**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

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

**Securities      Exchange Act of 1934**

**TELESTONE      TECHNOLOGIES CORPORATION**

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

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

----

**TELESTONE      TECHNOLOGIES CORPORATION**

**INDEX**

**PART      I. FINANCIAL INFORMATION**

|                                                                                                                                                              |   | Page   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| **Item                1. Condensed Financial Statements.**                                                                                                        |   |   |
|                                                                                                                                                              |   |   |
| Condensed                Consolidated Statements of Operations, for the three months and Nine                months ended September 30, 2008 and 2007 (unaudited) |   | 3      |
|                                                                                                                                                              |   |   |
| Condensed                Consolidated Balance Sheets, as of September 30, 2008 (unaudited)                and                December 31, 2007 (audited)          |   | 4      |
|                                                                                                                                                              |   |   |
| Condensed                Consolidated Statement of Stockholders’ Equity for the Nine months ended                September 30, 2008 (unaudited)             |   | 5      |
|                                                                                                                                                              |   |   |
| Condensed                Consolidated Statements of Cash Flows, for the Nine months ended                September                30, 2008 and 2007 (unaudited)   |   | 6      |
|                                                                                                                                                              |   |   |
| Notes                to Condensed Consolidated Financial Statements (unaudited)                                                                                   |   | 7-19   |
|                                                                                                                                                              |   |   |
| **Item                2. Management’s Discussion and Analysis or Plan of                Operation.**                                                        |   | 20-29  |
|                                                                                                                                                              |   |   |
| **Item                3. Quantitative and Qualitative Disclosures About Market                Risk.**                                                             |   | 30     |
|                                                                                                                                                              |   |   |
| **Item                4. Controls and Procedures.**                                                                                                               |   | 30     |
|                                                                                                                                                              |   |   |
| **PART                II. OTHER INFORMATION**                                                                                                                     |   |   |
|                                                                                                                                                              |   |   |
| **Item                1. Legal Proceedings.**                                                                                                                     |   | 31     |
| **Item                1A. Risk Factors.**                                                                                                                    |   | 31     |
| **Item                2. Unregistered Sales of Equity Securities and Use of                Proceeds.**                                                            |   | 31     |
| **Item                3. Defaults Upon Senior Securities.**                                                                                                       |   | 31     |
| **Item                4. Submission of Matters to a Vote of Security                Holders.**                                                                    |   | 31     |
| **Item                5. Other Information.**                                                                                                                     |   | 31     |
| **Item                6. Exhibits.**                                                                                                                              |   | 31     |

----

**ITEM      1. FINANCIAL STATEMENTS**

**Telestone          Technologies Corporation**

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

----

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

|                                                                     |   |   |   | **(Unaudited)**                                                           |   | **(Unaudited)**                                                          |   |
|--------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|--------|
|                                                                     |   |   |   | **Three                  months ended****September                  30,** |   | **Nine                  months ended****September                  30,** |   |
|                                                                     |   |   |   | **2008**                                                                  |   | 2007                                                                     |   | **2008** |   | 2007 |   |
|                                                                     |   | *Note* |   | ***US$’000***                                                       |   | *US$’000*                                                          |   | ***US$’000*** |   | *US$’000* |   |
| **Operating                  revenues**                                  |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |
| Sales                  of equipments                                     |   |   |   |                                                                      |   | **5,797**                                                                |   |   | 7,344 |   |   | **12,112** |   |   | 15,055 |   |
| Service                  income                                          |   |   |   |                                                                      |   | **2,610**                                                                |   |   | 1,956 |   |   | **8,832** |   |   | 5,898 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| Total                  operating revenues                                |   |   |   |                                                                      |   | **8,407**                                                                |   |   | 9,300 |   |   | **20,944** |   |   | 20,953 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Cost                  of operating revenues**                          |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| Cost                  of net sales                                       |   |   |   |                                                                      |   | **(3,586**                                                               | **)**  |   | (3,928 | ) |   | **(7,116** | **)** |   | (8,082 | ) |
| Cost                  of service                                         |   |   |   |                                                                      |   | **(879**                                                                 | **)**  |   | (727 | ) |   | **(3,281** | **)** |   | (2,088 | ) |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| Total                  cost of operating revenues                        |   |   |   |                                                                      |   | **(4,465**                                                               | **)**  |   | (4,655 | ) |   | **(10,397** | **)** |   | (10,170 | ) |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Gross                  income**                                        |   |   |   |                                                                      |   | **3,942**                                                                |   |   | 4,645 |   |   | **10,547** |   |   | 10,783 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Operating                  expenses**                                  |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| Sales                  and marketing                                     |   |   |   |                                                                      |   | **1,430**                                                                |   |   | 1,462 |   |   | **4,028** |   |   | 3,447 |   |
| General                  and administrative                              |   |   |   |                                                                      |   | **571**                                                                  |   |   | 713 |   |   | **1,824** |   |   | 1,893 |   |
| Research                  and development                                |   |   |   |                                                                      |   | **208**                                                                  |   |   | 165 |   |   | **461** |   |   | 662 |   |
| Depreciation                  and amortization                           |   |   |   |                                                                      |   | **76**                                                                   |   |   | 61 |   |   | **237** |   |   | 217 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| Total                  operating expenses                                |   |   |   |                                                                      |   | **2,285**                                                                |   |   | 2,401 |   |   | **6,550** |   |   | 6,219 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Operating                  income**                                    |   |   |   |                                                                      |   | **1,657**                                                                |   |   | 2,244 |   |   | **3,997** |   |   | 4,564 |   |
| Interest                  expense                                        |   |   |   |                                                                      |   | **(112**                                                                 | **)**  |   | (12 | ) |   | **(255** | **)** |   | (64 | ) |
| Other                  (expenses) income, net                            |   |   |   |                                                                      |   | **(28**                                                                  | **)**  |   | 5 |   |   | **915** |   |   | 17 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Income                  before income taxes**                          |   |   |   |                                                                      |   | **1,517**                                                                |   |   | 2,237 |   |   | **4,657** |   |   | 4,517 |   |
| Income                  taxes                                            |   |   | *4*    |                                                                      |   | **(395**                                                                 | **)**  |   | (369 | ) |   | **(917** | **)** |   | (800 | ) |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Net                  income**                                          |   |   |   |                                                                      |   | **1,122**                                                                |   |   | 1,868 |   |   | **3,740** |   |   | 3,717 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Other                  comprehensive income**                          |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| Foreign                  currency translation adjustment                 |   |   |   |                                                                      |   | **26**                                                                   |   |   | 34 |   |   | **1,515** |   |   | 63 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Comprehensive                  income**                                |   |   |   |                                                                      |   | **1,148**                                                                |   |   | 1,902 |   |   | **5,255** |   |   | 3,780 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Earnings                  per share:**                                 |   |   | *3*    |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Weighted                  average number of common stock outstanding** |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |
| Basic                                                                    |   |   |   |                                                                      |   | **10,404,550**                                                           |   |   | 9,604,550 |   |   | **10,404,550** |   |   | 9,479,489 |   |
| Dilutive                  effect of warrants                             |   |   |   |                                                                      |   | **19,860**                                                               |   |   | 108,506 |   |   | **58,712** |   |   | 102,735 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| Diluted                                                                  |   |   |   |                                                                      |   | **10,424,410**                                                           |   |   | 9,713,056 |   |   | **10,463,262** |   |   | 9,582,224 |   |
|                                                                     |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| **Net                  income per share of common stock**                |   |   |   |                                                                      |   |                                                                     |   |   |   |   |   |   |   |   |   |   |
| Basic                  and diluted (US$)                                 |   |   |   |                                                                      |   | **0.11**                                                                 |   |   | 0.19 |   |   | **0.36** |   |   | 0.39 |   |

