**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**





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


**Securities
      Exchange Act of 1934**





For
      the
      quarterly period ended March 31, 2007





Commission
      File Number: 001-32503




**TELESTONE
      TECHNOLOGIES CORPORATION**


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




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




Floor
      6,
      Saiou Plaza


No.
      5
      Haiying Road


Fengtai
      Technology Park


Beijing,
      People’s Republic of China 100070


(Address
      of Principal Executive Offices)




(86
      10)
      8367-0505


(Issuer’s
      Telephone Number, Including Area Code)





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




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes  ̈ No þ




As
      of
      April 24, 2007, 9,604,550 shares of the Issuer’s $.001 par value common stock
      were outstanding.




Transitional
      Small Business Disclosure Format :  Yes  ̈ No þ







**ITEM
      1. FINANCIAL STATEMENTS**




**Telestone
      Technologies Corporation**




**Index
      to Financial Statements**




**Page**Condensed
                Consolidated Balance Sheets (Unaudited)
            
            
            3Condensed
                Consolidated Statements of Operations (Unaudited)
            
            
            4Condensed
                Consolidated Statement of Changes in Stockholders’ Equity
                (Unaudited)
            
            
            5Condensed
                Consolidated Statement of Cash Flows (Unaudited)
            
            
            6Notes
                to Condensed Consolidated Financial Statements
            
            
            7-18





2


**Telestone
      Technologies Corporation**


**Condensed
      Consolidated Balance Sheets (Unaudited)**





**(Unaudited)**
              **As
                of**
              **March
                31,**
              **2007**
            
            As
                of
              December
                31,
              2006*Note*
            
            ***US$’000***
            
            *US$’000***ASSETS****Current
                assets**Cash
                and cash equivalents
            
            
            
            
            
            **7,718**
            
            
            3,380Accounts
                receivable
            
            
            *6*
            
            
            **30,603**
            
            
            29,777Due
                from related parties
            
            
            *12*
            
            
            **1,618**
            
            
            1,409Inventories
                - Finished goods
            
            
            
            
            
            **4,165**
            
            
            5,048Prepayment
            
            
            
            
            
            **107**
            
            
            315Other
                current assets
            
            
            
            
            
            **554**
            
            
            373Total
                current assets
            
            
            
            
            
            **44,765**
            
            
            40,302Property,
                plant and equipment, net
            
            
            *7*
            
            
            **807**
            
            
            821**Total
                assets**
            
            
            
            
            
            **45,572**
            
            
            41,123**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities**Short-term
                bank loan
            
            
            *8*
            
            
            **1,279**
            
            
            1,279Accounts
                payable - Trade
            
            
            
            
            
            **4,627**
            
            
            6,314Customer
                depositsfor sales of equipment
            
            
            
            
            
            **153**
            
            
            20Due
                to related parties
            
            
            *12*
            
            
            **2,001**
            
            
            2,001Taxes
                payable
            
            
            
            
            
            **5,882**
            
            
            2,571Accrued
                expenses and other liabilities
            
            
            
            
            
            **1,407**
            
            
            4,668Total
                current liabilities
            
            
            
            
            
            **15,349**
            
            
            16,853**Commitments
                and contingencies**
            
            
            *13***Stockholders’
                equity**Preferred
                stock, US$0.001 par value, 10,000,000 shares authorized, no shares
                issued
            
            
            
            
            
            **-**
            
            
            -Common
                stock and paid-in capital, US$0.001 par value:
              Authorized
                - 100,000,000 shares as of March 31, 2007and
                December 31, 2006
            
            
            
            
            
            **-**
            
            
            -Issued
                and outstanding - 9,604,550 shares as of March 31, 2007 and 8,935,106
                shares as of December 31, 2006
            
            
            *11*
            
            
            **10**
            
            
            9Dedicated
                reserves
            
            
            
            
            
            **2,619**
            
            
            2,619Additional
                paid-in capital
            
            
            
            
            
            **13,968**
            
            
            8,475Other
                comprehensive income
            
            
            
            
            
            **1,026**
            
            
            1,015Retained
                earnings
            
            
            
            
            
            **12,600**
            
            
            12,152Total
                stockholders’ equity
            
            
            
            
            
            **30,223**
            
            
            24,270**Total
                liabilities and stockholders’ equity**
            
            
            
            
            
