, 2012: the net loss was -$823,000; the net loss ratio was -2.35%.
As a result of the decrease in revenue and the bad debt provision in of approximately $1,870,000 included in general and administrative
expenses, our net income in both three months and six months periods decreased when compared to the same periods in 2011.



Revenue



Three months ended June 30, 2012 and 2011:



|              |  | Three Months Ended  June 30, 2012 |        |  | Three Months Ended  June 30, 2011 |  |        | Growth | 
|------------- |  | --------------------------------- | ------ |  | --------------------------------- |  | ------ | ------ | 
|              |  | $'000                             |        |  | % of revenue                      |  |        | $'000  | 
|Product sales |  |                                   | 5,953  |  |                                   |  | 33.32  | %      | 
|Service sales |  |                                   | 11,913 |  |                                   |  | 66.68  | %      | 
|Total         |  |                                   | 17,866 |  |                                   |  | 100.00 | %      | 



Six months ended June 30, 2012 and 2011:



|              |  | Six Months Ended  June 30, 2012 |        |  | Six Months Ended  June 30, 2011 |  |        | Growth | 
|------------- |  | ------------------------------- | ------ |  | ------------------------------- |  | ------ | ------ | 
|              |  | $'000                           |        |  | % of revenue                    |  |        | $'000  | 
|Product sales |  |                                 | 9,484  |  |                                 |  | 27.12  | %      | 
|Service sales |  |                                 | 25,485 |  |                                 |  | 72.88  | %      | 
|Total         |  |                                 | 34,969 |  |                                 |  | 100.00 | %      | 



For the three months ended June 30, 2012:
revenue generated from product sales was $5,953,000 and accounted for 33.32% of the second quarter’s total revenue. For the
three months ended June 30, 2012, revenue generated from service sales was $11,913,000 and accounted for 66.68% of the second quarter’s
total revenue. Changes in product sales and service revenues were subtle when compared to the same period in 2011. For the six
months ended June 30, 2012: revenue generated from product sales was $9,484,000 and accounted for 27.12% of the six months total
revenue. Revenue generated from service sales was $25,485,000 accounted for 72.88% of the six months total revenue.



The main contributors to the contract
revenue decrease were: construction of 3G has been completed and 4G Construction has experienced a slow and soft start; the
Company strategically controls revenue increases in certain cities where account receivables collecting period is
comparatively long and market downsizing has intensified competition.



Breakdown by Customers



Three months ended June 30, 2012 and 2011:



|              |  | Three Months Ended  June 30, 2012 |        |  | Three Months Ended  June 30, 2011 |  |       | Growth | 
|------------- |  | --------------------------------- | ------ |  | --------------------------------- |  | ----- | ------ | 
|              |  | $’000                             |        |  | % of revenue                      |  |       | $’000  | 
|China Mobile  |  |                                   | 7,750  |  |                                   |  | 43.38 | %      | 
|China Unicom  |  |                                   | 6,048  |  |                                   |  | 33.85 | %      | 
|China Telecom |  |                                   | 785    |  |                                   |  | 4.39  | %      | 
|Others        |  |                                   | 3,226  |  |                                   |  | 18.06 | %      | 
|Overseas      |  |                                   | 57     |  |                                   |  | 0.32  | %      | 
|Total         |  |                                   | 17,866 |  |                                   |  | 100.0 | %      | 



Page 34 of 40







Six months ended June 30, 2012 and 2011:



|              |  | Six Months Ended  June 30, 2012 |        |  | Six Months Ended  June 30, 2011 |  |       | Growth | 
|------------- |  | ------------------------------- | ------ |  | ------------------------------- |  | ----- | ------ | 
|              |  | $’000                           |        |  | % of revenue                    |  |       | $’000  | 
|China Mobile  |  |                                 | 17,524 |  |                                 |  | 50.11 | %      | 
|China Unicom  |  |                                 | 10,368 |  |                                 |  | 29.65 | %      | 
|China Telecom |  |                                 | 2,220  |  |                                 |  | 6.35  | %      | 
|Others        |  |                                 | 4,800  |  |                                 |  | 13.73 | %      | 
|Overseas      |  |                                 | 57     |  |                                 |  | 0.16  | %      | 
|Total         |  |                                 | 34,969 |  |                                 |  | 100.0 | %      | 



Revenues from the wireless telecom carriers
were the Company’s major source of revenue, among which the majority of the revenue was from China Mobile and China Unicom.
For the three months ended June 30, 2012, our revenue generated from China Mobile accounted for 43.38% of our total revenue. Our
revenue generated from China Unicom over the same period accounted for 33.85% of total revenue. For the six months ended June 20,
2012, our revenue generated from China Mobile accounted for 50.11% of total revenue and revenue from China Unicom accounted for
29.65% of total revenue. Compared with the same period of 2011, there is no significant change in the proportion of revenue generated
from the ‘Big Three’.



