**,
      UNITED STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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


**Securities
      Exchange Act of 1934**





For
      the
      quarterly period ended March 31, 2008





Commission
      File Number: 001-32503




**TELESTONE
      TECHNOLOGIES CORPORATION**


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




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




Floor
      6,
      Saiou Plaza


No.
      5
      Haiying Road


Fengtai
      Technology Park


Beijing,
      People’s Republic of China 100070


(Address
      of Principal Executive Offices)




(86
      10)
      8367-0505


(Issuer’s
      Telephone Number, Including Area Code)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to the filing requirements for at least the past 90
      days. Yes x No o


Indicate
        by check mark whether the registrant 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 filero
              Accelerated
                  filero
              Non-accelerated
                  filero(Do not check if a smaller reporting company)
              Smaller
                  reporting companyx





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




As
      of May
      13, 2008, 10,404,550 shares of the Issuer’s $.001 par value common stock were
      outstanding.







**TELESTONE
      TECHNOLOGIES CORPORATION**





**INDEX**





**PART
      I. FINANCIAL INFORMATION**





Page**Item
                1. Condensed Financial Statements.**Condensed
                Consolidated Statements of Operations, for the three months ended
                March
                31, 2008 and 2007 (unaudited)
            
            3Condensed
                Consolidated Balance Sheets, as of March 31, 2008 (unaudited) and
                December
                31, 2007 (audited)
            
            4Condensed
                Consolidated Statement of Stockholders’ Equity for the three months ended
                March 31, 2008 (unaudited)
            
            5Condensed
                Consolidated Statements of Cash Flows, for the three months ended
                March
                31, 2008 and 2007 (unaudited)
            
            6Notes
                to Condensed Consolidated Financial Statements (unaudited)
            
            7-18**Item
                2. Management’s Discussion and Analysis or Plan of
                Operation.**
            
            19-27**Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk.**
            
            27**Item
                4. Controls and Procedures.**
            
            27**PART
                II. OTHER INFORMATION****Item
                1. Legal Proceedings.**
            
            29**Item
                1A. Risk Factors.**
            
            29**Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds.**
            
            29**Item
                3. Defaults Upon Senior Securities.**
            
            29**Item
                4. Submission of Matters to a Vote of Security
                Holders.**
            
            29**Item
                5. Other Information.**
            
            29**Item
                6. Exhibits.**
            
            29


2


**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Statements of Operations and Other Comprehensive
      Income**


For
      the 3
      months ended March 31, 2008 and 2007





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





**(Unaudited)****Three
                months ended**
              **March
                31,****2008**
            
            2007*Note*
            
            ***US$’000***
            
            *US$’000***Operating
                revenues**Net
                sales of equipment
            
            
            
            
            
            **3,930**
            
            
            2,951Service
                income
            
            
            
            
            
            **2,559**
            
            
            1,844**6,489**
            
            
            4,795**Operating
                expenses**Equipment
                and services
            
            
            
            
            
            **3,335**
            
            
            2,401Sales
                and marketing
            
            
            
            
            
            **1,515**
            
            
            920General
                and administrative
            
            
            
            
            
            **674**
            
            
            620Research
                and development
            
            
            
            
            
            **130**
            
            
            172Depreciation
                and amortization
            
            
            
            
            
            **77**
            
            
            59Total
                operating expenses
            
            
            
            
            
            **5,731**
            
            
            4,172**Operating
                income**
            
            
            
            
            
            **758**
            
            
            623Interest
                expense
            
            
            
            
            
            **(36**
            **)**
            
            (24
            )Other
                income, net
            
            
            
            
            
            **318**
            
            
            -**Income
                before income taxes**
            
            
            
            
            
            **1,040**
            
            
            599Income
                taxes
            
            
            *4*
            
            
            **(203**
            **)**
            
            (151
            )**Net
                income**
            
            
            
            
            
            **837**
            
            
            448**Other
                comprehensive income**Foreign
                currency translation adjustment
            
            
            
            
            
            **1,460**
            
            
            -**Comprehensive
                income**
            
            
            
            
            
            **2,297**
            
            
            448**Earnings
                per share:**
            
            
            *3***Weighted
                average number of common stock outstanding**Basic
            
            
            
            
            
            **10,404,550**
            
            
            9,225,199Dilutive
                effect of warrants
            
            
            
            
            
            **81,366**
            
            
            5,313Diluted
            
            
            
            
            
            **10,485,916**
            
            
            9,230,512**Net
                income per share of common stock****Basic
                and diluted (US$)**
            
            
            
            
            
            **0.08**
            
            
            0.05





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




3


**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Balance Sheets**


As
      of
      March 31, 2008 and December 31, 2007





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





**(Unaudited)**
              **As
                of**
              **March
                31,**
            
            As
                of
              December
                31,**2008**
            
            2007***Note***
            
            ***US$’000***
            
            *US$’000***ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            
            
            
            
            **4,918**
            
            
            5,473Accounts
                receivable, net of allowance
            
            
            *6*
            
            
            **48,794**
            
            
            45,013Due
                from related parties
            
            
            *13*
            
            
            **1,872**
            
            
            1,792Inventories
            
            
            *10*
            
            
            **7,503**
            
            
            8,023Prepayment
            
            
            
            
            
            **1,391**
            
            
            1,169Other
                current assets
            
            
            
            
            
            **1,431**
            
            
            1,332Total
                current assets
            
            
            
            
            
            **65,909**
            
            
            62,802Goodwill
            
            
            *7*
            
            
            **3,119**
            
            
            3,119Property,
                plant and equipment, net
            
            
            *8*
            
            
            **1,171**
            
            
            1,170**4,290**
            
            
            4,289**Total
                assets**
            
            
            
            
            
            **70,199**
            
            
            67,091**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities:**Current
                portion of long term loan from related parties
            
            
            *13*
            
            
            **30**
            
            
            28Short-term
                bank loans
            
            
            *9,
                13*
            
            
            **2,141**
            
            
            2,051Accounts
                payable - Trade
            
            
            
            
            
            **8,085**
            
            
            7,614Customer
                depositsfor sales of equipment
            
            
            
            
            
            **385**
            
            
            262Due
                to related parties
            
            
            *13*
            
            
            **2,414**
            
            
            2,318Taxes
                payable
            
            
            
            
            
            **5,155**
            
            
            4,741Accrued
                expenses and other accrued liabilities
            
            
            
            
            
            **6,844**
            
            
            7,221Total
                current liabilities
            
            
            
            
            
            **25,054**
            
            
            24,235**Non-current
                liabilities:**Long
                term loan from related parties
            
            
            *13*
            
            
            **22**
            
            
            30**25,076**
            
            
            24,265**Commitments
                and contingencies**
            
            
            *14*
            
            
            **-**
            
            
            -**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 March 31, 2008 and December 31,
                2007
            
            
            
            
            
            **-**
            
            
            -Issued
                and outstanding - 10,404,550 shares as of
              March
                31, 2008 and December 31, 2007
            
            
            *12*
            
            
            **11**
            
            
            11Dedicated
                reserves
            
            
            
            
            
            **3,199**
            
            
            3,199Additional
                paid-in capital
            
            
            
            
            