            **45,572**
            
            
            41,123





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





3


**Telestone
      Technologies Corporation**


**Condensed
      Consolidated Statement of Operations (Unaudited)**







**(Unaudited)****Three
                months ended**
              **March
                31,****2007**
            
            2006*Note*
            
            ***US$’000***
            
            *US$’000***Operating
                revenues**Net
                sales of equipment
            
            
            
            
            
            **2,951**
            
            
            3,255Service
                income
            
            
            
            
            
            **1,844**
            
            
            520**4,795**
            
            
            3,775**Operating
                expenses**Equipment
                and services
            
            
            
            
            
            **2,401**
            
            
            1,808Sales
                and marketing
            
            
            
            
            
            **920**
            
            
            654General
                and administrative
            
            
            
            
            
            **620**
            
            
            304Research
                and development
            
            
            
            
            
            **172**
            
            
            113Depreciation
                and amortization
            
            
            
            
            
            **59**
            
            
            56Total
                operating expenses
            
            
            
            
            
            **4,172**
            
            
            2,935**Operating
                income**
            
            
            
            
            
            **623**
            
            
            840Interest
                expense
            
            
            
            
            
            **(24**
            **)**
            
            -Other
                income, net
            
            
            
            
            
            **-**
            
            
            5**Income
                before income taxes**
            
            
            
            
            
            **599**
            
            
            845Income
                taxes
            
            
            
            
            
            **(151**
            **)**
            
            (128
            )**Net
                income**
            
            
            
            
            
            **448**
            
            
            717**Earnings
                per share:**
            
            
            *4***Weighted
                average number of shares outstanding**Basic
            
            
            
            
            
            **9,225,199**
            
            
            8,583,439Dilutive
                effect of warrants
            
            
            
            
            
            **5,313**
            
            
            95,987Diluted
            
            
            
            
            
            **9,230,512**
            
            
            8,679,426**Net
                income per share of common stock**
            
            
            
            
            
            ***US***$******
            
            
            *US*$****Basic:**Net
                income
            
            
            
            
            
            **0.05**
            
            
            0.08**Diluted:**Net
                income
            
            
            
            
            
            **0.05**
            
            
            0.08





The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
 
 4


**Telestone
      Technologies Corporation**


**Condensed
      Consolidated Statement of Changes in Stockholders’ Equity
      (Unaudited)**







**Common
                stock****Number**
              **of
                shares**
            
            **Amount**
            
            **Additional**
              **paid-in**
              **capital**
            
            **Dedicated**
              **reserves**
            
            **Cumulative**
              **translation**
              **adjustment**
            
            **Retained**
              **earnings**
            
            Total**US$’000**
            
            **US$’000**
            
            *US$’000*
            
            *US$’000*
            
            *US$’000*
            
            *US$’000***Balance
                at January 1, 2007**
            
            
            8,935,106
            
            
            9
            
            
            8,475
            
            
            2,619
            
            
            1,015
            
            
            12,152
            
            
            24,270Issuance
                of stock (net of expenses)
            
            
            669,444
            
            
            1
            
            
            5,493
            
            
            -
            
            
            -
            
            
            -
            
            
            5,494Net
                income (loss)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            448
            
            
            448Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            11
            
            
            -
            
            
            11**Balance
                at March 31, 2007**
            
            
            **9,604,550**
            
            
            **10**
            
            
            **13,968**
            
            
            **2,619**
            
            
            **1,026**
            
            
            **12,600**
            
            
            **30,223**




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




5


**Telestone
      Technologies Corporation**


**Condensed
      Consolidated Statement of Cash Flows (Unaudited)**







**(Unaudited)****Three
                months ended**
              **March
                31,****2007**
            
            2006***US$’000***
            
            *US$’000***Cash
                flows from operating activities****Net
                income**
            
            
            **448**
            
            
            717Adjustments
                to reconcile net income to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            **59**
            
            
            56Provision
                for doubtful accounts
            
            
            **339**
            
            
            103Exchange
                difference
            
            
            **11**
            
            
            -Changes
                in assets and liabilities:Accounts
                receivable
            
