==============================================================================

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-QSB



(Mark One)



[ X ]

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the period ended March 31, 2004



[   ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d)

OF THE EXCHANGE ACT



For the transition period from ____________ to _____________





COMMISSION FILE NUMBER:   033-15096-D



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TELESTONE TECHNOLOGIES CORPORATION

(formerly Milestone Capital, Inc.)

(Exact name of small business issuer as specified in its charter)





DELAWARE

84-1111224

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)



275 Madison Avenue, 64th Floor, New York, NY 10016

(Address of principal executive offices)



(212) 880-3794

(Issuer's Telephone Number)





State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:  As of March 31, 2004, the registrant had 82,077,000 shares of common stock, no par value, issued and outstanding.



Transitional Small Business Disclosure Format (check one): Yes [ ]  No [X]

================================================================================

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PART I  FINANCIAL INFORMATION



ITEM 1.

FINANCIAL STATEMENTS



|TELESTONE TECHNOLOGIES CORPORATION                            |                                                 |                                                                                        
|------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------------------------------------------
|(FKA MILESTONE CAPITAL, INC.)                                 |                                                 |                                                                                        
|BALANCE SHEETS                                                |                                                 |                                                                                        
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|                                                              |                                                 |                                                                                        
|ASSETS                                                        |                                                 |                                                                                        
|                                                              |                                                 |                                                                                        
|Current Assets:                                               |                                                 |                                                                                        
|                                                              | Cash                                            |                                                                                        
|                                                              |                                                 | Total current assets                                                                   
|                                                              |                                                 |                                                                                        
|                                                              | Other Assets                                    |                                                                                        
|                                                              |                                                 | Total assets                                                                           
|                                                              |                                                 |                                                                                        
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                 |                                                 |                                                                                        
|                                                              |                                                 |                                                                                        
|Liabilities not subject to compromise:                        |                                                 |                                                                                        
|                                                              | Priority claims after filing                    |                                                                                        
|                                                              |                                                 | Total current liabilities not subject to compromise                                    
|                                                              |                                                 |                                                                                        
|Liabilities subject to compromise                             |                                                 |                                                                                        
|                                                              | Creditors holding secured claims                |                                                                                        
|                                                              | Creditors holding unsecured priority claims     |                                                                                        
|                                                              | Creditors holding unsecured nonpriority claims  |                                                                                        
|                                                              |                                                 | Total liabilities subject to compromise                                                
|                                                              |                                                 |                                                                                        
|                                                              | COMMITMENTS AND CONTINGENCIES                   |                                                                                        
|                                                              |                                                 |                                                                                        
|Preferred stock, $0.001 par value, 10,000,000 shares          |                                                 |                                                                                        
|                                                              | authorized, no shares issued                    |                                                                                        
|Common stock, $0.001 par value, 100,000,000 shares authorized |                                                 |                                                                                        
|                                                              | 99,917 and 99,849 shares issued and outstanding |                                                                                        
|Additional paid-in capital                                    |                                                 |                                                                                        
|Accumulated deficit                                           |                                                 |                                                                                        
|                                                              |                                                 |                                                                                        
|                                                              |                                                 | Total stockholders' equity (deficit)                                                   
|                                                              |                                                 |                                                                                        
|                                                              |                                                 | Total liabilities and stockholders' equity (deficit)                                   
|                                                              |                                                 |                                                                                        
|                                                              |                                                 | The accompanying notes are an integral part of these consolidated financial statements.
|                                                              |                                                 |                                                                                        
|                                                              |                                                 |                                                                                        





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|TELESTONE TECHNOLOGIES CORPORATION                                  
|--------------------------------------------------------------------
|(FKA MILESTONE CAPITAL, INC.)                                       
|STATEMENT OF OPERATIONS                                             
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|Revenues, net                                                       
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|Operating expenses                                                  
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|Net loss from continuing operations before:                         
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|Income taxes                                                        
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|Net loss before reorganization items and discontinued operations    
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|Reorganization item                                                 
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|Net loss before discontinued operations                             
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|Discontinued operations                                             
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|Net loss available to common stockholders                           
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|Basic and diluted net loss per common share, discontinued operations
|                                                                    
|Weighted average shares outstanding                                 
|                                                                    
|                                                                    
|                                                                    
|                                                                    



#







|TELESTONE TECHNOLOGIES CORPORATION                   
|-----------------------------------------------------
|(FKA MILESTONE CAPITAL, INC.)                        
|STATEMENT OF CASH FLOWS                              
|                                                     
|                                                     
|                                                     
|                                                     
|Cash flows from operating activities:                
|Net loss                                             
|Net loss from discontinued operations                
|                                                     
|Adjustments to reconcile net loss to net cash used in
|operating activities:                                
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
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|Net cash used in operating activities                
|                                                     
|Cash flows from investing activities:                
|Net cash provided by investing activities            
|                                                     
|Cash flows from financing activities:                
|                                                     
|                                                     
|Net cash provided by financing activities            
|                                                     
|Net increase (decrease) in cash and cash equivalents 
|                                                     
|Cash and cash equivalents at beginning of period     
|                                                     
|Cash and cash equivalents at the end of the period   
|                                                     
|Supplemental cash flow disclosures                   
|                                                     
|                                                     
|                                                     
|Non-cash transactions                                
|                                                     
|                                                     
|                                                     
|                                                     

#





Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



NOTE 1  ORGANIZATION AND DESCRIPTION OF BUSINESS



On January 3, 2002, Milestone entered into an exchange agreement (the "Exchange") with EliteAgents Mortgage Services, Inc. (formerly EliteAgents, Inc.) ("Elite"), a licensed mortgage banker. As of January 3, 2002, Telestone Technologies Corporation (fka Milestone Capital, Inc.) had, effectively, 8,000,000 shares of no par common stock outstanding. As of that date, Telestone Technologies Corporation (fka Milestone Capital, Inc.) effectively issued 72,000,000 shares of common stock as follows: (i) 37,148,544 shares were issued for all of the outstanding shares of Elite common stock; (ii) 2,543,277 shares were issued for all of the outstanding shares of Elite Series A preferred stock; (iii) 14,445,832 shares were issued for all of the outstanding shares of Elite Series B preferred stock; (iv) 12,615,588 shares were issued for the effective conversion of outstanding Elite convertible debentures with a principal balance of $615,290 and accrued interest of $4,756 into Telestone Technologies Corporation (fka Milestone Capital, Inc.) common stock and (v) 5,246,759 shares were issued to other investors that had agreed to purchase shares of Elite common stock or had performed services for Elite which were payable in shares of Elite common stock. As a result of the Exchange, Elite became a wholly-owned subsidiary of Telestone Technologies Corporation (fka Milestone Capital, Inc.), and Milestone had 80,000,000 shares of common stock outstanding of which 72,000,000, or 90%, were owned by the former stockholders of Elite and 8,000,000 shares, or 10%, were owned by the stockholders of Telestone Technologies Corporation (fka Milestone Capital, Inc.). Since the former stockholders of Elite became the owners of the majority of the outstanding common shares of Telestone Technologies Corporation (fka Milestone Capital, Inc.) after the Exchange, the Exchange was treated as a "purchase business combination" and a "reverse acquisition" for accounting purposes in which Telestone Technologies Corporation (fka Milestone Capital, Inc.) was the legal acquirer and Elite was the accounting acquirer. As a result, the assets and liabilities of Elite, the accounting acquirer, continued to be recorded at their historical carrying values upon completion of the Exchange. All share and per share amounts set forth herein prior to the Exchange have been retroactively restated to reflect the effects of the Exchange.