            **18,989**
            
            
            18,989Other
                comprehensive income
            
            
            
            
            
            **4,477**
            
            
            3,017Retained
                earnings
            
            
            
            
            
            **18,447**
            
            
            17,610Total
                stockholders’ equity
            
            
            
            
            
            **45,123**
            
            
            42,826**Total
                liabilities and stockholders’ equity**
            
            
            
            
            
            **70,199**
            
            
            67,091





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




4





**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Statements of Changes in Stockholders' Equity**


For
      the 3
      months ended March 31, 2008





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




**Common
                  stock issued****Number**
                **of
                  shares**
              
              **Amount**
              
              **Additional**
                **paid-in**
                **capital**
              
              **Dedicated**
                **reserves**
              
              **Other**
                **compre-**
                **hensive**
                **income**
              
              **Retained**
                **earnings**
              
              **Total****US$’000**
              
              **US$’000**
              
              *US$’000*
              
              *US$’000*
              
              *US$’000*
              
              *US$’000*Balance
                  at January 1, 2007
              
              
              8,935,106
              
              
              9
              
              
              8,475
              
              
              2,619
              
              
              1,015
              
              
              12,152
              
              
              24,270Issuance
                  of stock (net of expenses)
              
              
              1,469,444
              
              
              2
              
              
              10,514
              
              
              -
              
              
              -
              
              
              -
              
              
              10,516Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,038
              
              
              6,038Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,002
              
              
              -
              
              
              2,002Transfer
                  to indicated reserves
              
              
              -
              
              
              -
              
              
              -
              
              
              580
              
              
              -
              
              
              (580
              )
              
              -Balance
                  at December 31, 2007
              
              
              10,404,550
              
              
              11
              
              
              18,989
              
              
              3,199
              
              
              3,017
              
              
              17,610
              
              
              42,826Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              837
              
              
              837Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,460
              
              
              -
              
              
              1,460**Balance
                  at March 31, 2008 (unaudited)**
              
              
              **10,404,550**
              
              
              **11**
              
              
              **18,989**
              
              
              **3,199**
              
              
              **4,477**
              
              
              **18,447**
              
              
              **45,123**




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




5


**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Statements of Cash Flows**


For
      the 3
      months ended March 31, 2008 and 2007





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





**(Unaudited)****Three months ended March 31,****2008**
            
            2007***US$’000***
            
            *US$’000***Cash
                flows from operating activities****Net
                income**
            
            
            **837**
            
            
            448Adjustments
                to reconcile net income to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            **77**
            
            
            59Provision
                for doubtful accounts
            
            
            **74**
            
            
            339Changes
                in assets and liabilities:Accounts
                receivable
            
            
            **(1,811**
            **)**
            
            (1,165
            )Due
                from related parties
            
            
            **-**
            
            
            (209
            )Inventories
            
            
            **858**
            
            
            883Prepayment
            
            
            **(166**
            **)**
            
            208Other
                current assets
            
            
            **(39**
            **)**
            
            (181
            )Accounts
                payable
            
            
            **129**
            
            
            (1,687
            )Customer
                deposits for sales of equipment
            
            
            **109**
            
            
            133Due
                to related parties
            
            
            **(7**
            **)**
            
            -Taxes
                payable
            
            
            **198**
            
            
            3,311Accrued
                expenses and other accrued liabilities
            
            
            **(683**
            **)**
            
            (3,261
            )**Net
                cash used in operating activities**
            
            
            **(424**
            **)**
            
            (1,122
            )**Cash
                flows from investing activities**Purchase
                of property, plant and equipment
            
            
            **(28**
            **)**
            
            (74
            )Proceeds
                from disposal of property, plant and equipment
            
            
            **-**
            
            
            30**Net
                cash used in investing activities**
            
            
            **(28**
            **)**
            
            (44
            )**Cash
                flows from financing activities**Proceeds
                from issuance of shares (net of expenses)
            
            
            **-**
            
            
            5,493Repayment
                of long-term loan
            
            
            **(7**
            **)**
            
            -**Net
                cash (used in) generated from financing**
            
            
            **(7**
            **)**
            
            5,493**Net
                (decrease) increase in cash and cash equivalents**
            
            
            **(459**
            **)**
            
            4,327**Cash
                and cash equivalents, beginning of the period**
            
            
            **5,473**
            
            
            3,380**Effect
                on exchange rate changes**
            
            
            **(96**
            **)**
            
            11**Cash
                and cash equivalents, end of the period**
            
            
            **4,918**
            
            
            7,718**Supplemental
                disclosure of cash flows information**Interest
                received
            
            
            **10**
            
            
            2Interest
                paid
            
            
            **(36**
            **)**
            
            (24
            )Tax
                paid
            
            
            **(5**
            **)**
            
            -





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




6




**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 3
      months ended March 31, 2008 and 2007





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




**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, it is engaged in the
      business of design, development, installation and trading of wireless
      telecommunication coverage system equipment.




Beijing
      Telestone Wireless Telecommunication Company Limited (“BTWTC”), being considered
      as a variable interest entity (“VIE”) owned by TSTC’s directors and
      stockholders, was established in Beijing, the PRC with a tenture of 20 years
      from 17 June 2005 to 16 June 2025. As TSTC adopted FIN 46(R) for all periods
      presented, the financial statements of BTWTC are consolidated in the financial
      statements of Beijing Telestone.





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





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





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





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




7


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 3
      months ended March 31, 2008 and 2007





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




**2.**
            **PREPARATION
                OF INTERIM FINANCIAL
                STATEMENTS**





**Basis
      of presentations**


The
      accompanying unaudited condensed consolidated financial statements as of March
      31, 2008, 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 March 31, 2008 and for
      all
      periods presented.





Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with accounting principles generally accepted in the
      United States of America ("USA") have been condensed or omitted. These condensed
      consolidated financial statements should be read in conjunction with the audited
      financial statements and notes thereto included in the Company's Form-10KSB
      for
      the year ended December 31, 2007 filed on March 25, 2008. The results of
      operations for the three-month periods ended March 31, 2008 and 2007 are not
      necessarily indicative of the operating results to be expected for the full
      year.





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





**Basis
      of consolidation**


The
      financial statements include the accounts of TSTC, its subsidiaries and a VIE.
      All significant intercompany accounts and transactions have been eliminated
      upon
      consolidation.




**3.**
            **EARNINGS
                PER SHARE**





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





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




8


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 3
      months ended March 31, 2008 and 2007





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




**4.**
            **INCOME
                TAXES**





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





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





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




The
      Company’s income is principally generated in the PRC by Beijing Telestone,
      BTWTC, BTCTC, Guolian and Pan-pacific. Except for income from Beijing Telestone
      is subject to PRC income tax at a rate of 24%, all income of the Company is
      subject to PRC income taxes at an unified rate of 25% in accordance with the
      new
      enterprise income tax rates, as explained in below paragraph, implemented in
      PRC
      from January 1, 2008.




Since
      Beijing Telestone is registered as a wholly-owned foreign investment enterprise
      (“WOFIE”), Beijing Telestone has been subject to tax laws applicable to WOFIE in
      the PRC and was fully exempt from the PRC enterprise income tax of 24% for
      two
      years commencing in fiscal year 2004, followed by a 50% reduction for the next
      three years.