            
            **(1,165**
            **)**
            
            (2,850
            )Inventories,
                net
            
            
            **883**
            
            
            (29
            )Due
                from related parties
            
            
            **(209**
            **)**
            
            (95
            )Prepayment
            
            
            **208**
            
            
            (423
            )Other
                current assets
            
            
            **(181**
            **)**
            
            (33
            )Accounts
                payable
            
            
            **(1,687**
            **)**
            
            399Due
                to related parties
            
            
            **-**
            
            
            (10
            )Customer
                deposits for sales of equipment
            
            
            **133**
            
            
            3Taxes
                payable
            
            
            **3,311**
            
            
            857Accrued
                expenses and other liabilities
            
            
            **(3,261**
            **)**
            
            (235
            )**Net
                cash used in operating activities**
            
            
            **(1,111**
            **)**
            
            (1,540
            )**Cash
                flows from investing activities**Purchase
                of property, plant and equipment
            
            
            **(74**
            **)**
            
            (6
            )Proceeds
                from disposal of property, plant and equipment
            
            
            **30**
            
            
            -**Net
                cash used in investing activities**
            
            
            **(44**
            **)**
            
            (6
            )**Cash
                flows from financing activities**Proceeds
                from issuance of shares (net of expenses)
            
            
            **5,493**
            
            
            75**Net
                cash provided by financing**
            
            
            **5,493**
            
            
            75**Net
                increase (decrease) in cash and cash equivalents**
            
            
            **4,338**
            
            
            (1,471
            )**Cash
                and cash equivalents, beginning of the period**
            
            
            **3,380**
            
            
            3,605**Cash
                and cash equivalents, end of the period**
            
            
            **7,718**
            
            
            2,134





The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
  6


**Telestone
      Technologies Corporation**


**Notes
      to Condensed Consolidated Financial Statements**







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





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





Success
      Million International Limited (“SMI”), a company established in the Hong Kong
      Special Administrative Region of the People’s Republic of China (the “PRC”), is
      a wholly owned subsidiary of TTC and had no business operations since
      incorporation. Beijing Telestone Technology Company Limited (“Beijing
      Telestone”), a wholly-owned subsidiary of SMI established in the PRC with
      operating period for an initial term of 20 years until April 12, 2024, it is
      engaged in the business of design, development, installation and trading of
      wireless telecommunication coverage system equipment.





Beijing
      Telestone Wireless Telecommunication Company Limited (“BTWTC”), being considered
      as a variable interest entity owned by TTC’s directors and stockholders, was
      established in Beijing, the People’s Republic of China (the “PRC”) with a tenure
      of 20 years. As TTC adopted FIN 46 for all periods presented, the financial
      statements of BTWTC are consolidated in the financial statements of Beijing
      Telestone.





In
      this
      report, TTC, SMI, BTWTC and Beijing Telestone are collectively referred to
      as
      the “Company”.





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





The
      accompanying unaudited condensed consolidated financial statements as of March
      31, 2007, have been prepared based upon Securities and Exchange Commission
      ("SEC") rules that permit reduced disclosure for interim periods and include,
      in
      the opinion of management, all adjustments (consisting of normal recurring
      adjustments and reclassifications) necessary to present fairly the financial
      position, results of operations and cash flows as of March 31, 2007 and for
      all
      periods presented.





Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with accounting principles generally accepted in the
      United States of America ("USA") have been condensed or omitted. These condensed
      consolidated financial statements should be read in conjunction with the audited
      financial statements and notes thereto incorporated by reference in the
      Company's Form 10KSB/A for the year ended December 31, 2006 filed on March
      31,
      2007. The results of operations for the three-month periods ended March 31,
      2007
      and 2006 are not necessarily indicative of the operating results to be expected
      for the full year.


7
  **Telestone
        Technologies Corporation**
 **Notes
        to Condensed Consolidated Financial Statements**




**2.**  **PREPARATION
      OF INTERIM FINANCIAL STATEMENTS (CONTINUED)**





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





**3.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





**Accounting
                principles**




The
                consolidated financial statements and accompanying notes are prepared
                in
                accordance with generally accepted accounting principles in the United
                States of America (“USGAAP”).





**Basis
                of consolidation**




The
                consolidated financial statements include the accounts of TTC and
                its
                subsidiaries. All significant intercompany accounts and transactions
                have
                been eliminated upon consolidation.





**Revenue
      recognition**




Net
      sales
      of equipment represent the invoiced value of goods, net of value-added tax
      (“VAT”) and returns. The Company generally recognizes product revenue when
      persuasive evidence of an arrangement exists, delivery has occurred, the fee
      is
      fixed or determinable, and collectibility is probable. Service
      revenue is recognized when the service is performed and accepted by the
      customer. The
      Company has a policy of including handling costs incurred for finished goods,
      which are not significant, in the sales and marketing expenses.