Elite has continued its mortgage banking activities and other financial services subsequent to the Exchange. It has focused on mortgage loan originations through the uses of the Internet and proprietary technology. In addition, effective May 8, 2002, Telestone Technologies Corporation (fka Milestone Capital, Inc.) formed a wholly-owned subsidiary, EliteAgents Leasing Services, Inc. ("Leasing"), for the purpose of establishing equipment financing and leasing operations. Leasing did not generated any revenues through March 31, 2004 and December 31, 2003, respectively.

The "Company" as used herein refers to Elite prior to January 3, 2002, the date of the Exchange and Telestone Technologies Corporation (fka Milestone Capital, Inc.) together with Elite and Leasing subsequent to that date.



The Company filed Chapter 11 protection under the U.S. Bankruptcy Code on September 26, 2003.  During December, 2003, the Company sold all of its operating assets and subsequent to December 31, 2003, the Company sold its public shell.

Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



Basis of Presentation and Going Concern

The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  The Company has suffered recurring losses from operations since inception and has filed for bankruptcy.  These facts raise substantial doubts about the Companys ability to continue.  These financial statements do not include any adjustments that might result from the outcome of this uncertainty.  (See Note 3)





NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



This summary of significant accounting policies is presented to assist in understanding the Companys financial statements.  The financial statements and notes are representations of the Companys management, which is responsible for their integrity and objectivity.  These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.



Accounting Method

The Companys financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.



In May 2003, the Financial Account Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Accounting Standards no. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (hereinafter SFAS No. 150).  SFAS No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position.  Previously, many of those instruments were classified as equity.  SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  The Company has not yet determined the impact of the adoption of the statement.



In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative instruments and Hedging Activities: (hereinafter SFAS No. 149).  SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.  This statement is effective for contracts entered into or modified after December 31, 2003 and for hedging relationships designated after December 31, 2003.  The adoption of SFAS No. 149 is not expected to have an impact on the financial position or results of operations of the Company.





#





Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



In December 2002, the Financial Accounting Standards Board issued Statement No. 148 (hereinafter SFAS No. 148) on Accounting for Stock-Based CompensationTransition and Disclosure. This statement



provides alternative methods of transition for companies that choose to switch to the fair value method of accounting for stock options.  SFAS No. 148 also makes changes in the disclosure requirements for stock-based compensation, regardless of which method of accounting is chosen. Under the new standard, companies must report certain types of information more prominently and in a more understandable format in the footnotes to the financial statements, and this information must be included in interim as well as annual financial statements.  Historically, the Company has recorded stock based compensation and therefore there are no disclosure requirements of SFAS No. 148 in these financial statements.



In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146).  SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities.  SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract.  All costs associated with the disposition of assets in the bankruptcy are included in net assets of discontinued operations and/or net loss from discontinued operations.



Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents.



Derivative Instruments

The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (hereinafter SFAS No. 133), as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities  Deferral of the Effective Date of FASB No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.  These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.  They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.



If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of



#





Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



(i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.



At March 31, 2004 and December 31, 2003, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities.



Earnings Per Share

The Company has adopted Statement of Financial Accounting Standards No. 128, which provides for calculation of "basic" and "diluted" earnings per share.  Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average common shares outstanding for the period.  Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share.  Basic and diluted loss per share were the same, at the reporting dates, as there were no common stock equivalents outstanding.



Fair Value of Financial Instruments

The Company's financial instruments as defined by Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," include net assets from discontinued operations, creditors holding secured claims, creditors holding unsecured priority claims, and creditors holding unsecured non-priority claims.  All instruments are accounted for on a historical cost basis, which, due to the short maturity of these financial instruments, approximates fair value at March 31, 2004 and December 31, 2003.



Stock Options and Warrants:

In accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the Company will only recognize compensation costs as a result of the issuance of stock options and warrants to employees based on the excess, if any, of the fair value of the underlying stock at the date of grant (or at an appropriate subsequent measurement date) over the amount the employee must pay to acquire the stock. Therefore, the Company will not be required to recognize compensation expense as a result of any grants of stock options and warrants to employees at an exercise price that is equal to or greater than fair value. The Company will also make pro forma disclosures, in accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation" ("SFAS 123"), of net income or loss as if a fair value based method of accounting for stock options and warrants had been applied.



In accordance with SFAS 123, the Company will recognize the cost of preferred or common shares, options, warrants and other equity instruments issued to non-employees as consideration for services as expense over the periods in which the related services are rendered by a charge to compensation cost or another appropriate



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Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



expense or prepaid expense account and a corresponding credit to additional paid-in capital. Generally, cost will be determined based on the fair value of the equity instruments at the date of issuance. The fair value of shares, options, warrants and similar equity instruments were estimated based on the minimum value method prior to the Exchange and the Black-Scholes option pricing method after the Exchange (which are methods that meet the criteria set forth in SFAS 123) and the assumption that all of the options or other equity instruments will ultimately vest. The effect of actual forfeitures will be recognized as they occur.



Income Taxes

The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.  This statement requires the recognition of deferred tax liabilities and assets for the future consequences of events that have been recognized in the Companys consolidated financial statement or tax returns.  Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Companys assets and liabilities results in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such an asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized.  (See Note 5).



Long-lived Assets

In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.   This standard establishes a single accounting model for long-lived assets to be disposed of by sale, including discontinued operations, and requires that these long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations.  Accordingly, the Company reviews the carrying amount of long-lived assets for impairment where events or changes in circumstances indicate that the carrying amount may not be recoverable.  The determination of any impairment would include a comparison of estimated future cash flows anticipated to be generated during the remaining life of the assets to the net carrying value of the assets.  All costs associated with the disposition of assets in the bankruptcy are included in net assets of discontinued operations and/or net loss from discontinued operations.



Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  All significant transactions and balances among the companies included in the consolidated financial statements have been eliminated.



Use of Estimates

The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses.  Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements.  Accordingly, upon settlement, actual results may differ from estimated amounts.



Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



Voluntary Bankruptcy

On September 26, 2003, the Company, and all of its wholly owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the Bankruptcy Court) in order to facilitate the restructuring of the Companys debt, trade liabilities and other obligations (See Note 3).



NOTE 3  PETITION FOR RELIEF UNDER CHAPTER 11



On September 26, 2003, Telestone Technologies Corporation (fka Milestone Capital, Inc.) and its wholly owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the Bankruptcy Court) in order to facilitate the restructuring of the Companys debt, trade liabilities and other obligations.  The Company is currently operating as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders.  In general, as a debtor-in-possession, the Company is authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.



Under Section 362 of the Bankruptcy code, the filing of a bankruptcy petition automatically stays most actions against the Company, including most actions to collect pre-petition indebtedness or to exercise control of the property of the Companys estate.  Absent an order of the Bankruptcy Court, substantially all pre-petition liabilities will be addressed under a plan of reorganization.



Under Section 365 of the Bankruptcy Code, the Company may assume or reject certain pre-petition executory contracts and unexpired leases, including leases of real property, subject to the approval of the Bankruptcy court and certain other conditions.  In general, rejection of an unexpired lease or executory contract is treated as a pre-petition breach of the lease or contract.  Counterparties to these rejected contracts or leases may file proofs of claim against the Companys estate for damages relating to such breaches.  The Company cannot presently determine with certainty the ultimate aggregate liability which will result from the filing of claims relating to such contracts that have been or may be rejected.



The United States Trustee for the District of New Jersey has appointed an official committee of unsecured creditors (the Creditors Committee).  The Creditors committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court.  The rights and claims of various creditors and security holders will be determined by a plan of reorganization that is confirmed by the Bankruptcy Court.  Under the priority rules established by the Bankruptcy code, certain post-petition liabilities and certain pre-petition liabilities (i.e. senior secured debt) are given priority over unsecured pre-petition indebtedness and need to be satisfied before unsecured creditors or stockholders are entitled to any distribution.



Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



In order to exit Chapter 11 successfully, the Company will need to propose and obtain confirmation by the Bankruptcy court of a plan of reorganization that satisfies the requirements of the Bankruptcy Code.  At this time, it is not possible to predict accurately the effect of the Chapter 11 reorganization process on the companys business, creditors or stockholders or when the Company may emerge from Chapter 11.  The Companys future results depend on the timely and successful confirmation and implementation of a plan of reorganization.



The Company substantially consummated the sale of its primary assets by way of two separate sales transactions.  On December 31, 2003, the Court authorized the Company to sell substantially all of their assets, which primarily consisted of mortgage origination software and other related intellectual property to Crystal Pond Capital Partners.  The purchase price for this sale was $500,000, with an initial $100,000 payment.  The $400,000 balance is to be paid over three years out of 25% of the cumulative net-after-tax profit.



On March 24, 2004, the Court authorized the Debtors to sell designation rights for a plan of reorganization to Focus Tech Investments, Inc. or its designee (Focus) and 25,000,000 common shares which are nondilutable under any capitalization for a purchase price of $65,000.00.  In addition, fourteen creditors agreed to advance $50,000.00, as a non-recourse claim, under the terms of convertible promissory (Notes§ pursuant to Section 1145 of the Bankruptcy Code, to the Debtors to fund fees and expenses of the Debtors and Committees professionals for a plan of reorganization.  The Notes are convertible into a total of 4,000,000 common shares and 1,000,000 warrants issued pursuant to section 1145 of the Bankruptcy code and exempt from the registration requirements of Section 5 of the Security Act of 1933 and any state or local law requiring registration for an offer or sole of a security.

On August 23, 2004, a Securities Exchange Agreement between the shareholders of Success Million International, Ltd., a Hong Kong corporation, and Telestone Technologies Corporation resulted in the issuance of 4,100,000 common shares of Telestone for the 24,010,000 share of Success Million as part of the plan of reorganization.  As part of this reorganization, the Company also issued 3,800,000 common shares and 950,000 warrants exercisable at $3 and a note for $50,000 due and payable on or before January 1, 2005 at the interest rate of 10% per annum for the rights attributed in the March 24, 2004 advance of $50,000 from fourteen creditors.  In conjunction with the $65,000 paid to the Court by Focus Techs Investments, the Company issued a note for $150,000 due and payable on or before January 1, 2005 at the interest rate of 10% per annum.



Accounting Impact

These audited consolidated financials statements have been prepared in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position 90-7 Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7).  Pursuant to SOP 90-7, the

Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)

Companys pre-petition liabilities that are subject to compromise are reported separately on the balance sheet as an estimate of the amount that will ultimately be allowed by the Bankruptcy Court.

The following table sets forth the liabilities of the Company subject to compromise as of December 31, 2003:

March 31, 2004

Creditors holding secured claims

$      241,280

Creditors holding unsecured priority claims

$      130,018

Creditors holding unsecured nonpriority claims

2,624,949

Total liabilities subject to compromise

$   2,996,247



Pursuant to SOP 90-7, an objective of financials statements issued by an entity in Chapter 11 is to reflect its financial evolution during the proceeding.  For that purpose, the financial statements for periods including and subsequent to filing the Chapter 11 petition should distinguish transaction and events that are directly associated with the reorganization from the ongoing operations of the business.  Certain expenses not directly related to ongoing operations are reflected separately in the consolidated statement of operations as reorganization items.  (See Note 7).





NOTE 4  SHARE EXCHANGE



On January 3, 2002, Telestone Technologies Corporation (fka Milestone Capital, Inc.) completed a share exchange transaction (the Exchange Transaction) with EliteAgents, Inc. (EliteAgents), whereby Telestone Technologies Corporation (fka Milestone Capital, Inc.) issued shares of its common stock to the shareholders of EliteAgents in exchange for all of the issued and outstanding ownership interests in EliteAgents.  EliteAgents was originally incorporated in New Jersey in 1999 under the name MortgageBANC, Inc. as a New Jersey correspondent mortgage banker.  The name was changed to QuickFinance, Inc. and then to EliteAents, Inc. in March 2000.  Following the Exchange Transaction, EliteAgents, Inc. amended its Articles of Incoporation to change its name to EliteAgents Mortgage Services Inc. in February, 2002.  As a result of the Exchange Transaction, EliteAgents became a wholly owned subsidiary of Telestone Technologies Corporation (fka Milestone Capital, Inc.) for legal purposes and the continuing operating entity for accounting purposes.