On
      March
      16, 2007, a New Enterprise Income Tax Law (“NEITL”) was issued in the PRC. Prior
      to the issuance of the NEITL, domestic enterprises (“DE”) and foreign invested
      enterprises (“FIE”) in the PRC were taxed under different enterprise income tax
      laws. The NEITL unifies the enterprise tax law applicable to both DE and FIE
      commencing in fiscal year beginning from January 1, 2008. The new enterprise
      income tax (“EIT”) rates effective from January 1, 2008 are as
      follows:




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




By
      virtue
      of the NEITL, except for Beijing Telestone, BTWTC, BTCTC, Guolian and
      Pan-pacific are subject to the unified EIT rate of 25% commencing from fiscal
      year 2008.




The
      Company expects that Beijing Telestone shall become subject to the unified
      EIT
      rate of 25% under the NEITL. However, the 50% tax reduction, which has already
      been obtained by Beijing Telestone under the old tax laws, can still be
      maintained and the remaining tax holiday, which was commenced before 2008,
      can
      still be enjoyed by Beijing Telestone, until the year to expiry in
      2008.


9


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 3
      months ended March 31, 2008 and 2007





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




**4.**
            **INCOME
                TAXES (CONTINUED)**




Guolian
      had registered as a high / new technology enterprise (“Hi-tech enterprise”)
      under the old tax laws in 2006 which was subject to tax laws applicable to
      Hi-tech enterprise in the PRC and the rate of Hi-tech enterprise income tax
      was
      reduced to 15% commencing in fiscal year 2006. Since details of the
      implementation rules to obtain / re-apply the Hi-tech enterprise status under
      the NEITL are still in the process of having further clarification from the
      government of PRC, income tax for Guolian is provided at the unified EIT rate
      of
      25% for prudence.




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




**(Unaudited)**
                **Three
                  months ended**
                **March
                  31,****2008**
              
              2007%
              
              %Beijing
                  Telestone
              
              
              **24**
              
              
              24BTWTC
              
              
              **25**
              
              
              33BTCTC
              
              
              **25**
              
              
              33Guolian
              
              
              **25**
              
              
              15Pan-pacific
              
              
              **25**
              
              
              33





(a)  Income
      tax expenses are comprised of the following:




**(Unaudited)**
              **Three
                months ended**
              **March
                31,****2008**
            
            2007***US$’000***
            
            *US$’000*Current
                taxUnited States
            
            
            -
            
            
            -PRC
            
            
            **203**
            
            
            151**203**
            
            
            151





The
      Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109 (FIN 48), which clarifies the accounting and disclosure for
      uncertainty in tax positions, as defined, and prescribes the measurement process
      and a minimum recognition threshold for a tax position, taken or expected to
      be
      taken in a tax return, that is required to be met before being recognized in
      the
      financial statements. Under FIN 48, the Company must recognize the tax benefit
      from an uncertain position only if it is more-likely-than-not the tax position
      will be sustained on examination by the taxing authority, based on the technical
      merits of the position. The tax benefits recognized in the financial statements
      attributable to such position are measured based on the largest benefit that
      has
      a greater than 50% likelihood of being realized upon the ultimate resolution
      of
      the position.


10


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


*For
      the 3 months ended March 31, 2008 and 2007*





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




**4.**
            **INCOME
                TAXES (CONTINUED)**




(a)
            Income
                tax expenses (Continued)





As
      of
      January 1, 2007, upon adoption of FIN48, the Company has analyzed its filing
      positions in all of the federal, state and foreign jurisdictions where it is
      required to file income tax returns. As of March 31, 2008 and December 31,
      2007,
      the Company has identified the above jurisdictions as “major” tax jurisdictions,
      as defined, in which it is required to file income tax returns: United States
      and PRC. Based on the evaluations noted above, the Company has concluded that
      there are no significant uncertain tax positions requiring recognition in its
      consolidated financial statements. Based on a review of tax positions for all
      open years, no reserves for uncertain income tax positions have been recorded
      pursuant to FIN 48 during the three months ended March 31, 2008 and during
      the
      year ended December 31, 2007, and the Company does not anticipate that it is
      reasonably possible that any material increase or decrease in its unrecognized
      tax benefits will occur within twelve months.





As
      of
      December 31, 2007 and March 31, 2008, the Company had no unrecognized tax
      benefits or accruals for the potential payment or interest and penalties. The
      Company’s policy is to record interest and penalties in this connection as a
      component of the provision for income tax expense. For the 3 months ended March
      31, 2008, no interest or penalties were recorded.





(b)
            Reconciliation
                from the expected statutory tax rate in PRC of 25%*(2007:24%)*is
                as follows:




**(Unaudited)**
                **Three
                  months ended**
                **March
                  31,****2008**
              
              2007%
              
              %Statutory
                  rate - PRC
              
              
              **25.0**
              
              
              24.0Difference
                  in tax rate of a subsidiary of the Company
              
              
              **(0.6**
              **)**
              
              -Tax
                  exemption
              
              
              **(12.9**
              **)**
              
              (28.2
              )Non-deductible
                  items
              
              
              **9.3**
              
              
              26.1Others
              
              
              **(1.3**
              **)**
              
              3.3Effective
                  tax rate
              
              
              **19.5**
              
              
              25.2




11


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 3
      months ended March 31, 2008 and 2007





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




**5.**
            **OPERATING
                RISK**





(a)
            Concentration
                of major customers and suppliers




**(Unaudited)**
                **Three
                  months ended**
                **March
                  31,****2008**
              
              2007***US$’000***
              
              *US$’000*Major
                  customers with revenues of more than 10%of
                  the Company’s salesSales
                  to major customers
              
              
              **5,448**
              
              
              4,588Percentage
                  of sales
              
              
              **84**
              **%**
              
              95
              %Number
              
              
              **2**
              
              
              4Major
                  suppliers with purchases of more than 10%of
                  the Company’s purchasesPurchases
                  from major suppliers
              
              
              **8,064**
              
              
              487Percentage
                  of purchases
              
              
              **93**
              **%**
              
              64
              %Number
              
              
              **3**
              
              
              2





Accounts
      receivable related to the Company’s major customers comprised 87% and 72% of all
      accounts receivables as of March 31, 2008 and December 31, 2007
      respectively.





Credit
      risk represents the accounting loss that would be recognized at the reporting
      date if counter parties failed to perform as contracted. Concentrations of
      credit risk (whether on or off balance sheet) that arise from financial economic
      characteristics that would cause their ability to meet contractual obligations
      to be similarly affected by changes in economic or other conditions. The major
      concentrations of credit risk arise from the Company’s accounts receivable. Even
      though the Company has major concentrations, it does not consider itself exposed
      to significant risk with regards to the related receivables.





(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.


12


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 3
      months ended March 31, 2008 and 2007





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




**5.**
            **OPERATING
                RISK (CONTINUED)**





(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.