----

**Telestone        Technologies Corporation**

**Condensed        Consolidated Balance Sheets**

----

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

|                                                                                                                                                                                   |   |       |                     | **(Unaudited)****As                  of****September                  30,** |   |  As                  of December                  31, |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------------------------|-----------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|
|                                                                                                                                                                                   |   |       |                     | **2008**                                                                    |   | 2007                                                       |   |
| **ASSETS**                                                                                                                                                                             |   | ***Note*** |                     | ***US$’000***                                                         |   | *US$’000*                                            |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |
| **Current                  assets:**                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |
| Cash                  and cash equivalents                                                                                                                                             |   |       |                     |                                                                        |   | **6,327**                                                  |   |   | 5,473 |   |
| Accounts                  receivable, net of allowance                                                                                                                                 |   |       | *6*                      |                                                                        |   | **54,870**                                                 |   |   | 45,013 |   |
| Due                  from related parties                                                                                                                                              |   |       | *13*                     |                                                                        |   | **1,818**                                                  |   |   | 1,792 |   |
| Inventories                                                                                                                                                                            |   |       | *10*                     |                                                                        |   | **7,519**                                                  |   |   | 8,023 |   |
| Prepayment                                                                                                                                                                             |   |       |                     |                                                                        |   | **1,544**                                                  |   |   | 1,169 |   |
| Other                  current assets                                                                                                                                                  |   |       |                     |                                                                        |   | **2,127**                                                  |   |   | 1,332 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| Total                  current assets                                                                                                                                                  |   |       |                     |                                                                        |   | **74,205**                                                 |   |   | 62,802 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| Goodwill                                                                                                                                                                               |   |       | *7*                      |                                                                        |   | **3,119**                                                  |   |   | 3,119 |   |
| Property,                  plant and equipment, net                                                                                                                                    |   |       | *8*                      |                                                                        |   | **1,006**                                                  |   |   | 1,170 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   | **4,125**                                                  |   |   | 4,289 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| **Total                  assets**                                                                                                                                                      |   |       |                     |                                                                        |   | **78,330**                                                 |   |   | 67,091 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| **LIABILITIES                  AND STOCKHOLDERS’ EQUITY**                                                                                                                        |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| **Current                  liabilities:**                                                                                                                                              |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| Current                  portion of long term loan from related parties                                                                                                                |   |       | *13*                     |                                                                        |   | **32**                                                     |   |   | 28 |   |
| Short-term                  bank loans                                                                                                                                                 |   |       | *9,                  13* |                                                                        |   | **2,856**                                                  |   |   | 2,051 |   |
| Accounts                  payable - Trade                                                                                                                                              |   |       |                     |                                                                        |   | **9,612**                                                  |   |   | 7,614 |   |
| Customer                  deposits                  for sales of equipment                                                                                                             |   |       |                     |                                                                        |   | **211**                                                    |   |   | 262 |   |
| Due                  to related parties                                                                                                                                                |   |       | *13*                     |                                                                        |   | **1,839**                                                  |   |   | 2,318 |   |
| Taxes                  payable                                                                                                                                                         |   |       |                     |                                                                        |   | **4,888**                                                  |   |   | 4,741 |   |
| Accrued                  expenses and other accrued liabilities                                                                                                                        |   |       |                     |                                                                        |   | **10,809**                                                 |   |   | 7,221 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| Total                  current liabilities                                                                                                                                             |   |       |                     |                                                                        |   | **30,247**                                                 |   |   | 24,235 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| **Non-current                  liabilities:**                                                                                                                                          |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| Long                  term loan from related parties                                                                                                                                   |   |       | *13*                     |                                                                        |   | **2**                                                      |   |   | 30 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   | **30,249**                                                 |   |   | 24,265 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| **Commitments                  and contingencies**                                                                                                                                     |   |       | *14*                     |                                                                        |   | **-**                                                      |   |   | - |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| **Stockholders’                  equity:**                                                                                                                                       |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| Preferred                  stock, US$0.001 par value, 10,000,000 shares authorized,                  no shares issued                                                                  |   |       |                     |                                                                        |   | **-**                                                      |   |   | - |   |
| Common                  stock and paid-in-capital, US$0.001 par value:Authorized                  - 100,000,000 shares as of September 30, 2008 and                  December 31, 2007 |   |       |                     |                                                                        |   | **-**                                                      |   |   | - |   |
| Issued                  and outstanding - 10,404,550 shares as ofSeptember                  30, 2008 and December 31, 2007                                                             |   |       | *12*                     |                                                                        |   | **11**                                                     |   |   | 11 |   |
| Additional                  paid-in capital                                                                                                                                            |   |       |                     |                                                                        |   | **18,989**                                                 |   |   | 18,989 |   |
| Dedicated                  reserves                                                                                                                                                    |   |       |                     |                                                                        |   | **3,481**                                                  |   |   | 3,199 |   |
| Other                  comprehensive income                                                                                                                                            |   |       |                     |                                                                        |   | **4,532**                                                  |   |   | 3,017 |   |
| Retained                  earnings                                                                                                                                                     |   |       |                     |                                                                        |   | **21,068**                                                 |   |   | 17,610 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| Total                  stockholders’ equity                                                                                                                                      |   |       |                     |                                                                        |   | **48,081**                                                 |   |   | 42,826 |   |
|                                                                                                                                                                                   |   |       |                     |                                                                        |   |                                                       |   |   |   |   |
| **Total                  liabilities and stockholders’ equity**                                                                                                                  |   |       |                     |                                                                        |   | **78,330**                                                 |   |   | 67,091 |   |