NOTE 5  INCOME TAXES



Income taxes are provided based upon the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes.  Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax



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Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



basis of assets and liabilities and their financial reporting amounts at each year-end.  A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the more likely than not standard imposed by SFAS No. 109 to allow recognition of such an asset.



At March 31, 2004 and December 31, 2003, the Company had net deferred tax assets calculated at an expected rate of 34% of approximately $4,990,000 and $4,846,000, respectively, principally arising from net operating loss carryforwards for income tax purposes.  Management of the bankrupt company has determined that the Company will not realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been recorded.



The significant components of the deferred tax assets at March 31, 2004 and December 31, 2003 were as follows:



March 31, 2004

December 30, 2004

Net operating loss carryforward

$14,678,000

$14,253,000

Deferred tax asset

4,990,000

4,846,000

Deferred tax asset valuation allowance

(4,990,000)

(4,846,000)

Net deferred tax asset

$        -

$        -



At March 31, 2004 and December 31, 2003, the Company has net operating loss carryforwards of approximately $14,678,000 and $14,253,000, respectively, which expire in the years 2020 through 2022.  The change in the allowance account from March 31, 2004 and December 31, 2003 was approximately $425,000.





NOTE 6  STOCKHOLDERS EQUITY



Restricted stock:

All transactions involving issuances by the Company of shares of the Company's common stock and other securities during March 31, 2004 and December 31, 2003, respectively, involved unregistered shares of common stock and securities. Accordingly, trading of such securities is restricted pursuant to Rule 144 of the Securities Act of 1933.



Sales, issuances and cancellations of common stock:

In connection with the sale of common stock in 2000, the Company received a stock subscription receivable of $101,675. As of December 31, 2002, the stock subscription receivable had not been satisfied and, accordingly, it was cancelled and reversed against additional paid-in capital in 2002. Certain of the



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Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



purchasers of shares of common stock in 2000 received warrants to purchase 3,157,226 shares of the Company's common stock at exercise prices ranging from $.43 to $.49 per share. All of these warrants expired on December 31, 2002. During 2001, the Company issued warrants to purchase 254,467 shares of its common stock in exchange for services in connection with the sale of common stock in 2000. The warrants, which have an exercise price of $.17 per share and expire on December 10, 2006, remained outstanding at December 31, 2002.



During 2002, the Company sold 21,000 units at a cost of $10 per unit and received proceeds of $210,000. Each unit consisted of 50 shares of the Company's common stock, a warrant exercisable for up to 25 shares of the Company's common stock at an exercise price of $.40 per share (the "Class A Warrants") and a warrant exercisable for up to 25 shares of the Company's common stock at $.60 per share (the "Class B Warrants"). Both the Class A Warrants and Class B Warrants expire 24 months from the date of grant.



The Company issued 1,176,825 shares of common stock for the reimbursement of expenses and as payment for services in 2002. A total of 890,575 shares were issued to officers of the Company in 2002 for the reimbursement of expenses totaling $43,750. The number of shares issued to the officers was determined based on the offering price per share for shares sold through private placements. However, the fair value of the shares at the date of issuance was $267,173 based on the quoted market price. Accordingly, the Company recognized a charge of $267,173 during 2002 for the fair value of the shares issued to the officers. A total of 286,250 shares were issued by the Company as payments for services in 2002. The shares had a fair value of $54,300 which is included in loss from discontinued operations.  Subsequent to December 31, 2003, the Company issued approximately 55,000 shares of common stock in relationship to various commitments under the reorganization agreement.



Series A convertible preferred stock:

As of December 31, 2001, Elite had 508,655 shares of Series A convertible preferred stock that were authorized, issued and outstanding. These shares earned dividends, if declared, at the rate of 8% on the original purchase price. In addition, each share of Series A preferred stock was convertible into five shares of the Company's common stock. During 2001, the Company issued 40,692 shares of common stock to pay accrued dividends on the Series A convertible preferred stock of $20,000. As discussed Note 1, all of the shares of Series A convertible preferred stock were exchanged for shares of Telestone Technologies Corporation (fka Milestone Capital, Inc.) common stock on January 3, 2002.



Sales, issuances and cancellation of Series B preferred stock:

As of January 1, 2001, Elite had 12,357,165 shares of Series B preferred stock outstanding including 11,070,048 shares for which it had subscriptions receivable of $1,925,000 at a purchase price of $.17 per share. The fully-paid shares earned dividends, if declared, at the rate of 8% on the original purchase price. Each share of Series B preferred stock was convertible into one share of common stock. During 2001, the Company received proceeds of $1,454,773 from the payment of subscriptions receivable and canceled subscriptions for the purchase of 2,702,639 shares. In addition, during 2001, the Company: (i) sold an additional 3,440,637

#





Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



shares of Series B preferred stock and received proceeds of $598,365, (ii) issued 258,641 shares of Series B preferred stock as payment for salaries of $45,000 earned in years prior to 2001 and (iii) issued 1,092,031 shares of Series B preferred stock in exchange for the cancellation of a $190,000 loan from an officer. As discussed in Note 1, all of the shares of Series B convertible preferred stock were exchanged for shares of Telestone Technologies Corporation (fka Milestone Capital, Inc.) common stock on January 3, 2002.



Forgiveness of officers' salaries:

Officers of the Company forgave salaries of $409,333 in 2002, of which $367,666 was earned in 2002 and $41,667 was earned in 2001. Officers forgave salaries of $274,367 in 2001.



Issuance of options and warrants to employees:

During 2002, the Company issued warrants to purchase 1,080,000 shares of the Company's common stock to two of its officers as additional compensation. The warrants have an exercise price of $.20 per share and expire on September 30, 2007. The fair value of the warrants on the date of issuance was, effectively, $.43 per share. In accordance with the provisions of APB 25, the Company recognized compensation cost of $243,000 as a result of the issuance of these warrants based on the excess of the fair value of the underlying stock at the date of grant over the amount the employee must pay to acquire the stock.



In addition, the Company has a stock option plan (the "Option Plan") which provides for the issuance of incentive stock options to employees and consultants of the Company for the purchase of common stock. The term of each option, including the vesting provisions and the manner of exercise, is determined by the Board of Directors. Options granted to employees and consultants have a maximum of ten years from the date of grant to exercise their options. As of December 31, 2002 and 2001, the Company had 18,168,962 shares reserved for issuance under the Option Plan.