Breakdown by Type of technology



Three months ended June 30, 2012 and 2011:



|                    |  | Three Months Ended  June 30, 2012 |        |  | Three Months Ended  June 30, 2011 |  |       | Growth | 
|------------------- |  | --------------------------------- | ------ |  | --------------------------------- |  | ----- | ------ | 
|                    |  | $’000                             |        |  | % of revenue                      |  |       | $'000  | 
|WFDS                |  |                                   | 5,616  |  |                                   |  | 31.43 | %      | 
|Traditional product |  |                                   | 12,250 |  |                                   |  | 68.57 | %      | 
|Total               |  |                                   | 17,866 |  |                                   |  | 100   | %      | 



Six months ended June 30, 2012 and 2011:



|                    |  | Six months ended  June 30, 2012 |        |  | Six months ended  June 30, 2011 |  |       | Growth | 
|------------------- |  | ------------------------------- | ------ |  | ------------------------------- |  | ----- | ------ | 
|                    |  | $’000                           |        |  | % of revenue                    |  |       | $'000  | 
|WFDS                |  |                                 | 7,374  |  |                                 |  | 21.09 | %      | 
|Traditional product |  |                                 | 27,595 |  |                                 |  | 78.91 | %      | 
|Total               |  |                                 | 34,969 |  |                                 |  | 100   | %      | 



The revenue from WFDS products was $5,616,000
in the second quarter of 2012, which accounted for 31.43% of total revenue, increased by 13.89% when compared to the same period
in 2011. For the six months ended 2012, revenue of WFDS products was $7,374,000, which accounted for 21.09% of total revenue. WFDS
revenue increased significantly by $3,858,000 in the second quarter, compared to the first quarter of 2012.



Gross Profit



For the three months ended June 30, 2011 and 2012, a tabular
summary of our gross profit is presented below:



|                             |  | Three Months Ended  June 30, 2012 |        |  | Three Months Ended  June 30, 2011 |  |       | Growth | 
|---------------------------- |  | --------------------------------- | ------ |  | --------------------------------- |  | ----- | ------ | 
|                             |  | $’000                             |        |  | % of revenue                      |  |       | $'000  | 
|Revenue                      |  |                                   | 17,866 |  |                                   |  |       |        | 
|Equipment and services costs |  |                                   | 11,246 |  |                                   |  | 62.95 | %      | 
|Gross profit                 |  |                                   | 6,620  |  |                                   |  | 37.05 | %      | 



For Six months ended June 30, 2012 and
2011:



|                             |  | Six Months Ended  June 30, 2012 |        |  | Six Months Ended  June 30, 2011 |  |       | Growth | 
|---------------------------- |  | ------------------------------- | ------ |  | ------------------------------- |  | ----- | ------ | 
|                             |  | $’000                           |        |  | % of revenue                    |  |       | $'000  | 
|Revenue                      |  |                                 | 34,969 |  |                                 |  |       |        | 
|Equipment and services costs |  |                                 | 21,809 |  |                                 |  | 62.37 | %      | 
|Gross profit                 |  |                                 | 13,160 |  |                                 |  | 37.63 | %      | 



Page 35 of 40







Our gross profit was $6,620,000 in
the second quarter of 2012, decreased by $4,014,000 as compared to the second quarter of 2011, The gross profit ratio
decreased from 43.69% for the three months ended June 30, 2011 to 37.05% for the same period in 2012. For the six months
ended June 30, 2012, our gross profit was $13,160,000, decreased by $4,072,000, as compared to the same period in 2011. The
gross profit ratio decreased from 44.40% for six months ended June 30, 2011 to 37.63% for the same period in 2012. Intense
market competition and shrinkage of our profit margin resulted in the low gross profit ratio.