----

**Telestone          Technologies Corporation**

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

----

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

|                                                              |   | **Common                  stock issued** |           |            |   |                                 |   |                      |       |                                      |   |                     |   |
|-------------------------------------------------------------------|--------|------------------------------------------|----------------|-----------------|--------|--------------------------------------|--------|---------------------------|------------|-------------------------------------------|--------|--------------------------|--------|
|                                                              |   | **Number****of                  shares** |           | **Amount**      |   | **Additional****paid-in****capital** |   | **Dedicated****reserves** |       | **Other****compre-****hensive****income** |   | **Retained****earnings** |   | **Total** |   |
|                                                              |   |                                     |           | *US$’000* |   | *US$’000*                      |   | *US$’000*           |       | *US$’000*                           |   | *US$’000*          |   | *US$’000* |   |
|                                                              |   |                                     |           |            |   |                                 |   |                      |       |                                      |   |                     |   |   |   |
| Balance                  at January 1, 2007                       |   |                                     | 8,935,106      |            |   | 9                                    |   |                      | 8,475      |                                      |   | 2,619                    |   |   | 1,015 |   |   | 12,152 |   |   | 24,270 |   |
| Issuance                  of stock (net of expenses)              |   |                                     | 1,469,444      |            |   | 2                                    |   |                      | 10,514     |                                      |   | -                        |   |   | - |   |   | - |   |   | 10,516 |   |
| Net                  income                                       |   |                                     | -              |            |   | -                                    |   |                      | -          |                                      |   | -                        |   |   | - |   |   | 6,038 |   |   | 6,038 |   |
| Foreign                  currency translation                     |   |                                     |           |            |   |                                 |   |                      |       |                                      |   |                     |   |   |   |   |   |   |   |   |   |   |
| adjustment                                                        |   |                                     | -              |            |   | -                                    |   |                      | -          |                                      |   | -                        |   |   | 2,002 |   |   | - |   |   | 2,002 |   |
| Transfer                  to dedicated reserves                   |   |                                     | -              |            |   | -                                    |   |                      | -          |                                      |   | 580                      |   |   | - |   |   | (580 | ) |   | - |   |
|                                                              |   |                                     |           |            |   |                                 |   |                      |       |                                      |   |                     |   |   |   |   |   |   |   |   |   |   |
|                                                              |   |                                     |           |            |   |                                 |   |                      |       |                                      |   |                     |   |   |   |   |   |   |   |   |   |   |
| Balance                  at December 31, 2007                     |   |                                     | 10,404,550     |            |   | 11                                   |   |                      | 18,989     |                                      |   | 3,199                    |   |   | 3,017 |   |   | 17,610 |   |   | 42,826 |   |
| Net                  income                                       |   |                                     | -              |            |   | -                                    |   |                      | -          |                                      |   | -                        |   |   | - |   |   | 3,740 |   |   | 3,740 |   |
| Foreign                  currency translation adjustment          |   |                                     | -              |            |   | -                                    |   |                      | -          |                                      |   | -                        |   |   | 1,515 |   |   | - |   |   | 1,515 |   |
| Transfer                  to dedicated reserves                   |   |                                     | -              |            |   | -                                    |   |                      | -          |                                      |   | 282                      |   |   | - |   |   | (282 | ) |   | - |   |
|                                                              |   |                                     |           |            |   |                                 |   |                      |       |                                      |   |                     |   |   |   |   |   |   |   |   |   |   |
| **Balance                  at September 30, 2008****(unaudited)** |   |                                     | **10,404,550** |            |   | **11**                               |   |                      | **18,989** |                                      |   | **3,481**                |   |   | **4,532** |   |   | **21,068** |   |   | **48,081** |   |
|                                                              |   |                                     |           |            |   |                                 |   |                      |       |                                      |   |                     |   |   |   |   |   |   |   |   |   |   |