The Company has elected to continue to use the provisions of APB 25 in accounting for stock options and warrants granted to employees. During 2002, the exercise price of options granted to employees was equal to or greater than the fair market value of the stock at the date of grant and, accordingly, no earned or unearned compensation cost was recognized for options granted to employees. As explained above, the Company recognized compensation cost of $243,000 as a result of the issuance of warrants to purchase 1,080,000 shares to officers in 2002. During 2001, the Company granted options to purchase 803,910 shares to employees. The exercise price of options granted was $.05 per share and the fair market value per share of common stock was $.17 per share. Accordingly, a charge of $.12 per share, or an aggregate charge of $803,910, was initially recorded as unearned compensation with an offsetting credit to additional paid-in capital. During 2001, options to purchase 452,952 shares of common stock were cancelled and, accordingly, the Company reduced unearned compensation related to those options by $56,515. During 2002, options to purchase 946,618 shares of common stock were cancelled and, accordingly, the Company reduced unearned compensation related to those options by $118,110. The unearned compensation is being amortized over the respective vesting periods of the options of three to four years. During 2002 and 2001, the Company amortized $157,321 and $166,688, respectively, of unearned compensation. The remaining balance of unearned compensation of $329,028 as of



Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



March 31, 2004 and December 31, 2003, respectively,  has been reflected as a reduction of stockholders' equity.



The fair value of each option granted was estimated as of the date of grant using the Black Scholes option pricing model in 2002 and the minimum value method in 2001 in accordance with SFAS 123.





In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (hereinafter SFAS No. 146). SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 was issued in June 2002, effective December 31, 2002.  All costs associated with the disposition of assets in the bankruptcy are included in net assets of discontinued operations and/or net loss from discontinued operations.





NOTE 7  REORGANIZATION ITEMS



Pursuant to SOP 90-7, the Company is required to segregate certain expenses, realized gains and losses and provisions for losses not directly related to ongoing operations as reorganization items in the condensed consolidated statements of operations.  The following reorganization items were incurred during the period ended December 31, 2003.



December 31, 2003

Court costs

$      500

Advance for administrative costs

$115,000

Contribution of capital for professional services

$  15,000



NOTE 8  SUBSEQUENT EVENTS



On July 9, 2004, the First Amended Disclosure Statement (the Disclosure Statement) and First Amended Joint Plan of Liquidation (the Plan) were filed by the Debtors and the Official Committee of Unsecured Creditors, and the Scheduling Order, Disclosure Statement, Plan.



On August 10, 2004, at the hearing on confirmation, and of the Plan and Disclosure Statement, the Court approved the Plan and entered the order entitled Order Approving Disclosure Statement and Confirming First Amended Plan of Liquidation and Authorizing and Directing Certain Actions In



Telestone Technologies Corporation and Subsidiaries



Notes to Consolidated Financial Statements

(Unaudited)



Connection Therewith (Order) on August 12, 2004.  The Order provided that  the property dealt with by the Plan shall be free and clear of all liens, claims, encumbrances and interests, with valid liens, claims, encumbrances and interests to attach to the proceeds of sale as set forth in the Plan.





Pursuant to the Plan, as confirmed by the Bankruptcy Court, all prior operational assets were liquidated and the proceeds are being paid per the approved Claim Schedule to creditors and for the administration of the estate.  Pursuant to the Order, all of the property of Companys estate vested in the Plan Trustee, free and clear of all claims, liens, encumbrances, charges or other interests, and all executory contracts and unexpired



leases were rejected.  The Bankruptcy Court also placed an injunction against all entities that may have held, currently hold, or may hold a debt, claim or other liability or interest against the Company dischargeable upon confirmation of the Plan and permanently enjoined any action on account of such debt, claim, liability, interest or right.  The Bankruptcy Court further terminated all claims arising or related to stock, stock options, stock plans for employees, officers and directors, warrants and convertible provisions within the debt instruments by creditors.  The Bankruptcy Court also ordered that the common stock of the Company be diluted by reverse split of issued and outstanding common shares of the Company.  Under the Order Confirming, each share of the Companys common stock issued and outstanding was reclassified as and changed unto 822nd of 1 share of common stock at a $0.001 par value.



The Bankruptcy Court ordered that the Company reincorporate and redomicile from the State of Colorado to the State of Delaware and that the name of the Company be changed to Telestone Technologies Corporation; that the Board of Directors be authorized under the Plan it issue common shares pursuant to an Exchange Agreement at the time of closing or in escrow in which effective control or majority ownership of the Company is given to the acquired or acquiring business entity without the need of shareholder approval; that the Board of Directors be authorized to amend the Companys By-Laws and amend the Companys fiscal year to a date established and set forth in an Exchange Agreement without the need of shareholder approval; and that the Board of Directors be authorized and directed to conduct a shareholder meeting with the consent of a majority of shareholders at such time as set by the Board of Directors within forty-five (45) days of the closing of the Exchange Agreement, but no sooner than ten (10) days following the Companys filing of an 8K under the Securities Act of 1934 (Act) giving full financial disclosure and the mailing of an Information Statement pursuant to the Act..



Pursuant to the Bankruptcy Court Order, the Company reincorporated in the State of Delaware under the name Telestone Technologies Corporation on August 13, 2004, by filing a Certificate of Incorporation filed with the State of Delaware.  The Company is now authorized to issue a total of 110,000,000 shares with 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.



Pursuant to the Bankruptcy Court Order and on August 17, 2004, the Company approved the reverse split of issued and outstanding common shares.  Under the Bankruptcy Courts Order, the Companys common stock issued and outstanding was reclassified as and changed unto 822nd of 1 share of common stock at a par value of $0.001.  A Certificate of Amendment was filed with the Delaware Secretary of State on August 17, 2004.

#





ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS



CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE LITIGATION REFORM ACT OF 1995. Statements contained in this filing that are not based on historical fact, including without limitation statements containing the words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect" and similar words, constitute "forward-looking statements". These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements. These factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which Telestone Technologies Corporation ("we", "Milestone" or Company) operates; technology changes; the competition we face; changes in our business strategy or development plans; the high leverage of Milestone; our ability to attract and retain qualified personnel; existing governmental regulations and changes in, or our failure to comply with, governmental regulations; liability and other claims asserted against us; it's our ability or the ability of our third-party suppliers to take corrective action in a timely manner with respect to changing government regulations; and other factors referenced in our filings with the Securities and Exchange Commission.