**6.**
            **ACCOUNTS
                RECEIVABLE**




**(Unaudited)**
              **As
                of**
              **March
                31,**
              **2008**
            
            As
                of
              December
                31,
              2007***US$’000***
            
            *US$’000*Completed
                contracts
            
            
            **52,603**
            
            
            48,733Retentions
            
            
            **557**
            
            
            715**53,160**
            
            
            49,448Allowance
                for doubtful accounts
            
            
            **(4,366**
            **)**
            
            (4,435
            )**48,794**
            
            
            45,013





Of
      the
      retentions balance as of March 31, 2008 and December 31, 2007, approximately
      US$358 and US$685 respectively are expected to be collected within one
      year.








**7.**
            **GOODWILL**





**(Unaudited)**
              **As
                of**
              **March
                31,**
              **2008**
            
            As
                of
              December
                31,
              2007***US$’000***
            
            *US$’000*Goodwill
            
            
            **3,119**
            
            
            3,119





The
      goodwill, represented the excess of the purchase price over the fair value
      of
      net assets acquired, arose from the acquisition of Guolian and Pan-pacific
      by
      BTWTC on July 5, 2007 and it is not being amortized, but will be tested annually
      for impairment in accordance with SFAS No. 12.


13




**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 3
      months ended March 31, 2008 and 2007


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





**8.**
            **PROPERTY,
                PLANT AND EQUIPMENT, NET**





Property,
                plant and equipment is summarized as
                follows:





Estimated useful life
            
            **(Unaudited)**
              **As of**
              **March 31,**
              **2008**
            
            As of
              December 31,
              2007(in
                years)
            
            ***US$’000***
            
            *US$’000*Buildings
            
            
            30
            
            
            **305**
            
            
            287Leasehold
                improvement
            
            
            5
            
            
            **85**
            
            
            81Plant
                and machinery
            
            
            5
            
            
            **554**
            
            
            515Office
                equipment
            
            
            5
            
            
            **883**
            
            
            838Motor
                vehicles
            
            
            5
            
            
            **568**
            
            
            545**2,395**
            
            
            2,266Accumulated
                depreciation
            
            
            
            
            
            **(1,224**
            **)**
            
            (1,096
            )**1,171**
            
            
            1,170




**9.**
            **SHORT-TERM
                BANK LOANS**





All
                bank loans are secured by guarantees provided by the director, Mr.
                Han
                Daqing and an independent guaranty company. The bank loans are charged
                at
                interest rate of 6.57% to 7.29% per annum and wholly repayable within
                2008.




**10.**
            **INVENTORIES**





Inventories
                consisted of the followings:






**(Unaudited)**
              **As of**
              **March 31,**
              **2008**
            
            As of
              December 31,
              2007***US$’000***
            
            *US$’000*Raw
                materials
            
            
            **33**
            
            
            29Finished
                goods
            
            
            **7,470**
            
            
            7,994**7,503**
            
            
            8,023




14




**Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 For
        the 3
        months ended March 31, 2008 and 2007
 *(Dollars
        in thousands except share data and per share amounts)*




**11.**
            **SEGMENT
                INFORMATION**





During
      the period ended March 31, 2008 and year ended December 31, 2007, all revenues
      of the Company are from its installation and trading of wireless
      telecommunication. No financial information by business segment is presented.





As
      the
      Company operates mainly in the PRC and over 90% of its revenue and operating
      profit are from the PRC, no geographical analysis is presented.




**12.**
            **COMMON
                STOCK**





As
      of
      March 31, 2008 and December 31, 2007, the authorized capital of TSTC is
      110,000,000 shares within which 100,000,000 being shares of common stock with
      a
      par value of $0.001, and 10,000,000 being shares of preferred stock with a
      par
      value of $0.001.





On
      February 20, 2007, TSTC issued 669,444 shares of common stock and 177,403
      warrants for total net proceeds of US$5,454. The warrants are exercisable over
      a
      4-year period at a per share exercise price of US$11.6.





On
      November 30, 2007, TSTC further issued 800,000 shares of common stock for total
      net proceeds of US$5,062 in connection with the acquisition of Guolian and
      Pan-pacific.





TSTC
      had
      10,404,550 shares of outstanding common stock and 192,403 outstanding warrants
      as of March 31, 2008 and December 31, 2007.




**13.**
            **RELATED
                PARTY TRANSACTIONS**





**Summary
      of related party transactions**




***Note***
            
            **(Unaudited)**
              **As of**
              **March 31,**
              **2008**
            
            As of
              December 31,
              2007***US$’000***
            
            *US$’000***Due
                from related parties**Other
                employees
            
            
            *a*
            
            
            **479**
            
            
            456Ex-stockholders
                of SMI/Guolian
            
            
            *b*
            
            
            **1,393**
            
            
            1,336**1,872**
            
            
            1,792**Due
                to related parties**Directors
            
            
            *a*
            
            
            **927**
            
            
            887Ex-stockholders
                of Beijing Telestone/Guolian
            
            
            *b*
            
            
            **1,487**
            
            
            1,431**2,414**
            
            
            2,318




15




**Telestone
          Technologies Corporation**
 
 **Notes
          to Condensed Consolidated Financial Statements**
 For
          the 3
          months ended March 31, 2008 and 2007
 *(Dollars
          in thousands except share data and per share
          amounts)*




**13.**
            **RELATED
                PARTY TRANSACTIONS
                (CONTINUED)**





**Summary
      of related party transactions (Continued)**




***Note***
                  
                  **(Unaudited)**
                    **As
                      of**
                    **March
                      31,**
                    **2008**
                  
                  As
                      of
                    December
                      31,
                    2007***US$’000***
                  
                  *US$’000***Loan
                      from related parties**A
                      director of Beijing Telestone
                  
                  
                  *c*
                  
                  
                  **26**
                  
                  
                  29A
                      close family member of a director of Beijing Telestone
                  
                  
                  *c*
                  
                  
                  **26**
                  
                  
                  29**52**
                  
                  
                  58**Current
                      portion of long term loan from related parties**
                  
                  
                  
                  
                  
                  **(30**
                  **)**
                  
                  (28
                  )**Long
                      term loan from related parties**
                  
                  
                  
                  
                  
                  **22**
                  
                  
                  30**Guarantor
                      of short term loan**A
                      director
                  
                  
                  *9*
                  
                  
                  **2,141**
                  
                  
                  2,051




Note:





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





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





(c)
            The
                long-term loan was advanced to Pan-pacific and is collateralized
                by the
                Company’s building properties, bears monthly interest rate at 0.57% and is
                repayable by installments.


16




**Telestone
          Technologies Corporation**
 
 **Notes
          to Condensed Consolidated Financial Statements**
 For
          the 3
          months ended March 31, 2008 and 2007
 *(Dollars
          in thousands except share data and per share amounts)*


**14.**
            **COMMITMENTS
                AND CONTINGENCIES**





The
      Company recognizes its revenue upon the completion of contract and has made
      full
      tax provision in accordance with relevant national and local laws and
      regulations of the PRC. A contract is considered 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, Beijing Telestone recognized revenue on an “invoice basis”
instead of when goods are delivered and services are rendered. This is not
      in
      strict compliance with the relevant laws and regulations. Accordingly, despite
      the fact that Beijing Telestone has made full tax provision in the financial
      statements, Beijing Telestone may be subject to a penalty for the deferred
      reporting of tax obligations. The exact amount of penalty cannot be estimated
      with any reasonable degree of certainty. The board of directors considers it
      is
      more-likely-than-not that the penalty will not be imposed.