----

**Telestone        Technologies Corporation**

**Condensed        Consolidated Statements of Cash Flows**

----

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

|                                                                                                            |   | **(Unaudited)**                                      |       |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|------------|
|                                                                                                            |   | **Nine                  months ended September 30,** |       |
|                                                                                                            |   | **2008**                                             |       | 2007 |   |
|                                                                                                            |   | ***US$’000***                                  |       | *US$’000* |   |
| **Cash                  flows from operating activities**                                                       |   |                                                 |       |   |   |
| **Net                  income**                                                                                 |   |                                                 | **3,740**  |   |   | 3,717 |   |
| Adjustments                  to reconcile net income to net cash used in operating                  activities: |   |                                                 |       |   |   |   |   |
| (Gain)                  Loss on disposal of property, plant and equipment                                       |   |                                                 | **(15**    | **)** |   | 5 |   |
| Depreciation                  and amortization                                                                  |   |                                                 | **237**    |   |   | 217 |   |
| Provision                  for doubtful accounts                                                                |   |                                                 | **337**    |   |   | 3,629 |   |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| Changes                  in assets and liabilities:                                                             |   |                                                 |       |   |   |   |   |
| Accounts                  receivable                                                                            |   |                                                 | **(8,349** | **)** |   | (10,341 | ) |
| Due                  from related parties                                                                       |   |                                                 | **55**     |   |   | (419 | ) |
| Inventories                                                                                                     |   |                                                 | **881**    |   |   | (81 | ) |
| Prepayment                                                                                                      |   |                                                 | **(330**   | **)** |   | (439 | ) |
| Other                  current assets                                                                           |   |                                                 | **(751**   | **)** |   | 21 |   |
| Accounts                  payable                                                                               |   |                                                 | **1,693**  |   |   | (1,571 | ) |
| Customer                  deposits for sales of equipment                                                       |   |                                                 | **(64**    | **)** |   | 207 |   |
| Due                  to related parties                                                                         |   |                                                 | **(595**   | **)** |   | (12 | ) |
| Taxes                  payable                                                                                  |   |                                                 | **(66**    | **)** |   | 1,845 |   |
| Accrued                  expenses and other accrued liabilities                                                 |   |                                                 | **3,335**  |   |   | (1,481 | ) |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| **Net                  cash generated from (used in) operating                  activities**                    |   |                                                 | **108**    |   |   | (4,703 | ) |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| **Cash                  flows from investing activities**                                                       |   |                                                 |       |   |   |   |   |
| Purchase                  of property, plant and equipment                                                      |   |                                                 | **(32**    | **)** |   | (246 | ) |
| Proceeds                  from disposal of property, plant and equipment                                        |   |                                                 | **49**     |   |   | 31 |   |
| Acquisition                  of a subsidiary, net of cash disbursed                                             |   |                                                 | -          |   |   | (186 | ) |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| **Net                  cash generated from (used in) investing                  activities**                    |   |                                                 | **17**     |   |   | (401 | ) |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| **Cash                  flows from financing activities**                                                       |   |                                                 |       |   |   |   |   |
| Repayment                  of short-term bank loans                                                             |   |                                                 | **(2,142** | **)** |   | - |   |
| Proceeds                  from issuance of shares (net of expenses)                                             |   |                                                 | **-**      |   |   | 5,454 |   |
| Repayment                  of long-term loan from related parties                                               |   |                                                 | **(27**    | **)** |   | 631 |   |
| Proceeds                  from new short-term bank loans raised                                                 |   |                                                 | **2,856**  |   |   | (8 | ) |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| **Net                  cash generated from financing**                                                          |   |                                                 | **687**    |   |   | 6,077 |   |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| **Net                  increase in cash and cash equivalents**                                                  |   |                                                 | **812**    |   |   | 973 |   |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| **Cash                  and cash equivalents, beginning of the period**                                         |   |                                                 | **5,473**  |   |   | 3,380 |   |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| Effect                  on exchange rate changes                                                                |   |                                                 | **42**     |   |   | 63 |   |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| **Cash                  and cash equivalents, end of the period**                                               |   |                                                 | **6,327**  |   |   | 4,416 |   |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| **Supplemental                  disclosure of cash flows information**                                          |   |                                                 |       |   |   |   |   |
| Interest                  received                                                                              |   |                                                 | **23**     |   |   | 21 |   |
| Interest                  paid                                                                                  |   |                                                 | **187**    |   |   | 64 |   |
| Tax                  paid                                                                                       |   |                                                 | **54**     |   |   | - |   |
|                                                                                                            |   |                                                 |       |   |   |   |   |
| **Non-cash                  investing activity**                                                                |   |                                                 |       |   |   |   |   |
| Acquisition                  of a subsidiary                                                                    |   |                                                 | **-**      |   |   | 5,062 |   |

----

**Telestone          Technologies Corporation**

**Notes          to Condensed Consolidated Financial Statements**

----

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

**1.                   **
**ORGANIZATION        AND PRINCIPAL ACTIVITIES**

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

----

**Telestone        Technologies Corporation**

**Notes        to Condensed Consolidated Financial Statements**

----

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

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

**Basis        of presentations**

**Basis        of consolidation**

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

----

**Telestone          Technologies Corporation**

**Notes          to Condensed Consolidated Financial Statements**

----

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

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

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

----

**Telestone          Technologies Corporation**

**Notes          to Condensed Consolidated Financial Statements**

----

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

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

|                               |   | **(Unaudited)****Nine                  months ended****September                  30,** |   |
|------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|
|                               |   | **2008**                                                                                |   | 2007 |   |
|                               |   | **%**                                                                                   |   | % |   |
|                               |   |                                                                                    |   |   |   |
| Beijing                  Telestone |   |                                                                                    | **24** |   |   | 24 |   |
| BTWTC                              |   |                                                                                    | **25** |   |   | 33 |   |
| BTCTC                              |   |                                                                                    | **25** |   |   | - |   |
| Guolian                            |   |                                                                                    | **25** |   |   | 15 |   |
| Pan-pacific                        |   |                                                                                    | **25** |   |   | 33 |   |

|                           |   | **(Unaudited)****Nine                  months ended****September                  30,** |    |
|--------------------------------|--------|-----------------------------------------------------------------------------------------|---------|
|                           |   | **2008**                                                                                |    | 2007 |   |
|                           |   | ***US$’000***                                                                     |    | *US$’000* |   |
| Current                  tax   |   |                                                                                    |    |   |   |   |   |
| United                  States |   |                                                                                    | **-**   |   |   | - |   |
| PRC                            |   |                                                                                    | **917** |   |   | 800 |   |
|                           |   |                                                                                    |    |   |   |   |   |
|                           |   |                                                                                    | **917** |   |   | 800 |   |