Significant Events



NOTICE OF FILING OF BANKRUPTCY PETITION AND SALE OF OPERATING ASSETS on September 26, 2003, the company and its subsidiary, Elite Agents Mortgage Services, Inc. filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy code in the US Bankruptcy Court for the District of New Jersey, in Newark (Case Nos. 03-41805 and 03-41806).  Both companies filed a Motion pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy procedure directing joint administration of the proceedings.  This allows the companies to continue to operate while a plan of reorganization is finalized.  We are pursuing the opportunity to acquire another mortgage company that has significant mortgage processor infrastructure in place.  We are also trying to evolve Milestone into a technology licensing company that would provide our software, for compensation, to other mortgage companies.  We further have ceased the origination of any new mortgage loans.  There are no assurances that either strategy will be successful, and we may be forced to close the company and sell the assets.  All discussions regarding the financial condition and results of operations should be read in conjunction with the pending Chapter 11 proceedings.  No funds will be available for distribution to stockholders after all approved bankruptcy administration expenses were paid and distributions have been made to the Companys creditors whose claims exceeded the Companys potential resources from the sale of its operating assets and sale of designation rights to present a plan of reorganization.



GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. Other than as required by law, we disclaim any obligation to update information concerning the factors mentioned above or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments.



CERTAIN DISCUSSIONS WHICH FOLLOW REGARDING THE DESCRIPTION OF BUSINESS REFER TO THE OPERATING BUSINESS PRIOR TO BEING DISCONTINUED DUE TO THE BANKRUPTCY.



Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated 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, including those related to property and equipment, stock based compensation, income taxes and contingencies. We base our estimates 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.

Results of Operations



Based on the challenges we have experienced in hiring mortgage professionals; and in particular mortgage processors, during the boom period in the residential mortgage industry, Milestone has determined that our growth objectives can best be met through acquisitions of complementary companies or by becoming a software licensing firm.  We are pursuing both opportunities.



We generate revenue primarily from (i) loan origination and broker fees, (ii) net gain on the sale of mortgage loans in the secondary market and (iii) interest income received on mortgage loans during the period in which we warehouse loans pending their sale in the secondary market. Loan origination fees, net gain on the sale of mortgage loans and interest income are largely transaction oriented and volume driven.



We currently broker more than 95% of our loans to more than 20 lenders. We do not engage in the practice of servicing loans.  All of the loans funded by our warehouse line were sold out of the line within 30 days. The proceeds of the loans sold out of our warehouse line are used to repay the line of credit that originally funded the loans.



Our net loss from operations for the third quarter of fiscal year 2003 was ($225,672) compared to a net loss from operations of ($615,846) in the third quarter of fiscal 2002, a decrease of 81%. For the third quarter of fiscal year 2003, revenues decreased 18% to $584,850 from $771,960 in the third quarter of 2002. Total operating expenses decreased by 44% to ($763,193) for the third quarter of 2003 from ($1,311,342) in the third quarter of 2002. Our net loss from operations for the first nine months of fiscal year 2003 was ($863,635) compared to a net loss from operations of ($2,117,316) in the first nine months of fiscal 2002.  For the first nine months of fiscal year 2003, revenues increased to $2,517,597 from $1,751,398 in the first nine months of 2002. Total operating expenses decreased to ($3,381,232) for the first nine months of 2003 from ($3,868,714) in the first nine months of 2002.



Loan Origination and Broker Fee Income. We recognize fees from purchase mortgage loan originations at closing if the loan is brokered by us instead of warehoused by us. Loan origination income decreased to $573,913 in fiscal third quarter 2003 from $643,984 in fiscal third quarter 2002.  For the nine months ending March 31, 2004, loan origination income increased to $ 2,495,965 from $ 1,495,291 in the first nine months of 2002.  The primary factor that contributed significantly to the increase in revenue per loan we experienced during the third quarter of 2003 compared to the third quarter of 2002 was the better margins that we received from the lending institutions we utilized due to better relations with them and our improved understanding of which institutions provide better margins.



Gains on Sale of Mortgage Loans. When we warehouse loans, we seek to sell those loans in the secondary markets. Our gains and losses from the sale of mortgage loans are affected by several factors including (i) competitive market forces affecting our pricing structure at the time of origination, (ii) interest rate increases or decreases between the time that we commit to originate or purchase loans and the time that we commit to sell the loans in the secondary markets, (iii) price subsidies and (iv) the recognition of gains relating to originated mortgage servicing rights. Our net gain on the sales of mortgage loans from our loan warehousing operations was $19,207 for the first nine months of 2002.  We did not actively engage in the usage of our warehouse line due to staffing issues.



Total operating expenses decreased to ($3,381,232) for the first nine months of 2003 from ($3,868,714) in the first nine months of 2002. Direct expenses increased by to ($864,053) for the first nine months of 2003 from ($577,784) for the first nine months of 2002. General and administrative expenses decreased to ($2,515,820) for the first nine months of 2003 from ($3,219,084) for the first nine months of 2002.



The Company capitalized professional fees of $490,833 incurred in connection with the prospective acquisitions of three related entities in the mortgage banking industry discussed above.



Income Taxes



We have incurred net operating losses since inception and, therefore, we have not incurred any income taxes. We have a net operating tax loss carry forward of approximately $9,700,000 as of June 30, 2003. However, due to certain limitations established by the Internal Revenue Code, the amount of net operating loss carry-forward available for use in any one year is limited.



Disclosure About Market Risk



We manage many risks in the normal course of business. However, we consider interest rate risk to be one of the most significant market risks that could materially impact our financial position and results of operations. The movements in interest rates affect the value of capitalized mortgage servicing rights, the mortgage inventory held for sale, volume of loan production and total net interest income earned.



Liquidity and Capital Resources



Milestone Capital is currently in Chapter 11 bankruptcy due to liquidity and capital resource issues.  We are pursuing the opportunity to acquire another mortgage company that has significant mortgage processor infrastructure in place.  We are also trying to evolve Milestone into a technology licensing company that would provide our software, for compensation, to other mortgage companies.  We further have ceased the origination of any new mortgage loans.  There are no assurances that either strategy will be successful and we may be forced to close the company and sell the assets.  The Company is currently soliciting potential acquirers of the various assets of the Company.



As of March 31, 2004, we had a cash balance of $17,388 and a working capital deficiency in excess of $2,200,000. We believe that we may continue to incur negative cash flows from operating activities for the foreseeable future.  There can be no assurance that we will be able to obtain additional capital on terms acceptable to us or complete the transactions previously discussed. See "Need for additional financing; uncertainty of additional financing" in the "Risk Factors" section of Milestone's Annual Report on Form 10-KSB filed on April 15, 2003, as amended by Milestone's Form 10-KSB/A filed on April 30, 2003.



Milestone has accrued significant accounts payable in connection with the negotiation of one of the proposed acquisitions, and in the event that we do not obtain the debt financing, our need to obtain alternative sources of financing in order to continue our ongoing business operations and satisfy our accounts payable will be increased.