**15.**
            **STOCK
                OPTION PLAN**




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




No
      options have been granted to any parties during the period ended March 31,
      2008
      and as of the date of these financial statements.




**16.**
            **RECENT
                ACCOUNTING PRONOUNCEMENTS**




In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
      No.
      157 establishes a framework for measuring fair value within generally accepted
      accounting principles, clarifies the definition of fair value within that
      framework and expands disclosures about the use of fair value
      measurements.  SFAS No. 157 does not require any new fair value
      measurements in generally accepted accounting principles.  However,
      the definition of fair value in SFAS No. 157 may affect assumptions used by
      companies in determining fair value.  On January 1, 2008 the Company
      adopted SFAS 157 with respect to its financial assets and liabilities that
      are
      measured at fair value; the adoption of these provisions did not have a material
      impact on the consolidated financial statements.


In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
        for Financial Assets and Financial Liabilities—Including an amendment of FASB
        Statement No. 115,” or SFAS 159. SFAS 159 permits entities to
        choose to measure many financial instruments and certain other items at fair
        value. Entities that elect the fair value option will report unrealized gains
        and losses in earnings at each subsequent reporting date. The fair value
        option
        may be elected on an instrument-by-instrument basis, with few exceptions.
        SFAS 159 also establishes presentation and disclosure requirements to
        facilitate comparisons between companies that choose different measurement
        attributes for similar assets and liabilities. Companies may elect the fair
        value option under SFAS 159 for fiscal years beginning after
        November 15, 2007. We elected not to adopt the fair value option of
        SFAS 159 at this time.
 
 In
        December 2007, the FASB issued SFAS No. 141 (Revised), *Business
        Combinations* .  SFAS
        No. 141(R) improves the relevance, representational faithfulness, and
        comparability of the information that a reporting entity provides in its
        financial reports about a business combination and requires an acquirer to
        recognize the assets acquired, the liabilities assumed, and any noncontrolling
        interest in the acquiree at the acquisition date, measured at their fair
        values
        as of that date.  This Statement applies prospectively to business
        combinations for which the acquisition date is on or after the beginning
        of the
        first annual reporting period beginning on or after December 15,
        2008.  The adoption of this Statement is not expected to have a
        material impact on the Company’s financial position or results of
        operations.
 
 In
        December 2007, the FASB issued SFAS No. 160, *Noncontrolling
        Interests in Consolidated Financial*  *Statements* .  SFAS
        No. 160 amends ARB 51 to establish accounting and reporting standards for
        the
        noncontrolling interest in a subsidiary and for the deconsolidation of a
        subsidiary and clarifies that a noncontrolling interest in a subsidiary is
        an
        ownership interest in the consolidated entity that should be reported as
        equity
        in the consolidated financial statements.  This Statement is effective
        for fiscal years beginning on or after December 15, 2008.  The
        adoption of this Statement is not expected to have a material impact on the
        Company’s financial position or results of operations.
 
 In
        March
        2008, the FASB issued SFAS No. 161, *Disclosures
        about Derivative Instruments and Hedging*  *Activities* ,
        an
        Amendment of FASB Statement No. 133.  SFAS No. 161 amends SFAS No. 133
        and requires entities to enhance their disclosures about (a) how and why
        an
        entity uses derivative instruments, (b) how derivative instruments and related
        hedged items are accounted for under SFAS No. 133 and its related
        interpretations, and (c) how derivative instruments and related hedged items
        affect an entity’s financial position, financial performance, and cash
        flows.  SFAS No. 161 is effective for fiscal years beginning on or
        after November 15, 2008.  The adoption of SFAS No. 161 is not expected
        to have a material impact on the Company’s financial position or results of
        operations.




17




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




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





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





**BUSINESS
      DESCRIPTION**





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





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





Our
      wireless coverage solutions business is comprised of research, development
      and
      application of wireless communications technology. In addition to sales of
      our
      internally designed wireless communication equipment, including repeaters,
      antennas and radio frequency accessories, we also provide project design,
      project management, installation, maintenance and other after-sales services
      in
      accordance with our customers’ requirements. Since the establishment of
      Telestone in 1997, we have gradually developed business relationships with
      China
      Mobile Group (“China Mobile”), China Unicom Group (“China Unicom”), China
      Telecom Group (“China Telecom”) and China Netcom Group (“China Netcom”), which
      are currently our main customers. During 2007 and the three months ended March
      31, 2008, there was a significant increase in the revenue from China Mobile
      and
      China Unicom. During that time we also improved our business relationships
      with
      our wireless system equipment vendor within China. We have been exploring the
      wireless system equipment industry over the past year and have continued to
      expand its business into overseas markets. So far, our marketing effort has
      been
      expanded to nineteen (19) countries in the world, such as the U.S., Vietnam,
      Mexico, Brazil, Russia, India, The Philippines, Thailand, Ireland, Ecuador,
      Mongolia, South Africa, Turkey, Indonesia and New Zealand. The expansion outside
      of China is a relatively new strategy for Telestone. The Company is pleased
      with
      the initial results and believes that the quality of our products and services
      will allow Telestone to be increasingly competitive
      internationally.





In
      2008,
      the Company completed the research and development of the third generation
      (“3G”) application equipments, such as WCDMA, CDMA2000 and TD-SCDMA, three
      expected licenses within the 3G network. Before 3G licensed Chinese domestic
      carriers will face the problems of multi-carriers and multi-mobile
      telecommunication system, our research and development center has developed
      a
      new third generation indoor coverage solution, which uses the fiber optic
      technology in the radio frequency signal distribution to transmit high speed
      data signals.




18




**BUSINESS
      REVIEW**





The
      following is a chart of our operations for the three months ended March 31,
      2008:




2008
                
                2007
                
                ComparisonsItem
                
                $'000
                
                %
                    of
                  revenue
                
                $'000
                
                %
                    of
                  revenue
                
                $'000
                
                %Revenue
                
                
                6489
                
                
                
                
                
                4795
                
                
                
                
                
                1694
                
                
                35.33
                %Cost
                    of equipment and services
                
                
                3335
                
                
                51.39
                %
                
                2401
                
                
                50.07
                %
                
                934
                
                
                38.90
                %Gross
                    profit
                
                
                3154
                
                
                48.61
                %
                
                2394
                
                
                49.93
                %
                
                760
                
                
                31.75
                %Sales
                    and marketing expenses
                
                
                1515
                
                
                23.35
                %
                
                920
                
                
                19.19
                %
                
                595
                
                
                64.67
                %General
                    and administrative
                
                
                674
                
                
                10.39
                %
                
                620
                
                
                12.93
                %
                
                54
                
                
                8.71
                %Research
                    and development
                
                
                130
                
                
                2.00
                %
                
                172
                
                
                3.59
                %
                
                -42
                
                
                -24.42
                %Depreciation
                    and Amortization
                
                
                77
                
                
                1.19
                %
                
                59
                
                
                1.23
                %
                
                18
                
                
                30.51
                %Interest
                    expenses
                
                
                36
                
                
                0.55
                %
                
                24
                
                
                0.50
                %
                
                12
                
                
                50.00
                %Other
                    income
                
                
                318
                
                
                4.90
                %
                
                0
                
                
                0.00
                %
                
                318Income
                    before tax
                
                
                1040
                
                
                16.03
                %
                
                599
                
                
                12.49
                %
                
                441
                
                
                73.62
                %Income
                    tax
                
                
                203
                
                
                3.13
                %
                
                151
                
                
                3.15
                %
                
                52
                
                
                34.44
                %Net
                    income
                
                
                837
                
                
                12.90
                %
                
                448
                
                
                9.34
                %
                
                389
                
                
                86.83
                %





Our
      revenues during the three month period ended March 31, 2008 were derived from
      system integration service to domestic telecom carriers, direct product sales
      to
      system integration providers and direct product sales to overseas markets.
      Our
      major customers include China Mobile, China Unicom, China Telecom and China
      Netcom. Our operating rev enues
      are
      composed of sales of wireless equipment and service income that includes system
      integration, engineering services, technical support, wireless network
      optimization and network maintenance.