----

**Telestone          Technologies Corporation**

**Notes          to Condensed Consolidated Financial Statements**

----

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

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

*(2007:24%)*

|                                                                   |   | **(Unaudited)****Nine                  months ended****September                  30,** |      |
|------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|-----------|
|                                                                   |   | **2008**                                                                                |      | 2007 |   |
|                                                                   |   | **%**                                                                                   |      | *%* |   |
|                                                                   |   |                                                                                    |      |   |   |
| Statutory                  rate - PRC                                  |   |                                                                                    | **25.0**  |   |   | 24.0 |   |
| Differences                  in tax rates of subsidiary of the Company |   |                                                                                    | **(0.7**  | **)** |   | - |   |
| Tax                  exemption                                         |   |                                                                                    | **(10.1** | **)** |   | (15.3 | ) |
| Non-deductible                  items                             |   |                                                                                    | **5.7**   |   |   | 7.8 |   |
| Others                                                                 |   |                                                                                    | **(0.2**  | **)** |   | 1.2 |   |
|                                                                   |   |                                                                                    |      |   |   |   |   |
| Effective                  tax rate                                    |   |                                                                                    | **19.7**  |   |   | 17.7 |   |

----

**Telestone          Technologies Corporation**

**Notes          to Condensed Consolidated Financial Statements**

----

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

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

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

|                                                                                                               |   | **(Unaudited)****Nine                  months ended****September                  30,** |       |
|--------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|------------|
|                                                                                                               |   | **2008**                                                                                |       | 2007 |   |
|                                                                                                               |   | ***US$’000***                                                                     |       | *US$’000* |   |
| Major                  customers with revenues of more than 10% of the                  Company’s sales      |   |                                                                                    |       |   |   |   |   |
| Sales                  to major customers                                                                          |   |                                                                                    | **18,499** |   |   | 19,048 |   |
| Percentage                  of sales                                                                               |   |                                                                                    | **88**     | **%** |   | 92 | % |
| Number                                                                                                             |   |                                                                                    | **2**      |   |   | 3 |   |
|                                                                                                               |   |                                                                                    |       |   |   |   |   |
| Major                  suppliers with purchases of more than 10% of the                  Company’s purchases |   |                                                                                    |       |   |   |   |   |
| Purchases                  from major suppliers                                                                    |   |                                                                                    | **2,258**  |   |   | 2,005 |   |
| Percentage                  of purchases                                                                           |   |                                                                                    | **36**     | **%** |   | 25 | % |
| Number                                                                                                             |   |                                                                                    | **1**      |   |   | 1 |   |
|                                                                                                               |   |                                                                                    |       |   |   |   |   |

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

----

**Telestone        Technologies Corporation**

**Notes        to Condensed Consolidated Financial Statements**

----

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

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

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

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

|                                             |   | **(Unaudited)****As                  of****September                  30,****2008** |       | As                  ofDecember                  31,2007 |   |
|--------------------------------------------------|--------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------|--------|
|                                             |   | ***US$’000***                                                                 |       | *US$’000*                                         |   |
|                                             |   |                                                                                |       |                                                    |   |
| Completed                  contracts             |   |                                                                                | **59,221** |                                                    |   | 48,733 |   |
| Retentions                                       |   |                                                                                | **667**    |                                                    |   | 715 |   |
|                                             |   |                                                                                |       |                                                    |   |   |   |
|                                             |   |                                                                                | **59,888** |                                                    |   | 49,448 |   |
| Allowance                  for doubtful accounts |   |                                                                                | **(5,018** | **)**                                                   |   | (4,435 | ) |
|                                             |   |                                                                                |       |                                                    |   |   |   |
|                                             |   |                                                                                | **54,870** |                                                    |   | 45,013 |   |

**7.                    **
**GOODWILL        **

|     |   | **(Unaudited)****As                  of****September                  30,****2008** |      |  As                  ofDecember                  31,2007 |   |
|----------|--------|-------------------------------------------------------------------------------------|-----------|---------------------------------------------------------------|--------|
|     |   | ***US$’000***                                                                 |      | *US$’000*                                               |   |
|     |   |                                                                                |      |                                                          |   |
| Goodwill |   |                                                                                | **3,119** |                                                          |   | 3,119 |   |

----

**Telestone          Technologies Corporation**

**Notes          to Condensed Consolidated Financial Statements**

----

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

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

|                                      |   | Estimated                  useful life |   | **(Unaudited)****As                  of****September                  30,****2008** |   | As                  ofDecember                  31,2007 |   |
|-------------------------------------------|--------|----------------------------------------|--------|-------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                      |   | (in                  years)            |   | ***US$’000***                                                                 |   | *US$’000*                                         |   |
|                                      |   |                                   |   |                                                                                |   |                                                    |   |
| Buildings                                 |   |                                   | 30     |                                                                                |   | **305**                                                 |   |   | 287 |   |
| Leasehold                  improvement    |   |                                   | 5      |                                                                                |   | **85**                                                  |   |   | 81 |   |
| Plant                  and machinery      |   |                                   | 5      |                                                                                |   | **555**                                                 |   |   | 515 |   |
| Office                  equipment         |   |                                   | 5      |                                                                                |   | **887**                                                 |   |   | 838 |   |
| Motor                  vehicles           |   |                                   | 5      |                                                                                |   | **479**                                                 |   |   | 545 |   |
|                                      |   |                                   |   |                                                                                |   |                                                    |   |   |   |   |
|                                      |   |                                   |   |                                                                                |   | **2,311**                                               |   |   | 2,266 |   |
| Accumulated                  depreciation |   |                                   |   |                                                                                |   | **(1,305**                                              | **)**  |   | (1,096 | ) |
|                                      |   |                                   |   |                                                                                |   |                                                    |   |   |   |   |
|                                      |   |                                   |   |                                                                                |   | **1,006**                                               |   |   | 1,170 |   |