Net cash used in operating activities was $238,852 for the nine months ended March 31, 2004, as compared to net cash used in operations of $454,777 for the nine months ended September 30, 2002. The decrease in net cash used in operating activities was primarily due to the reduction in the net operating loss during the nine months ended March 31, 2004, as compared to the nine months ended September 30, 2002.



During the first fiscal quarter of 2002, we engaged in two capital raising initiatives. In February 2002, we closed an offering of unregistered common stock of Milestone from which we raised $214,000 through the sale of 4,356,184 shares. The shares issued in this transaction were exempt from registration requirements pursuant to the exemption from registration contained in Rule 506 of Regulation D of the Securities Act of 1933 as amended to date.



On March 1, 2002, we initiated an offering of up to $1.15 million in unregistered convertible debentures to accredited investors. The convertible debentures bear interest at 10% per year and can be converted at any time at the option of the holder into shares of our unregistered common stock at $0.20 per share. The convertible debentures mature on September 1, 2003. In addition, holders of the convertible debentures receive one share of our unregistered common stock for each $1.00 of convertible debentures purchased. We closed this offering during the first quarter of 2002. We raised $350,000 from this offering. The notes and shares issued in this offering were exempt from registration requirements pursuant to the exemption from registration contained in Rule 506 of Regulation D of the Securities Act of 1933 as amended to date.



The proceeds of these raises have been used to fund operating expenses, increase advertising and marketing in the mortgage division, and launch the equipment leasing division. At various times during 2002, holders converted the debentures into 375,000 shares of the Company's common stock. The debentures that were converted had an aggregate principal balance of $75,000.



In September 2002 Milestone initiated a new private placement to raise capital to fund our due diligence costs and other  transaction costs associated with our pending acquisitions, to pay down certain accounts payable and to fund operating expenses. Milestone is offering up to 110,000 Units for $10 per Unit. Each Unit consists of (i) 50 shares of Milestone's unregistered common stock, (ii) a warrant exercisable for up to 25 shares of Milestone's unregistered common stock at an exercise price of $0.40 per share, and (iii) a warrant exercisable for up to 25 shares of Milestone's unregistered common stock at an exercise price of $0.60 per share. The Units will be offered solely to a limited number of accredited investors. The Units have not been registered under the Securities Act of 1933 as amended to date, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. From October 1, 2002 through November 4, 2002, Milestone had raised $145,000 from this offering, and the issued securities were exempt from registration requirements pursuant to the exemption from registration contained in Rule 506 of Regulation D of the Securities Act of 1933 as amended to date.



During 2002, the Company issued 905,575 shares of common stock of the Company in exchange for services. Of the 905,575 shares issued, 890,575 were issued to officers of the Company for the reimbursement of expenses of $43,750. All shares issued to officers were issued through a private placement the Company was then offering to accredited investors. The securities issued in this transaction were exempt from registration requirements pursuant to the exemption from registration contained in Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933 as amended to date.



In addition, during 2002, the Company issued 271,250 shares of common stock with a fair value of $54,300 in exchange for general and administrative costs. The securities issued in this transaction were exempt from registration requirements pursuant to the exemption from registration contained in Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933 as amended to date.



During 2002, certain officers of the Company advanced an aggregate of $221,000 to the Company to fund ongoing operations. The Company issued warrants to purchase 1,080,000 shares of the Company's common stock at an exercise price of $.20 per share that expire on September 30, 2007 in consideration for the provision by these officers of the funding. The securities issued in this transaction were exempt from registration requirements pursuant to the exemption from registration contained in Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933 as amended to date.



The Company maintains a warehouse line of credit with The Provident Bank. The warehouse line of credit is subject to quarterly review.



Inflation



Inflation may significantly affect our ability to originate loans. Interest rates typically increase during periods of high inflation and decrease during periods of low inflation. Generally, the mortgage banking industry, and in particular the refinance mortgage industry, has experienced increased origination volume in response to low interest rates, and loan originations, particularly refinance mortgage originations, have generally decreased during periods of high interest rates.



Special Cautionary Notice Regarding Forward-Looking Statements



In addition to historical information, this Quarterly Report on Form 10-QSB contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in "Management's Discussion and Analysis or Plan of Operation" as well as in this Quarterly Report generally. You should carefully review the risks described in this Quarterly Report as well as the risks described in our Annual Report on Form 10-KSB filed on April 15, 2003, as amended by our Form 10-KSB/A filed on

April 30, 2003. In addition, when used in this Quarterly Report, the words "anticipates," "plans," "believes," "intends," "estimates," and "expects" and similar expressions are generally intended to identify forward-looking statements. Such statements are subject to a number of risks and uncertainties. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by these forward-looking statements or us. We undertake no obligation to revise these forward-looking statements to reflect any future events or circumstances.



Cautionary Statements



We continue to be subject to certain factors that could cause our results to differ materially from expected and historical results. You should carefully review the risks described in this Quarterly Report as well as the risks described in our Annual Report on Form 10-KSB filed on August ____, 2004.



ITEM 3.

CONTROLS AND PROCEDURES



(a)  Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, management including our principal executive officer and principal financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures.  Based upon, and as of the date of that evaluation, our principal executive officer and principal financial officer concluded that, our disclosure controls and procedures effectively provided reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commissions rules and forms.

(b)  Changes in internal controls.   The Company did not have the financial resources to retain our outside accounting firm to review our internal controls over financial reporting during the quarter ended March 31, 2004.  Management does not believe that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION



ITEM 1.

LEGAL PROCEEDINGS



The Company is currently in Chapter 11 bankruptcy proceedings within the federal court system.  The Company is pursuing several strategies to exit from Chapter 11 as a solvent going concern; however, no assurances can be made that the Company will be successful.  The Company is also pursuing potential acquirers of the various assets of the Company as an alternative to any form of re-organization.



NOTICE OF FILING OF BANKRUPTCY PETITION AND SALE OF OPERATING ASSETS on September 26, 2003, the company and its subsidiary, Elite Agents Mortgage Services, Inc., filed voluntary petitions for protection under Chapter 11 of the United States Bankruptcy code in the US Bankruptcy Court for the District of New Jersey, in Newark (Case Nos. 03-41805 and 03-41806).  Both companies filed a Motion pursuant to Rule 1015(b) of the Federal Rules of Bankruptcy procedure directing joint administration of the proceedings.  This allows the companies to continue to operate while a plan of reorganization is finalized.  We are pursuing the opportunity to acquire another mortgage company that has significant mortgage processor infrastructure in place.  We are also trying to evolve Milestone into a technology licensing company that would provide our software, for compensation, to other mortgage companies.  We further have ceased the origination of any new mortgage loans.  There are no assurances that either strategy will be successful, and we may be forced to close the company and sell the assets.  All discussions regarding the financial condition and results of operations should be read in conjunction with the pending Chapter 11 proceedings.  No funds will be available for distribution to stockholders after all approved bankruptcy administration expenses were paid and distributions have been made to the Companys creditors whose claims exceeded the Companys potential resources from the sale of its operating assets and public shell.



GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. Other than as required by law, we disclaim any obligation to update information concerning the factors mentioned above or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments.



CERTAIN DISCUSSIONS WHICH FOLLOW REGARDING THE DESCRIPTION OF BUSINESS REFER TO THE OPERATING BUSINESS PRIOR TO BEING DISCONTINUED DUE TO THE BANKRUPTCY.



ITEM 2.

CHANGES IN SECURITIES



During the first fiscal quarter of 2002, we engaged in two capital raising initiatives. In February 2002, we closed an offering of unregistered common stock of Milestone from which we raised $214,000 through the sale of 4,356,184 shares. The shares issued in this transaction were exempt from registration requirements pursuant to the exemption from registration contained in Rule 506of Regulation D of the Securities Act of 1933 as amended to date.



On March 1, 2002, we initiated an offering of up to $1.15 million in unregistered convertible debentures to accredited investors. The convertible debentures bear interest at 10% per year and can be converted at any time at the option of the holder into shares of our unregistered common stock at $0.20 per share. The convertible debentures mature on September 1, 2003. In addition, holders of the convertible debentures receive one share of our unregistered common stock for each $1.00 of convertible debentures purchased. We closed this offering during the first quarter of 2002. We raised $350,000 from this offering. The notes and shares issued in this offering were exempt from registration requirements pursuant to the exemption from registration contained in Rule 506 of Regulation D of the Securities Act of 1933 as amended to date. The proceeds of these raises have been used to fund operating expenses, increase advertising and marketing in the mortgage division, and launch the equipment

leasing division.



In September 2002 Milestone initiated a new private placement to raise capital to fund our due diligence costs and other transaction costs associated with our pending acquisitions, to pay down certain accounts payable and to fund operating expenses. Milestone is offering up to 110,000 Units for $10 per Unit. Each Unit consists of (i) 50 shares of Milestone's unregistered common stock, (ii) a warrant exercisable for up to 25 shares of Milestone's unregistered common stock at an exercise price of $0.40 per share, and (iii) a warrant exercisable for up to 25 shares of Milestone's unregistered common stock at an exercise price of $0.60 per share. The Units will be offered solely to a limited number of accredited investors. The Units have not been registered under the Securities Act of 1933 as amended to date, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Through September 30, 2002, Milestone had not raised any proceeds from this offering. From October 1, 2002 through November 4, 2002, Milestone had raised $145,000 from this offering, and the issued securities were exempt from registration requirements pursuant to the exemption from registration contained in Rule 506 of Regulation D of the Securities Act of 1933 as amended to date.



In 2002, the Company issued 905,575 shares of common stock of the Company in exchange for services. Of the 905,575 shares issued, 890,575 were issued to officers of the Company for the reimbursement of expenses of $43,750. All shares issued to officers were issued through a private placement the Company was then offering to accredited investors. The securities issued in this transaction were exempt from registration requirements pursuant to the exemption from registration contained in Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933 as amended to date.



In addition, during 2002, the Company issued 271,250 shares of common stock with a fair value of $54,300 in exchange for general and administrative costs. The securities issued in this transaction were exempt from registration requirements pursuant to the exemption from registration contained in Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933 as amended to date.



During 2002, certain officers of the Company advanced an aggregate of $221,000 to the Company to fund ongoing operations. The Company issued warrants to purchase 1,080,000 shares of the Company's common stock at an exercise price of $.20 per share that expire on September 30, 2007 to two of these officers in consideration for the provision by these officers of the funding. The securities issued in this transaction were exempt from registration requirements pursuant to the exemption from registration contained in Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933 as amended to date.



ITEM 5.

OTHER INFORMATION



Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company is responsible for listing the non-audit services approved in the third quarter of 2003 by the Company's Board of Directors. Non-audit services are defined in the law as services other than those provided in connection with an audit or a review of the financial statements of the Company. The non-audit services approved by the Board of Directors in the third quarter of 2003 (see list below) are each considered by the Company to be other services.





ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits



Exhibit 31.1  Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of  2002



Exhibit 31.2  Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of  2002



Exhibit 32.1  Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of  2002



Exhibit 32.2  Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of  2002

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ITEM 7.

CONTROLS AND PROCEDURES



Due to the pending bankruptcy of the Company, we are operating and controlled by the Reorganization Plan approved by the Bankruptcy Court.  Prior to the filing of the Bankruptcy, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) that is required to be included in our periodic SEC reports.  There have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date we carried out this evaluation.



There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation described in the preceding paragraph as the Bankruptcy is still pending.



* * * * *





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SIGNATURES



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





TELESTONE TECHNOLOGIES CORPORATION

Registrant



Date: September 1, 2004

By:

/s/   Charles J. DeMory

Charles J. DeMory, Chief Executive Officer,

President, Director and Principal Executive

Officer



By:

/s/   John Mangel, III

John Mangel, III, Chief Financial Officer,

Executive Vice President and Director

(Principal Financial and Accounting Officer)







In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



Signature                                                      Title                                           Date





/s/   Charles J. DeMory

Charles J. DeMory

Chief Executive Officer                   September 1, 2004

President, Director and

Principal Executive Officer





/s/   John Mangel, III

John Mangel, III

Chief Financial Officer                   September 1, 2004

Executive Vice President

and Director (Principal

Financial and Accounting

Officer)

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CERTIFICATIONS





I, Charles J. DeMory, certify that:



1.

I have reviewed this annual report on Form 10-KSB of Telestone Technologies Corporation.



2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4.

The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



(a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



(b)

evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



(c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



1.

The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



(a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and



2.

The registrants other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date: September 1, 2004





By:

/s/   Charles J. DeMory

Charles J. DeMory, Chief Executive Officer,

President, Director and Principal Executive

Officer







#





CERTIFICATIONS





I, John Mangel, III, certify that:



1.

I have reviewed this annual report on Form 10-KSB of Telestone Technologies Corporation.



2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4.

The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



(a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



(b)

evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



(c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5.

The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



(a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and



6.

The registrants other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date: September 1, 2004







By:

/s/   John Mangel, III

John Mangel, III, Chief Financial Officer,

Executive Vice President and Director

(Principal Financial and Accounting Officer

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