Operating Expenses



Three months ended June 30, 2012 and 2011:



|                                    |  | Three Months Ended
    June 30, 2012 |       |  | Three Months Ended 
    June 30, 2011 |  |       | Growth | 
|----------------------------------- |  | ------------------------------------ | ----- |  | ------------------------------------- |  | ----- | ------ | 
|                                    |  | $’000                                |       |  | % of revenue                          |  |       | $'000  | 
|Sales and Marketing expenses        |  |                                      | 3,032 |  |                                       |  | 16.97 | %      | 
|General and Administrative expenses |  |                                      | 3,782 |  |                                       |  | 21.17 | %      | 
|Research and Development expenses   |  |                                      | 567   |  |                                       |  | 3.17  | %      | 
|Depreciation and Amortization       |  |                                      | 192   |  |                                       |  | 1.08  | %      | 
|Total                               |  |                                      | 7,573 |  |                                       |  | 42.39 | %      | 



Six months ended June 30, 2012 and 2011:



|                                   |  | Six Months Ended 
    June 30, 2012 |        |  | Six Months Ended 
    June 30, 2011 |  |       | Growth | 
|---------------------------------- |  | ----------------------------------- | ------ |  | ----------------------------------- |  | ----- | ------ | 
|                                   |  | $’000                               |        |  | %  of revenue                       |  |       | $'000  | 
|Sales and Marketing expenses       |  |                                     | 6,649  |  |                                     |  | 19.02 | %      | 
|General and Administrative expense |  |                                     | 5,128  |  |                                     |  | 14.66 | %      | 
|Research and Development Expense   |  |                                     | 1,030  |  |                                     |  | 2.95  | %      | 
|Depreciation and Amortization      |  |                                     | 393    |  |                                     |  | 1.12  | %      | 
|Total                              |  |                                     | 13,200 |  |                                     |  | 37.75 | %      | 



Sales and Marketing expenses



Sales and marketing expenses were $3,032,000 or 16.97% of our
revenue for the three months ended June 30, 2012, as compared to $3,026,000, or 12.43% of our revenue for the same period in 2011.
Sales and marketing expenses were $6,649,000, or 19.01% of our revenue for the six months ended June 30, 2012, as compared to $5,157,000
or 13.29% of our revenue for the same period in 2011.



The slight increase in sales and marketing expenses for the
six months ended June 30, 2012 was mainly due to the increase in the number of staff at the branch offices of the Company.



General and Administrative expenses



General and administrative expenses were $3,782,000 or 21.17%
of our revenue for the three months ended June 30, 2012, as compared to $1,360,000 or 5.59% of revenue for the same period in 2011.
For the six months ended June 30, 2012, general and administrative expenses were $5,128,000 or 14.66% of our revenue, as compared
to $3,365,000 or 8.67% of revenue for the same period in 2011.



The increase in General and Administrative expenses for the
six months ended June 30, 2012 was mainly due to a provision for bad debts of accounts receivable of $1,870,000 made during the
three months ended June 30, 2012.



Page 36 of 40







Research and Development expenses



Research and development expenses were $567,000 or 3.17% of
revenues for the three months ended June 30, 2012, as compared to $620,000, or 2.55% of revenues for the same period in 2011. For
the six months ended June 30, 2012 the R&D expenses were $1,030,000 or 2.95% of revenues, as compared to $868,000 or 2.24%
of revenues for the same period in 2011.



There were no significant changes to R&D expenses except
for a slight increase due to additional R&D staff.



Interest Expense



Three months ended June 30, 2012 and 2011:



|                  |  | Three Months Ended  June 30, 2012 |     |  | Three Months Ended  June 30, 2011 |  |      | Growth | 
|----------------- |  | --------------------------------- | --- |  | --------------------------------- |  | ---- | ------ | 
|                  |  | $’000                             |     |  | % of revenue                      |  |      | $'000  | 
|Interest expenses |  |                                   | 259 |  |                                   |  | 1.45 | %      | 



Six months ended June 30, 2012 and 2011:



|                  |  | Six Months Ended  June 30, 2012 |     |  | Six Months Ended  June 30, 2011 |  |      | Growth | 
|----------------- |  | ------------------------------- | --- |  | ------------------------------- |  | ---- | ------ | 
|                  |  | $’000                           |     |  | % of revenue                    |  |      | $'000  | 
|Interest expenses |  |                                 | 530 |  |                                 |  | 1.52 | %      | 



Interest expenses



Interest expenses were $259,000 for the
three months ended June 30, 2012, an increase of 38.50% as compared to $187,000 for the same period in 2011. For the six months
ended June 30, 2011, interest expenses were $530,000, an increase of $194,000 or 57.74% as compared to $336,000 for the same period
in 2011. The increase in the interest expense in 2012 was due to more interest paid on short-term loans. The Company’s short-term
loans increased to $11,232,000 when compared with same period of 2011 and the associated interest expenses increased accordingly.