The
      Company provides installation services for certain sales of equipment under
      fixed-price contracts. In connection with these contracts, the Company follows
      the guidance contained in AICPA Statement of Position ("SOP") 81-1, "Accounting
      for Performance of Construction-Type and Certain Production-Type Contracts"





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


8
  **Telestone
          Technologies Corporation**
 **Notes
          to Condensed Consolidated Financial Statements**
  **3.**  **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Revenue
      recognition (Continued)**




Service
      costs include all direct material and labor costs and those indirect costs
      related to contract performance, such as indirect labor, supplies, tools and
      repairs. General and administrative costs are charged to expense as incurred.





**Research
      and development**




All
                costs of research and development activities are expensed as
                incurred.





**Income
      taxes**




Provision
                for income and other related taxes have been provided in accordance
                with
                the tax rates and laws in effect in the
                PRC.





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





**Inventories**




All
      inventories are stated at the lower of weighted average cost or market.
      Potential losses from obsolete and slow-moving inventories are provided for
      when
      identified.





**Property,
      plant and equipment**




Property,
                plant and equipment are stated at original cost less accumulated
                depreciation and amortization.





The
                cost of an asset comprises its purchase price and any directly
                attributable costs of bringing the asset to its present working condition
                and location for its intended use. Expenditures incurred after the
                assets
                have been put into operation, such as repairs and maintenance, overhaul
                and minor renewals and betterments, are normally charged to operating
                expenses in the period in which they are incurred. In situations
                where it
                can be clearly demonstrated that the expenditure has resulted in
                an
                increase in the future economic benefits expected to be obtained
                from the
                use of the assets, the expenditure is
                capitalized.


When
              assets are sold or retired, their costs and accumulated depreciation
              are
              eliminated from the consolidated financial statements and any gain
              or loss
              resulting from their disposal is recognized in the year of disposition
              as an
              element of other income, net.
 9
  **Telestone
          Technologies Corporation**
 **Notes
          to Condensed Consolidated Financial Statements**
 **3.**  **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES
            (CONTINUED)**





**Property,
      plant and equipment (Continued)**




Depreciation
                is provided to write off the cost of property, plant and equipment
                using
                the straight-line method at rates based on their estimated useful
                lives
                from the date on which they become fully operational and after taking
                into
                account their estimated residual
                values.




**Accounting
      for the impairment of long-lived assets**




The
      long-lived assets held and used by the Company are reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      assets may not be recoverable. It is reasonably possible that these assets
      could
      become impaired as a result of technology or other industry changes.
      Determination of recoverability of assets to be held and used is by comparing
      the carrying amount of an asset to future net undiscounted cash flows to be
      generated by the assets. If such assets are considered to be impaired, the
      impairment to be recognized is measured by the amount by which the carrying
      amount of the assets exceeds the fair value of the assets. Assets to be disposed
      of are reported at the lower of the carrying amount or fair value less costs
      to
      sell.





**Operating
      leases**




Leases
      where substantially all the rewards and risks of ownership of assets remain
      with
      the leasing company are accounted for as operating leases. Rental receivables
      and payables under operating leases are recognized as income and expenses
      respectively on the straight-line basis over the lease terms.





**Foreign
      currency translation**




The
      Company considers Renminbi as its functional currency as a substantial portion
      of the Company’s business activities are based in Renminbi. However, the Company
      has chosen the United States dollar as its reporting currency.




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




For
            translation of financial statements into the reporting currency, assets
            and
            liabilities are translated at the exchange rate at the balance sheet
            date,
            equity accounts are translated at historical exchange rates, and revenues,
            expenses, gains and losses are translated at the weighted average rates
            of
            exchange prevailing during the period.
 10
  **Telestone
          Technologies Corporation**
 **Notes
          to Condensed Consolidated Financial Statements**


**3.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Foreign
      currency translation (Continued)**




Translation
      adjustments, when material, resulting from this process are recorded in
      accumulated other comprehensive income within stockholders’ equity. Other
      comprehensive income for foreign currency translation was recorded for the
      period ended March 31, 2007 after the Renminbi ceased to be pegged to the United
      States Dollars during the period.