Our
      revenues for this reporting period increased as compared to the same period
      in
      2007. Our revenues for the three months period ended March 31, 2008 were
      $6,489,000, up from $4,795,000 for the corresponding period of the previous
      year. We believe that, with the expected launch of the 3G wireless network,
      Chinese carriers’ total capital investment in year 2008 will continue to
      increase over that of 2007.





For
      the
      reporting period, the Company provided new products and innovative solutions
      and
      also developed new leads into other mobile telecommunication markets. We
      continued our expansion in the domestic markets where we already had a strong
      presence and are continuing to develop overseas markets. We have established
      business relationships with the local telecommunication carriers in these
      regions, and expect that these new products, solutions and markets will enhance
      our business prospects.





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


19





**CRITICAL
      ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates based on historical experience and
      on
      various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. We believe critical accounting policies as disclosed
      in our Annual Report on Form 10-KSB for the year ended December 31, 2007 reflect
      the judgments and estimates used in preparation of our financial statements.
      We
      believe there have been no material changes to our critical accounting policies
      and estimates during the three months ended March 31, 2008 compared to those
      discussed in our Annual Report on Form 10-KSB for the year ended December 31,
      2007.





**RESULTS
      OF OPERATION**





**Revenues**





For
      the
      three months ended March 31, 2008, our revenues were $ 6,489,000, representing
      an increase of 35.33% as compared to the same period in 2007. The reason for
      the
      increased revenue is due to our expansion of business in larger markets,
      including the increase in revenue from existing customers such as Beijing
      Mobile, Shanghai Mobile and Tianjin Unicom etc.





We
      believe that our revenues in year 2008 will continue to improve and eventually
      eclipse fiscal 2007’s revenue totals with the continued development and
      application of our new products, solutions and the contribution of our newly
      developing markets, especially as the expected 3G network is
      launched.





**Breakdown
      by Nature**





Three
      months ended March 31, 2008





2008
            
            2007
            
            Growth$'000
            
            %
                of
              revenue
            
            $'000
            
            %
                of
              revenue
            
            $'000
            
            %product
                sales
            
            
            3930
            
            
            60.56
            %
            
            2951
            
            
            61.54
            %
            
            979
            
            
            33.18
            %service
                sales
            
            
            2559
            
            
            39.44
            %
            
            1844
            
            
            38.46
            %
            
            715
            
            
            38.77
            %total
            
            
            6489
            
            
            
            
            
            4795
            
            
            
            
            
            1694
            
            
            35.33
            %





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





For
      the
      three months ended March 31, 2008, our revenues generated from product sales
      were $3,930,000, representing an increase of 33.18% as compared to the
      corresponding period of 2007. For the three months ended March 31, 2008, our
      revenues generated from service sales were $2,559,000, representing an increase
      of 38.77% as compared to the same period in 2007.





For
      the
      three months ended March 31, 2008, revenues generated from product sales
      accounted for 60.56% of total revenues, compared to 61.54% for the same period
      of 2007. For the three months ended March 31, 2008, revenues generated from
      service sales accounted for 39.44% of total revenues, compared to that of 38.46%
      for the same period of 2007.


20




**Breakdown
      by Customers**





Three
      months ended March 31, 2008





2008
            
            2007
            
            Growth$'000
            
            %
                of
              revenue
            
            $'000
            
            %
                of
              revenue
            
            $'000
            
            %China
                Mobile
            
            
            2667
            
            
            41.10
            %
            
            1841
            
            
            38.39
            %
            
            826
            
            
            44.87
            %China
                Unicom
            
            
            2781
            
            
            42.86
            %
            
            1557
            
            
            32.47
            %
            
            1224
            
            
            78.61
            %China
                Netcom
            
            
            299
            
            
            4.61
            %
            
            519
            
            
            10.82
            %
            
            -220
            
            
            -42.39
            %China
                Telecom
            
            
            132
            
            
            2.03
            %
            
            671
            
            
            13.99
            %
            
            -539
            
            
            -80.33
            %Overseas
            
            
            169
            
            
            2.60
            %
            
            206
            
            
            4.30
            %
            
            -37
            
            
            -17.96
            %Others
            
            
            441
            
            
            6.80
            %
            
            1
            
            
            0.02
            %
            
            440
            
            
            44000.00
            %Total
            
            
            6489
            
            
            
            
            
            4795
            
            
            
            
            
            1694
            
            
            35.33
            %





Revenue
      from carriers was the Company’s major source of revenue during the reporting
      period, and the majority of such revenue was generated from China Mobile and
      China Unicom.





For
      the
      three months ended March 31, 2008, our revenues generated from China Mobile
      and
      China Unicom were $2,667,000 and $2,781,000 respectively, representing an
      increase of 44.87% and 78.61%, respectively, as compared to the same period
      in
      2007. The increase in our revenues from China Mobile was primarily due
      to our increased business with Beijing Mobile, Shanghai Mobile. The reason
      for the increased revenue from China Unicom is our expansion marketing share
      in
      China Unicom based on maintenance of the current Unicom markets. Tianjin Unicom
      has contributed a substantial amount to our revenue from China Unicom mainly
      because of their remarkably increasing investment.





For
      the
      three months ended March 31, 2008, our revenues generated from China Netcom
      were
      $299,000, representing a decrease of 42.39% compared to $519,000 as of the
      same
      period of last year. **** For
      the
      three months ended March 31, 2008, our revenues generated from China Telecom
      were $132,000, representing a decrease of 80.33% as compared to the same period
      in 2007. Because of the coming restructuring among Chinese telecom operators,
      China Netcom and China Telecom had cut down their expenditure in PHS (Personal
      Handy-phone System). This leads to our significant decreased revenue from China
      Netcom and China Telecom.





For
      the
      three months ended March 31, 2008, our revenues generated from Overseas were
      $169,000, representing a decrease of 17.96% compared to the same period of
      2007.
      The overseas revenue was mainly from Vietnam market in first quarter 2007.
      However, the Vietnam carriers postpone their investment of 2008 to the second
      quarter which caused our decreased first quarter revenue from overseas markets.
      In 2008, we will focus on the business in the Commonwealth of Independent
      States, North and South America, Middle East and Vietnam. A greatly increased
      business is expected in the whole year of 2008.