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

|   | All                  bank loans are secured by guarantees provided by the director,                  Mr. Han                  Daqing and an independent guaranty company. At the balance sheet                  date, the                  bank loans are charged at interest rate of 7.47% per annum and                  wholly                  repayable within one year. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**10.                  **
**INVENTORIES**

|                            |   | **(Unaudited)****As                  of****September                  30,****2008** |      |  As                  ofDecember                  31,2007 |   |
|---------------------------------|--------|-------------------------------------------------------------------------------------|-----------|---------------------------------------------------------------|--------|
|                            |   | ***US$’000***                                                                 |      | *US$’000*                                               |   |
|                            |   |                                                                                |      |                                                          |   |
| Raw                  materials  |   |                                                                                | **16**    |                                                          |   | 29 |   |
| Finished                  goods |   |                                                                                | **7,503** |                                                          |   | 7,994 |   |
|                            |   |                                                                                |      |                                                          |   |   |   |
|                            |   |                                                                                | **7,519** |                                                          |   | 8,023 |   |

----

**Telestone          Technologies Corporation**

**Notes          to Condensed Consolidated Financial Statements**

----

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

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

| **12.** | **COMMON                  STOCK** |
|---------|-----------------------------------|

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

**Summary        of related party transactions**

|                                                          |   | ***Note*** |   | **(Unaudited)****As                  of****September                  30,****2008** |   |  As                  ofDecember                  31,2007 |   |
|---------------------------------------------------------------|--------|------------|--------|-------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|
|                                                          |   |       |   | ***US$’000***                                                                 |   | *US$’000*                                               |   |
| **Due                  from related parties**                 |   |       |   |                                                                                |   |                                                          |   |
| Other                  employees                              |   |       | *a*    |                                                                                |   | **422**                                                       |   |   | 456 |   |
| Ex-stockholders                  of SMI/Guolian               |   |       | *b*    |                                                                                |   | **1,396**                                                     |   |   | 1,336 |   |
|                                                          |   |       |   |                                                                                |   |                                                          |   |   |   |   |
|                                                          |   |       |   |                                                                                |   | **1,818**                                                     |   |   | 1,792 |   |
|                                                          |   |       |   |                                                                                |   |                                                          |   |   |   |   |
| **Due                  to related parties**                   |   |       |   |                                                                                |   |                                                          |   |   |   |   |
| Directors                                                     |   |       | *a*    |                                                                                |   | **366**                                                       |   |   | 887 |   |
| Ex-stockholders                  of Beijing Telestone/Guolian |   |       | *b*    |                                                                                |   | **1,473**                                                     |   |   | 1,431 |   |
|                                                          |   |       |   |                                                                                |   |                                                          |   |   |   |   |
|                                                          |   |       |   |                                                                                |   | **1,839**                                                     |   |   | 2,318 |   |

----

**Telestone          Technologies Corporation**

**Notes          to Condensed Consolidated Financial Statements**

----

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

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

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

|                                                                                       |   | ***Note*** |   | **(Unaudited)****As                  of****September                  30,****2008** |   | As                  ofDecember                  31,2007 |   |
|--------------------------------------------------------------------------------------------|--------|------------|--------|-------------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                                                       |   |       |   | ***US$’000***                                                                 |   | *US$’000*                                         |   |
| **L****oan                  from related parties**                                         |   |       |   |                                                                                |   |                                                    |   |
| A                  director of Beijing Telestone                                           |   |       | *c*    |                                                                                |   | **17**                                                  |   |   | 29 |   |
| A                  close                  family member of a director of Beijing Telestone |   |       | *c*    |                                                                                |   | **17**                                                  |   |   | 29 |   |
|                                                                                       |   |       |   |                                                                                |   |                                                    |   |   |   |   |
|                                                                                       |   |       |   |                                                                                |   | **34**                                                  |   |   | 58 |   |
|                                                                                       |   |       |   |                                                                                |   |                                                    |   |   |   |   |
| **Current                  portion of long term loan from related parties**                |   |       |   |                                                                                |   | **(32**                                                 | **)**  |   | (28 | ) |
|                                                                                       |   |       |   |                                                                                |   |                                                    |   |   |   |   |
| **Long                  term loan from related parties**                                   |   |       |   |                                                                                |   | **2**                                                   |   |   | 30 |   |
|                                                                                       |   |       |   |                                                                                |   |                                                    |   |   |   |   |
|                                                                                       |   |       |   |                                                                                |   |                                                    |   |   |   |   |
| **Guarantor                  of short term loan**                                          |   |       |   |                                                                                |   |                                                    |   |   |   |   |
| A                  director                                                                |   |       | *9*    |                                                                                |   | **2,856**                                               |   |   | 2,051 |   |

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

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

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

----

**Telestone          Technologies Corporation**

**Notes          to Condensed Consolidated Financial Statements**

----

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

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

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

| **16.** | **RECENT                  ACCOUNTING PRONOUNCEMENTS** |
|---------|-------------------------------------------------------|

*Business        Combinations*

----

**Telestone            Technologies Corporation**

**Notes            to Condensed Consolidated Financial Statements**

----

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

| **16.** | **RECENT                  ACCOUNTING PRONOUNCEMENTS                  (CONTINUED)** |
|---------|------------------------------------------------------------------------------------|