**Use
      of estimates**




The
      preparation of the consolidated financial statements in conformity with USGAAP
      requires the Company’s management to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and disclosure of contingent
      assets and liabilities at the date of financial statements and the reported
      amounts of revenues and expenses during the reported periods. Actual amounts
      could differ from those estimates. Estimates are used for, but not limited
      to,
      the accounting for certain items such as allowance for doubtful accounts,
      depreciation and amortization, inventory allowance, taxes and
      contingencies.





**Allowance
      for doubtful accounts**




Accounts
      receivable are stated at the amount billed to customers. The
      Company recognizes an allowance for doubtful accounts to ensure trade and other
      receivables are not overstated due to uncollectibility. The Company’s estimate
      is based on a variety of factors, including historical collection experience,
      existing economic conditions and a review of the current status of the
      receivable. Accounts receivable are presented net of an allowance for doubtful
      accounts of US$3,262,535 and US$2,923,000 as of March 31, 2007 and December
      31,
      2006 respectively.





**Related
      parties**




Parties
      are considered to be related if one party has the ability, directly or
      indirectly, to control the other party or exercise significant influence over
      the other party in making financial and operating decisions. Parties are also
      considered to be related if they are subject to common control or common
      significant influence.




**Recently
        issued accounting standards**


There
      are
      no new accounting pronouncements for which adoption is expected to have a
      material effect on the Company's financial statements.


11
  **Telestone
            Technologies Corporation**
 **Notes
            to Condensed Consolidated Financial Statements**
  **4.**  **EARNINGS
          PER SHARE**





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





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





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





(a)  Concentration
      of major customers and suppliers




**(Unaudited)**
              **Three
                months ended**
              **March
                31,****2007**
            
            2006***US$’000***
            
            *US$’000*Major
                customers with revenues of more than 10% of the Company’s
                salesSales
                to major customers
            
            
            **4,588**
            
            
            3,773Percentage
                of sales
            
            
            **95**
            **%**
            
            99.9
            %Number
            
            
            **4**
            
            
            4Major
                suppliers with purchases of more than 10% of the Company’s
                purchasesPurchases
                from major suppliers
            
            
            **487**
            
            
            1,279Percentage
                of purchases
            
            
            **64**
            **%**
            
            79
            %Number
            
            
            **2**
            
            
            2




Accounts
      receivable related to the Company’s major customers comprised 92% and 93% of all
      accounts receivables as of March 31, 2007 and December 31, 2006
      respectively.





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


12
  **Telestone
            Technologies Corporation**
 **Notes
            to Condensed Consolidated Financial Statements**




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





(b)
            Country
                risks





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





(c)
            Cash
                and time deposits





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





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




**(Unaudited)**
              **As
                of**
              **March
                31,**
              **2007**
            
            As
                of
              December
                31,
              2006***US$’000***
            
            *US$’000*Completed
                contracts
            
            
            **33,334**
            
            
            31,568Retentions
            
            
            **531**
            
            
            1,132**33,865**
            
            
            32,700Allowance
                for doubtful accounts
            
            
            **(3,262**
            **)**
            
            (2,923
            )**30,603**
            
            
            29,777





Of
      the
      retentions balance as of March 31, 2007 and December 31, 2006, approximately
      US$919,000 and US$350,000 respectively are expected to be collected after one
      year.


13
  **Telestone
            Technologies Corporation**
 **Notes
            to Condensed Consolidated Financial Statements**





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





Property,
      plant and equipment is summarized as follows:





Estimated
                useful life
            
            **(Unaudited)**
              **As
                of**
              **March
                31,**
              **2007**
            
            As
                of
              December
                31,
              2006(in
                years)
            
            ***US$’000***
            
            *US$’000*Leasehold
                improvement
            
            
            5
            
            
            **100**
            
            
            100Plant
                and machinery
            
            
            5
            
            
            **415**
            
            
            409Office
                equipment
            
            
            5
            
            
            **616**
            
            
            602Motor
                vehicles
            
            
            5
            
            
            **447**
            
            
            438**1,578**
            
            
            1,549Accumulated
                depreciation
            
            
            
            
            
            **(771**
            **)**
            
            (728
            )**807**
            
            
            821




**8.**  **SHORT-TERM
      BANK LOAN**





The
      bank
      loan is secured by a personal guarantee of Mr. Han Daqing, the Company’s Chief
      Executive Officer, repayable on September 16, 2007, and interest bearing at
      an
      interest rate that is adjusted monthly at 130% of the national standard rate
      established by the People’s Bank of China.