For
      the
      three months ended March 31, 2008, the total sales to other customers was
      $441,000, as compared to $1,000 generated as of the same period in 2007,
      representing an increase of 44,000.00% for the corresponding period of the
      previous year. This significant increase in sales to other customers is
      primarily due to our business expansion of our system integration. The third
      business department was established to strengthen the business of system
      equipment and special network.


21




**Cost
        Analysis**





Three
      months ended March 31, 2008




2008
                
                2007
                
                Growth$'000
                
                %
                    of
                  revenue
                
                $'000
                
                %
                    of
                  revenue
                
                $'000
                
                %product
                    sales cost
                
                
                2100
                
                
                32.36
                %
                
                1597
                
                
                33.31
                %
                
                503
                
                
                31.50
                %service
                    cost
                
                
                1235
                
                
                19.03
                %
                
                804
                
                
                16.77
                %
                
                431
                
                
                53.61
                %Total
                
                
                3335
                
                
                51.39
                %
                
                2401
                
                
                50.07
                %
                
                934
                
                
                38.90
                %





For
      the
      three months ended March 31, 2008, our total costs were $3,335,000, representing
      an increase of 38.90% as compared to the same period of 2007. The increase
      in
      our total costs is attributable to our business expansion.





Our
      costs
      of revenues include product sales costs and service costs.





For
      the
      three months ended March 31, 2008, our product sales costs were $2,100,000,
      representing an increase of 31.50% as compared to the same period in 2007.
      However, during the reporting period our product sales costs accounted for
      32.36% of our total revenue, as compared to 33.31% for the same period in 2007.
      We intend to take measures to slow the rising of cost associated with product
      sales, including reducing our purchase costs through large scale procurement,
      decreasing the use of raw materials through optimization of our system design,
      regularly improving our system integration technologies, and optimizing our
      supply chain to receive better terms from suppliers.





For
      the
      three months ended March 31, 2008, our service costs were $1,235,000,
      representing an increase of 53.61% as compared to the same period in 2007.
      The
      increase in service costs was mainly due to the growth of network-optimization
      and project maintenance incurred in the first quarter of the year
      2008.





**Gross
      Profit and Gross Margin**





For
      the
      three months ended March 31, 2008, our gross profit was $3,154,000, representing
      an increase of 31.75% as compared to the same period in 2007. Our gross margin
      for the reporting period was 48.61% as compared to 49.93% for the same period
      in
      2007.





The
      increased gross profit is because of our business expansion.





Our
      decreased gross margin during the reporting period was mainly due to strong
      competition, which resulted in a decrease in the sales price per unit product
      despite an increase in the cost of service. We intend to take some effective
      measures to control product cost and take advantage of our research and
      development capabilities to enhance our marketing competence.





**Operating
      Expenses**




2008
                
                2007
                
                ComparisonsItem
                
                $'000
                
                %
                    of
                  revenue
                
                $'000
                
                %
                    of
                  revenue
                
                $'000
                
                %Sales
                    and marketing expenses
                
                
                1515
                
                
                23.35
                %
                
                920
                
                
                19.19
                %
                
                595
                
                
                64.67
                %General
                    and administrative expenses
                
                
                674
                
                
                10.39
                %
                
                620
                
                
                12.93
                %
                
                54
                
                
                8.71
                %Research
                    and development expenses
                
                
                130
                
                
                2.00
                %
                
                172
                
                
                3.59
                %
                
                -42
                
                
                -24.42
                %Total
                
                
                2319
                
                
                35.74
                %
                
                1712
                
                
                35.71
                %
                
                607
                
                
                35.46
                %




22




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





**Sales
      and Marketing Expenses**





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





For
      the
      three months ended March 31, 2008, sales and marketing expenses were $1,515,000,
      accounting for 23.35% of the total revenues, as compared to $920,000, or 19.19%
      of total revenues for the same period in 2007. Sales and marketing expenses
      had
      an increase of 64.67% as compared to the same period of 2007.





Sales
      and
      marketing expenses increased because of our efforts to expand our business
      categories and penetrate into new markets. We expect the increase in sales
      and
      marketing expenses during this quarter will benefit our income growth in the
      coming quarters.





**General
      and Administrative Expenses**





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





For
      the
      three months ended March 31, 2008, general and administrative expenses were
      $674,000, accounting for 10.39% of the total revenues, as compared to $620,000,
      or 12.93% of the total revenues for the same period in 2007. General and
      administrative expenses had an increase of 8.71% as compared to the same period
      of 2007.





In
      2007,
      in compliance with Section 404 of the Sarbanes-Oxley Act of 2002, the internal
      control process is optimized and our work is more efficient. Therefore, the
      General and Administrative Expenses were maintained almost at the same level
      with that in the same period of 2007.





**Research
      & Development Expenses**





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





For
      the
      three months ended March 31, 2008, research and development expenses were
      $130,000, accounting for 2.00% of the total revenues, as compared to $172,000,
      or 3.59% of the total revenues for the same period in 2007. Research and
      development expenses had a decrease of 24.42% as compared to the same period
      of
      2007.





The
      decreased expense in Research and Development is result of the reduction of
      investment in the products of 2G since the 2G products have matured. And now
      our
      Research and Development is focusing on WFDS (Wireless Fiber Distributed
      System).





We
      have
      directed some of our research and development efforts towards investing in
      wireless telecommunications research and development, primarily TD-SCDMA related
      technologies and applications. We expect these research activities will enhance
      our technologies, reduce the cost of existing products and create future revenue
      through the launch of new 3G products.


23




**Net
      Income**





For
      the
      three months ended March 31, 2008, our net income was $837,000 which is
      representing an increase of 86.83% as compared to the same period in 2007.
      Net
      income increase is mainly due to the growth of revenue and exchange rate
      fluctuations. Without the exchange rate fluctuations, the net income increase
      is
      about 27.90% as compared to the same period of last year.





Our
      income before tax was $1,040,000 for the three months ended March 31, 2008,
      as
      compared to $599,000 for the corresponding period last year, which represented
      an increase of 73.62%.




**LIQUIDITY
      AND SOURCE OF CAPITAL**





We
      generally finance our operations from cash flow generated internally. As of
      March 31, 2008, we had current assets of $65,909,000. Current assets are
      comprised of inventories of $7,503,000, accounts receivable of $48,794,000,
      prepayments, deposits and other receivables of $4,694,000, and cash and cash
      equivalents of $4,918,000. Current liabilities comprised accounts payable of
      $8,085,000, tax payables of $5,155,000, a short-term bank loan of $2,141,000,
      and other payables and accruals of $9,673,000.





Our
      trading terms with our customers are mainly on credit. As of March 31, 2008,
      our
      accounts receivable were $48,794,000 compared to $45,013,000 as of December
      31,
      2007. The credit period is generally less than one year. The gradual increase
      in
      the accounts receivable is mainly due to: 1) steady growth in revenues resulting
      from growth in business, and 2) change in the settlement pattern of the mobile
      operators.