Liquidity and Capital Resources



We generally finance our operations from
internally generated cash flow and short-term bank loans. As of June 30, 2012, we had current assets of $285,782,000. Our current
assets were mainly comprised of: inventories of $10,707,000, accounts receivable of $259,562,000, prepayments of $2,351,000, other
current assets of $3,945,000 and cash and cash equivalents of $7,674,000. Current liabilities were $159,546,000 and were mainly
comprised of accounts payable of $51,481,000, income tax payables of $19,204,000, short-term loans of $11,232,000, customer deposits
for sales of equipment of $2,501,000, amounts due to related parties of $1,821,000, service cost payable of $40,115,000 and other
payables and accruals amounting to $33,192,000.



Our net cash flow used in operating activities
was $7,527,000 for the six months ended June 30, 2012. Current assets were $285,782,000 and current liabilities were $159,546,000,
reflecting a current ratio (current assets/current liabilities) of 1.79:1.



Our trading terms with our customers are
mainly on credit. The accounts receivable turnover period for the three months ended June 30, 2012 was 1232 days. The long accounts
receivable turnover period is due to the rapid-growth in revenue in 2010, which resulted in an increase in accounts receivable,
and also to the fact that the trading terms with our customers are mainly credit based.



We have experienced a long accounts receivable
turnover period. This is due to the fact that most of our projects are integrated projects and the accounts receivable turnover
period for these kinds of sales is usually longer. Most of our major competitors focus on pure equipment sales, which lead to shorter
accounts receivable turnover periods. In addition, most of our customers are the “Big Three”, which are known as “blue
chip” customers and their payment cycles are comparatively long.



That said, our inventory turnover period
for the three months ended June 30, 2012 was 264 days. Also, our inventory turnover period for the six months ended June 30,2012
was 278 days.



In 2012, our cash and bank balances are
mainly denominated in RMB and U.S. Dollars, while our bank borrowings are mainly denominated in RMB. Our revenue, expenses, assets
and liabilities are mainly denominated in RMB and U.S. Dollars.



OFF-BALANCE SHEET ARRANGEMENTS



We do not have any off-balance sheet arrangements.



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 our 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 tax surcharge
and penalty will be imposed.



Page 37 of 40







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, 2011 have not been remediated as of the Evaluation Date, although steps have been taken toward
remediation during the quarter ended June 30, 2012.



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



(b) Changes in internal control over financial reporting



During the quarter ended June 30, 2012,
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.



Page 38 of 40







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.  Mine Safety Disclosures.



Not Applicable.



Item 5.  Other Information.



None.



Item 6.  Exhibits.



The following documents are filed or furnished as part of this
report:



|31.1*    |  | Chief Executive Officer Certification furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|-------- |  | ---------------------------------------------------------------------------------------------------------
|31.2*    |  | Chief Financial Officer Certification furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|32.1*    |  | Chief Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2*    |  | Chief Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|101.INS† |  | XBRL Instance Document                                                                                   
|101.SCH† |  | XBRL Taxonomy Extension Schema Document                                                                  
|101.CAL† |  | XBRL Taxonomy Extension Calculation Linkbase Document                                                    
|101.DEF† |  | XBRL Taxonomy Extension Definition Linkbase Document                                                     
|101.LAB† |  | XBRL Taxonomy Extension Label Linkbase Document                                                          
|101.PRE† |  | XBRL Taxonomy Extension Presentation Linkbase Document                                                   



*Filed herewith.

†Furnished herewith.



Page 39 of 40







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 CORPORATION
|--------------------------- | ----------------------------------
|                            |                                   
|Date:       August 14, 2012 | By:                               
|                            |                                   
|                            |                                   
|                            |                                   
|Date:       August 14, 2012 | By:                               
|                            |                                   
|                            |                                   



Page 40 of 40