**9.**  **TAXATION**





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





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


14
  **Telestone
            Technologies Corporation**
 **Notes
            to Condensed Consolidated Financial Statements**





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




**9.**  **TAXATION
      (CONTINUED)**





All
      of
      the Company’s income is generated in the PRC by Beijing Telestone and BTWTC are
      subject to PRC income taxes at a rate of 24% and 33% respectively. Since Beijing
      Telestone has registered as a wholly-owned foreign investment enterprise
      (“WOFIE”), it is subject to tax laws applicable to WOFIE in the PRC and is fully
      exempt from the PRC enterprise income tax of 24% for two years, followed by
      a
      50% reduction for the next three years commencing with fiscal year
      2007.





Income
      tax expenses are comprised of the following:





**(Unaudited)**
              **Three
                months ended March 31,****2007**
            
            2006***US$’000***
            
            *US$’000*Current
                taxHong
                Kong
            
            
            **-**
            
            
            -PRC
            
            
            **151**
            
            
            128**151**
            
            
            128





In
      July
      2006, the Financial Accounting Standards Board (FASB) issued Interpretation
      No.
      48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109 (FIN 48), which clarifies the accounting and disclosure for
      uncertainty in tax positions, as defined, and prescribes the measurement process
      and a minimum recognition threshold for a tax position, taken or expected to
      be
      taken in a tax return, that is required to be met before being recognized in
      the
      financial statements. Under FIN 48, the Company must recognize the tax benefit
      from an uncertain position only if it is more-likely-than-not the tax position
      will be sustained on examination by the taxing authority, based on the technical
      merits of the position. The tax benefits recognized in the financial statements
      attributable to such position are measured based on the largest benefit that
      has
      a greater than 50% likelihood of being realized upon the ultimate resolution
      of
      the position.





As
      of
      January 1, 2007, the Company is subject to the provisions of FIN 48, and has
      analyzed its filing positions in all of the federal, state and foreign
      jurisdictions where it is required to file income tax returns. As of December
      31, 2006, and March 31, 2007, the Company has identified the following
      jurisdictions as “major” tax jurisdictions, as defined, in which it is required
      to file income tax returns: United States; Hong Kong and China. Based on the
      evaluations noted above, the Company has concluded that there are no significant
      uncertain tax positions requiring recognition in its consolidated financial
      statements. Based on a review of tax positions for all open years, no reserves
      for uncertain income tax positions have been recorded pursuant to FIN 48 during
      the three months ended March 31, 2007, and the Company does not anticipate
      that
      it is reasonably possible that any material increase or decrease in its
      unrecognized tax benefits will occur within twelve months.


15
  **Telestone
            Technologies Corporation**
 **Notes
            to Condensed Consolidated Financial Statements**





**9.**  **TAXATION
      (CONTINUED)**





Upon
      adoption of FIN 48 on January 1, 2007, and as of March 31, 2007, the Company
      had
      no unrecognized tax benefits or accruals for the potential payment or interest
      and penalties. The Company’s policy is to record interest and penalties in this
      connection as a component of the provision for income tax expense. For the
      three
      months ended March 31, 2007, no interest or penalties were
      recorded.





**10.**  **SEGMENT
      INFORMATION**





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





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





**11.**
            **COMMON
                STOCK**





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





The
      Company had 9,604,550 and 8,935,106, shares of common stock outstanding as
      of
      March 31, 2007 and December 31, 2006 respectively and 192,403 and 15,000
      warrants outstanding as of March 31, 2007 and December 31, 2006
      respectively.


16
  **Telestone
            Technologies Corporation**
 **Notes
            to Condensed Consolidated Financial Statements**





**12.**  **RELATED
      PARTY TRANSACTION**





**Summary
      of related party transactions**




**(Unaudited)**
              **As
                of**
              **March
                31,**
              **2007**
            
            As
                of
              December
                31,
              2006***US$’000***
            
            *US$’000***Due
                from related parties**Other
                employees (Note (a))
            
            
            **370**
            
            
            161Ex-stockholders
                of SMI (Note (b))
            
            
            **1,248**
            
            
            1,248**1,618**
            
            
            1,409**Due
                to related parties**Directors
                (Note (a))
            
            
            **714**
            
            
            714Ex-stockholders
                of Beijing Telestone (Note (b))
            
            
            **1,287**
            
            
            1,287**2,001**
            
            
            2,001**Guarantor
                of short term loan**A
                director
            
            
            **1,279**
            
            
            1,279





Notes :




(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)  The
      amounts due to ex-stockholders of Beijing Telestone of US$1,287,000 represent
      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.