For
      the
      three months ended March 31, 2008, the collection of accounts receivable had
      a
      better performance as compared to the same period of last year, and we believe
      the outstanding accounts receivable will be collected because our major
      customers, China Unicom and China Mobile, are reputable and sizeable state-owned
      mobile operators in the PRC. Additionally, the Company has not experienced
      significant bad debts in the past. This notwithstanding, we have paid special
      attentions to lowering the turnover period of our accounts receivable balances
      and have taken the following measures:





(1)
            The
                provincial branch managers and the headquarter district managers
                are in
                charge of the collection of the account receivables, which results
                are an
                important element of their performance evaluation and work
                assessment.





(2)
            Approximately
                1% of the account receivables will be allocated to a special fund
                for the
                sales team as incentive for the collection of the account
                receivables.





(3)
            The
                company will keep in touch with the management of key departments
                (such as
                the financial department and the planning department) of the carriers
                in
                headquarters as well as the provincial branches to monitor the collection
                of the account receivables.





(4)
            We
                encourage sales to China Mobile, China Telecom, China Netcom and
                certain
                provincial branches of China Unicom who had good credit history.
                We
                believe these measures will optimize the structure of our account
                receivables and minimize our financial risks in the
                future.





We
      believe the above-mentioned measures will shorten our accounts receivable
      turnover period and provide a better internal control environment for us to
      cope
      with the fast growing telecommunication industry in the PRC in the coming
      years.


24




As
      of
      March 31, 2008, our inventories were $7,503,000, as compared to $8,023,000
      as of
      December 31, 2007, which represented a decrease of 6.48%. The decrease in the
      inventories was mainly due to meeting the operation requirement, controlling
      the
      balance of inventories, and enhancing the management and acceleration of
      inventory turnover.





As
      of
      March 31, 2008, our cash and bank balances were mainly denominated in Renminbi
      (“RMB”) and United States dollars (“US$”) while our bank borrowings were mainly
      denominated in RMB. Our revenue and expenses, assets and liabilities are mainly
      denominated in RMB and US$. Recently, the exchange rate fluctuations in the
      PRC
      have led to an appreciation of RMB. This may result in certain exchange
      risks.





We
      have
      experienced negative cash flows from operating activities for the periods ended
      March 31, 2008 and 2007, which is primarily the result of extended turnover
      periods related to our accounts receivable, as mentioned above. A continuation
      of this situation could negatively impact our liquidity and in turn our overall
      results of operations. In order to address this issue, apart from the
      implementation of the above-mentioned measures to reduce the turnover period,
      we
      are also exploring the possibility of obtaining third party financing and
      considering raising additional capital through debt or equity
      financings.





Our
      gearing ratio, calculated as total debts over total assets, was 35.72% as of
      March 31, 2008 and 36.17% as of December 31, 2007, respectively.





**BUSINESS
      STRATEGIES**





In
      order
      to maintain our leading position in the PRC’s wireless coverage solutions
      sector, and expand and diversify our revenue streams, we will adopt a three
      pronged strategy to ensure value for its shareholders:





1.
      We
      plan to continue to invest in research and development for our key technologies
      and our products to enhance our leading position in wireless coverage technology
      and take full advantage of the PRC’s investment in the 3G networks. We have
      dedicated research and development to wireless coverage solutions and in the
      next three years our main business will continue to be wireless coverage
      solutions for mobile telecommunications. Our proprietary WFDS product is one
      of
      the leading indoor wireless coverage products in China, and it is applicable
      to
      2G, 3G, Broadband access and CATV networks.





2.
      In the
      domestic market, we intend to maintain strong relationships with Chinese mobile
      carriers and potentially make selective acquisitions in major provincial markets
      where we do not have leading market share. Our potential targets are companies
      that enjoy a leading market position and have strong business networks in their
      provincial markets or that have strong production capability and companies
      that
      own applicable value-added products whose customer premises network platform
      adapting to WFDS. We are confident that we will deepen our penetration of
      provincial markets and raise our overall market share through selective
      acquisitions and the promotion of new solutions.





3.
      We
      also plan to focus on building up our presence in markets outside the PRC.
      We will continue to strengthen our presence overseas by leveraging our expertise
      and leading wireless coverage products and solutions. In the United States,
      we
      plan to seek cooperation with peers that have strong research and development
      ability, and then develop technology and products that fit in the market of
      the
      PRC. However, we will also find partners within the integration business and
      then sell our products, as our products have a significant cost advantage.
      In
      the developing countries, we only seek cooperation with a local integration
      partner to deliver our leading wireless coverage solution technology, whom
      we
      then work with to set up our local products distribution
      channels.


25




**BUSINESS
      OUTLOOK**





As
      we
      mentioned last quarter, during May a dialogue regarding the significant
      re-organization of the Chinese telecom industry is scheduled to occur. Following
      the reorganization, China’s mobile operators are expected to be licensed to
      operate both 2G and 3G networks, and this should mark the start of large scale
      capital investment in 3G infrastructure. Given Telestone’s advanced technology
      across the 2G and 3G technology space, we believe the Company is in a strong
      position to benefit from this investment, however, the Company will only be
      in a
      position to provide a detailed outlook after fully assessing the
      post-reorganization market environment.





**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
      common practice in the PRC that official invoices bearing the tax authority
      stamp are not issued to customers until payments are received. We follow the
      practice of reporting our revenue for PRC tax purposes when invoices are issued.
      All unbilled revenue will become taxable when invoices are issued. For PRC
      tax
      reporting purposes, we recognize revenue on an “invoice basis” instead of when
      goods are delivered and services are rendered. This is not in strict compliance
      with the relevant laws and regulations. Accordingly, despite the fact that
      we
      have made full tax provision in the financial statements, we may be subject
      to a
      penalty for the deferred reporting of tax obligations. The exact amount of
      any
      penalty cannot be assessed at this point with any reasonable degree of
      certainty. The Board of Directors considers it is unlikely that the tax penalty
      will be imposed.





**EMPLOYMENT
      AND REMUNERATIONS**





We
      offer
      competitive remuneration schemes to our employees based on industry practices
      as
      well as the employees and our performance.




**OFF-BALANCE
      SHEET ARRANGEMENTS**


We
        do not
        have any off-balance sheet arrangements.
 
 **Item
        3. Quantitative and Qualitative Disclosures About Market
        Risk**
 
 None.
 
 **Item** **4** **.
        Controls and Procedures**
 
 (a)
        Evaluation of disclosure controls and procedures.


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




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




26




(b)
      Changes in internal control over financial reporting.


During
      the quarter ended March 31, 2008, 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.


27




**PART
      I** **I**




**OTHER
      INFORMATION**




**Item
      1.** **Legal
      Proceedings** **.**




None.  **Item
        1A. Risk Factors.**
 
 None.





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




None





**Item
      3.** **Defaults
      Upon Senior Securities.**




None.




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




None.




**Item
      5.** **Other
      Information.**




None.





**Item
                6.**
            **Exhibits.**




The
      following documents are filed as part of this report:




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




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




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




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




28




**SI** G **NATURES**





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:
                May 15, 2008
            By:
            /s/
                Han DaqingHan
                Daqing, Chief Executive Officer(Principal
                Executive Officer)Date:
                May 15, 2008
            By:
            /s/
                Liu DongpingLiu
                Dongping, Chief Financial Officer(Principal
                Financial Officer)




29