*Fair        Value Measurements*

*Noncontrolling        Interests in Consolidated Financial*
*Statements*

*Disclosures        about Derivative Instruments and Hedging*
*Activities*

----

**Telestone            Technologies Corporation**

**Notes            to Condensed Consolidated Financial Statements**

----

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

| **16.** | **RECENT                  ACCOUNTING PRONOUNCEMENTS                  (CONTINUED)** |
|---------|------------------------------------------------------------------------------------|

*The        Hierarchy of Generally Accepted Accounting Principles*

*Determining        Whether Instruments Granted in Share-Based Payment Transactions are        Participating Securities*
*Earnings        Per Share*

*Disclosures        about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement        No. 133*
*FASB        Interpretation No. 45; and Clarification of the Effective Date of FASB Statement        No. 161*

----

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

**BUSINESS      DESCRIPTION**

----

**BUSINESS      REVIEW**

|                                          | 2008                Q3 | 2007                Q3      | Comparisons |
|-----------------------------------------------|------------------------|-----------------------------|-------------|
| Item                                          | $'000                  | %                of revenue | $'000       | %                of revenue | $'000 | % |
| Revenue                                       | 8,407                  |                      | 9,300       |   | -893 | -9.60% |
| Cost                of equipment and services | 4,465                  | 53.11%                      | 4,655       | 50.05% | -190 | -4.08% |
| Gross                profit                   | 3,942                  | 46.89%                      | 4,645       | 49.95% | -703 | -15.13% |
| Sales                and marketing expenses   | 1,430                  | 17.01%                      | 1,462       | 15.72% | -32 | -2.19% |
| General                and administrative     | 571                    | 6.79%                       | 713         | 7.67% | -142 | -19.92% |
| Research                and development       | 208                    | 2.47%                       | 165         | 1.77% | 43 | 26.06% |
| Depreciation                and Amortization  | 76                     | 0.90%                       | 61          | 0.66% | 15 | 24.59% |
| Interest                expenses              | 112                    | 1.33%                       | 12          | 0.13% | 100 | 833.33% |
| Other                income                   | -28                    | -0.33%                      | 5           | 0.05% | -33 | -660.00% |
| Income                before tax              | 1,517                  | 18.04%                      | 2,237       | 24.05% | -720 | -32.19% |
| Income                tax                     | 395                    | 4.70%                       | 369         | 3.97% | 26 | 7.05% |
| Net                income                     | 1,122                  | 13.35%                      | 1,868       | 20.09% | -746 | -39.94% |

|                                          | 2008                Nine Months | 2007                Nine Months | Comparisons |
|-----------------------------------------------|---------------------------------|---------------------------------|-------------|
| Item                                          | $'000                           | %                of revenue     | $'000       | %                of revenue | $'000 | % |
| Revenue                                       | 20,944                          |                          | 20,953      |   | -9 | -0.04% |
| Cost                of equipment and services | 10,397                          | 49.64%                          | 10,170      | 48.54% | 227 | 2.23% |
| Gross                profit                   | 10,547                          | 50.36%                          | 10,783      | 51.46% | -236 | -2.19% |
| Sales                and marketing expenses   | 4,028                           | 19.23%                          | 3,447       | 16.45% | 581 | 16.86% |
| General                and administrative     | 1,824                           | 8.71%                           | 1,893       | 9.03% | -69 | -3.65% |
| Research                and development       | 461                             | 2.20%                           | 662         | 3.16% | -201 | -30.36% |
| Depreciation                and Amortization  | 237                             | 1.13%                           | 217         | 1.04% | 20 | 9.22% |
| Interest                expenses              | 255                             | 1.22%                           | 64          | -0.31% | 191 | 298.44% |
| Other                income                   | 915                             | 4.37%                           | 17          | 0.08% | 898 | 5282.35% |
| Income                before tax              | 4,657                           | 22.24%                          | 4,517       | 21.56% | 140 | 3.10% |
| Income                tax                     | -917                            | -4.38%                          | -800        | -3.82% | -117 | 14.63% |
| Net                income                     | 3,740                           | 17.86%                          | 3,717       | 17.74% | 23 | 0.62% |

----

**CRITICAL      ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES**

----

**RESULTS      OF OPERATION**

**Revenues**

**Breakdown      by Nature**

|                         | 2008                Q3 | 2007                Q3      | Growth |
|------------------------------|------------------------|-----------------------------|--------|
|                       | $'000                  | %                of revenue | $'000  | %                of revenue | $'000 | % |
| product                sales | 5797                   | 68.95%                      | 7344   | 78.97% | -1547 | -21.06% |
| service                sales | 2610                   | 31.05%                      | 1956   | 21.03% | 654 | 33.44% |
| total                        | 8407                   | 100.00%                     | 9300   | 100.00% | -893 | -9.60% |

|                         | 2008                Nine months | 2007                Nine months | Growth |
|------------------------------|---------------------------------|---------------------------------|--------|
|                       | $'000                           | %                of revenue     | $'000  | %                of revenue | $'000 | % |
| product                sales | 12112                           | 57.83%                          | 15055  | 71.85% | -2943 | -19.55% |
| service                sales | 8832                            | 42.17%                          | 5898   | 28.15% | 2934 | 49.75% |
| total                        | 20944                           | 100.00%                         | 20953  | 100.00% | -9 | -0.04% |