The
      directors are of the view that the ex-stockholder
      of Beijing Telestone still has right to appeal and file another lawsuit against
      SMI and Beijing Telestone although no court summon has been received by the
      Company as of the date of this report.


17
  **Telestone
            Technologies Corporation**
 **Notes
            to Condensed Consolidated Financial Statements**




**13.**  **COMMITMENTS
      AND CONTINGENCIES**





The
      Company recognizes its revenue upon the completion of contract and has made
      full
      tax provision in accordance with relevant national and local laws and
      regulations of the PRC. A contract is considered completed upon completion
      of
      all essential contract work and the installation has been accepted by the
      customers. It is the common practice in the PRC that invoices are not issued
      to
      customers until payments are received. The Company follows the practice of
      reporting its revenue for PRC tax purposes when invoices are issued. All
      unbilled revenue will become taxable when invoices are issued. For PRC tax
      reporting purpose, Beijing Telestone recognized revenue on an “invoice basis”
instead of when goods are delivered and service are rendered. This is not in
      strict compliance with the relevant laws and regulations. Accordingly, despite
      the fact that Beijing Telestone has made full tax provision in the financial
      statements, Beijing Telestone may be subject to a penalty for the deferred
      reporting of tax obligations. The exact amount of penalty cannot be estimated
      with any reasonable degree of certainty. The board of directors considers it
      is
      not more-likely-than-not that the tax penalty will be imposed.





**14.**  **STOCK
      OPTION PLAN**





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





No
      options have been granted to any parties during the period ended March 31,
      2007
      and as of the date of these financial statements.




18




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




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





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





**BUSINESS
      DESCRIPTION**





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





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





Our
      wireless coverage solutions business is comprised of research, development
      and
      application of wireless communications technology. In addition to sales of
      our
      internally designed wireless communication equipment, including repeaters,
      antennas and radio frequency accessories, we also provide project design,
      project management, installation, maintenance and other after-sales services
      in
      accordance with our customers’ requirements. Since the establishment of
      Telestone in 1997, we have gradually developed business relationships with
      China
      Mobile Group (“China Mobile”), China Unicom Group (“China Unicom”), China
      Telecom Group (“China Telecom”) and China Netcom Group (“China Netcom”), which
      are currently our main customers. During 2006 and the three months ended March
      31, 2007, there was a significant increase in the revenue from China Telecom
      and
      China Netcom. During that time we also improved our business relationships
      with
      our wireless system equipment vendor within China. We have been exploring the
      wireless system equipment industry over the past year and have continued to
      expand its business into overseas markets, such as Vietnam, the United States,
      India and the Indonesia regions.





19




In
      2006,
      the Company completed the research and development of the 3G application
      equipments, such as WCDMA, CDMA2000 and TD-SCDMA, three expected licenses within
      the 3G network. Before 3G licensed Chinese domestic carriers will face the
      problems of multi-carriers and multi-mobile telecommunication system, our
      research and development center has developed a new third generation indoor
      coverage solution, which uses the fiber technology in the radio frequency signal
      distribution to transmit high speed data signals.





On
      January 30, 2007 the Company’s common shares began to be traded on NASDAQ Global
      Market. The Company believes that listing on the NASDAQ Global Market will
      further enhance the Company’s access to the broader capital
      markets.





**BUSINESS
      REVIEW**





The
      following is a chart of our operations for the three months ended March 31,
      2007:




**2007**
            
            
            **2006**
            
            
            **Comparisons****Item**
            
            
            **$’000**
            
            
            **%
                of Revenue**
            
            
            **$’000**
            
            
            **%
                of Revenue**
            
            
            **$’000**
            
            
            **%**Revenue
            
            
            4,795
            
            
            
            
            
            3,775
            
            
            
            
            