----

**Breakdown      by Customers**

|                       | 2008                Q3 | 2007                Q3      | Growth |
|------------------------------|------------------------|-----------------------------|--------|
|                       |  $'000          | %                of revenue | $'000  | %                of revenue | $'000 | % |
| China                Mobile  | 2704                   | 32.17%                      | 4190   | 45.05% | -1486 | -35.46% |
| China                Unicom  | 5175                   | 61.56%                      | 3029   | 32.57% | 2146 | 70.85% |
| China                Netcom  | 309                    | 0.00%                       | 275    | 2.96% | 34 | 12.36% |
| China                Telecom | 73                     | 0.87%                       | 1469   | 15.80% | -1396 | -95.00% |
| Overseas                     | 106                    | 1.26%                       | 131    | 1.41% | -25 | -19.08% |
| Others                       | 40                     | 0.48%                       | 206    | 2.22% | -166 | -80.58% |
| Total                        | 8407                   | 100.00%                     | 9300   | 100.00% | -893 | -9.61% |

|                       | 2008                Nine months | 2007                Nine months | Growth |
|------------------------------|---------------------------------|---------------------------------|--------|
|                       | $'                000           | %                of Revenue     | $'000  | %                of revenue | $'000 | % |
| China                Mobile  | 9402                            | 44.89%                          | 8398   | 40.08% | 1004 | 11.96% |
| China                Unicom  | 9559                            | 45.64%                          | 7583   | 36.19% | 1976 | 26.06% |
| China                Netcom  | 701                             | 3.35%                           | 980    | 4.68% | -279 | -28.47% |
| China                Telecom | 392                             | 1.87%                           | 3340   | 15.94% | -2948 | -88.25% |
| Overseas                     | 329                             | 1.57%                           | 401    | 1.91% | -72 | -17.95% |
| Others                       | 561                             | 2.67%                           | 251    | 1.20% | 310 | 123.51% |
| Total                        | 20944                           | 100.00%                         | 20953  | 100.00% | -9 | -0.05% |

----

**Cost      Analysis**

|                               | 2008                Q3 | 2007                Q3      | Growth |
|------------------------------------|------------------------|-----------------------------|--------|
| Item                               | $'000                  | %                of revenue | $'000  | %                of revenue | $'000 | % |
| products                sales cost | 3586                   | 42.65%                      | 3928   | 42.23% | -342 | -8.71% |
| service                cost        | 879                    | 10.46%                      | 727    | 7.82% | 152 | 20.91% |
| Total                              | 4465                   | 53.11%                      | 4655   | 50.05% | -190 | -4.08% |

|                               | 2008                Nine months | 2007                Nine months | Growth |
|------------------------------------|---------------------------------|---------------------------------|--------|
| Item                               | $'000                           | %                  of revenue   | $'000  | %                of revenue | $'000 | % |
| products                sales cost | 7116                            | 33.98%                          | 8082   | 38.57% | -966 | -11.95% |
| service                cost        | 3281                            | 15.67%                          | 2088   | 9.97% | 1193 | 57.14% |
| Total                              | 10397                           | 49.64%                          | 10170  | 48.54% | 227 | 2.23% |

----

**Gross      Profit and Gross Margin**

**Operating      Expenses**

|                                               | 2008                Q3 | 2007                Q3      | Comparisons |
|----------------------------------------------------|------------------------|-----------------------------|-------------|
| Item                                               | $'000                  | %                of revenue | $'000       | %                of revenue | $'000 | % |
| Sales                and marketing expenses        | 1430                   | 17.01%                      | 1462        | 15.72% | -32 | -2.19% |
| General                and administrative expenses | 571                    | 6.79%                       | 713         | 7.67% | -142 | -19.92% |
| Research                and development expenses   | 208                    | 2.47%                       | 165         | 1.77% | 43 | 26.06% |
| Total                                              | 2209                   | 26.28%                      | 2340        | 25.16% | -131 | -5.60% |

|                                               | 2008                Nine months | 2007                Nine months | Comparisons |
|----------------------------------------------------|---------------------------------|---------------------------------|-------------|
| Item                                               | $'000                           | %                of revenue     | $'000       | %                of revenue | $'000 | % |
| Sales                and marketing expenses        | 4028                            | 19.23%                          | 3447        | 16.45% | 581 | 16.86% |
| General                and administrative expenses | 1824                            | 8.71%                           | 1893        | 9.03% | -69 | -3.65% |
| Research                and development expenses   | 461                             | 2.20%                           | 662         | 3.16% | -201 | -30.36% |
| Total                                              | 6313                            | 30.14%                          | 6002        | 28.65% | 311 | 5.18% |

----

**Sales      and Marketing Expenses**

**General      and Administrative Expenses**

**Research      & Development Expenses**

----

**Net      Income**

**LIQUIDITY      AND SOURCE OF CAPITAL**

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

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

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

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

----

**BUSINESS      STRATEGIES **

----

**BUSINESS      OUTLOOK**

**CONTINGENT      LIABILITIES**

**EMPLOYMENT      AND REMUNERATIONS**

**OFF-BALANCE      SHEET ARRANGEMENTS**

**Item      3. Quantitative and Qualitative Disclosures About Market      Risk**

**Item      4. Controls and Procedures**

----

**PART      II**

**OTHER      INFORMATION**

**Item      1.  Legal Proceedings.**

**Item      1A. Risk Factors.**

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

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

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

**Item      5.   Other Information.**

| **Item                6.** | **Exhibits.** |
|----------------------------|---------------|

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

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

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

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

----

**SI**
**NATURES**

|                                   | **TELESTONE                TECHNOLOGIES****CORPORATION** |
|----------------------------------------|----------------------------------------------------------|
|                                   |                                                     |   |
| Date:                November 14, 2008 | By:                                                      |       /s/                Han Daqing |
|                                   |                                                     | Han                Daqing, Chief Executive Officer |
|                                   |                                                     | (Principal                Executive Officer) |
|                                   |                                                     |   |
|                                   |                                                     |   |
| Date:                November 14, 2008 | By:                                                      |       /s/                Liu Dongping |
|                                   |                                                     | Liu                Dongping, Chief Financial Officer |
|                                   |                                                     | (Principal                Financial Officer) |

----