            1,020
            
            
            27.02
            %Cost
                of equipment and services
            
            
            2,401
            
            
            50.07
            %
            
            1,808
            
            
            47.89
            %
            
            593
            
            
            32.80
            %Gross
                profit
            
            
            2,394
            
            
            49.93
            %
            
            1,967
            
            
            52.11
            %
            
            427
            
            
            21.71
            %Sales
                and marketing expenses
            
            
            920
            
            
            19.19
            %
            
            654
            
            
            17.32
            %
            
            266
            
            
            40.67
            %General
                and administrative
            
            
            620
            
            
            12.93
            %
            
            304
            
            
            8.05
            %
            
            316
            
            
            103.95
            %Research
                and development
            
            
            172
            
            
            3.59
            %
            
            113
            
            
            2.99
            %
            
            59
            
            
            52.21
            %Depreciation
                and Amortization
            
            
            59
            
            
            1.23
            %
            
            56
            
            
            1.48
            %
            
            3
            
            
            5.36
            %Interest
                expenses
            
            
            24
            
            
            0.50
            %
            
            -
            
            
            0.00
            %
            
            24
            
            
            0.00
            %Other
                income
            
            
            -
            
            
            0.00
            %
            
            5
            
            
            0.13
            %
            
            -5
            
            
            -100.00
            %Income
                before tax
            
            
            599
            
            
            12.49
            %
            
            845
            
            
            22.38
            %
            
            -246
            
            
            -29.11
            %Income
                tax
            
            
            (151
            )
            
            3.15
            %
            
            (128
            )
            
            3.39
            %
            
            -23
            
            
            17.97
            %Net
                income
            
            
            448
            
            
            9.34
            %
            
            717
            
            
            18.99
            %
            
            -269
            
            
            -37.52
            %





20


Our
      revenues during the three month period ended March 31, 2007 were derived from
      system integration service to domestic telecom carriers, direct product sales
      to
      system integration providers and direct product sales to overseas markets.
      Our
      major customers include China Mobile, China Unicom, China Telecom and China
      Netcom. The majority of our revenues for the period were generated from mobile
      operators, while revenues from system integration providers were comparatively
      small.





Our
      revenues for this reporting period increased as compared to the same period
      in
      2006. Our net revenues for the three month period ended March 31, 2007 were
      $4,795,000, up from $3,775,000 for the corresponding period of the previous
      year. We believe that, with the expected launch of the 3G network, Chinese
      carriers’ total capital investment in year 2007 will continue to increase over
      that of 2006.





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





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





**CRITICAL
      ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates based on historical experience and
      on
      various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. We believe critical accounting policies as disclosed
      in our Annual Report on Form 10-KSB for the year ended December 31, 2006 reflect
      the more significant judgments and estimates used in preparation of our
      financial statements. We believe there have been no material changes to our
      critical accounting policies and estimates during the three months ended March
      31, 2007 compared to those discussed in our Annual Report on Form 10-KSB for
      the
      year ended December 31, 2006.





21


**RESULTS
      OF OPERATION**





**Revenues**





For
      the
      three months ended March 31, 2007, our revenues were $ 4,795,000, representing
      an increase of 27.02% as compared to the same period in 2006. The increase
      in
      our revenues was primarily due to carriers increasing their capital expenditures
      and taking advantage of market opportunities to expand our
      businesses.





We
      believe that our revenues in year 2007 will continue to improve and eventually
      eclipse fiscal 2006’s revenue totals with the continued development and
      application of our new products, solutions and the contribution of our newly
      developing markets, especially as the expected 3G network is
      launched.





Our
      revenues were primarily derived from products sales and service
      income.





**Breakdown
      by Nature**





Three
      months ended March 31, 2007


**2007**
              
              **2006**
              
              **Growth****$’000**
              
              **%
                  of Revenue**
              
              **$’000**
              
              **%
                  of Revenue**
              
              **$’000**
              
              %Product
                  Sales
              
              
              2,759
              
              
              57.54
              %
              
              3,255
              
              
              86.23
              %
              
              -496
              
              
              -15.24
              %Service
                  Sales
              
              
              1,844
              
              
              38.46
              %
              
              520
              
              
              13.77
              %
              
              1,324
              
              
              254.62
              %Others
              
              
              192
              
              
              4.00
              %
              
              
              
              
              
              
              
              192Total
              
              
              4,795
              
              
              
              
              
              3,775
              
              
              
              
              
              1,020
              
              
              27.02
              %





For
      the
      three months ended March 31, 2007, our revenues generated from product sales
      were $2,759,000, representing a decrease of 15.24% as compared to the
      corresponding period of 2006. For the three months ended March 31, 2007, our
      revenues generated from service income were $1,844,000, representing an increase
      of 254.62% as compared to the same period in 2006. The increase in service
      sales
      was resulting from revenue increase in network-optimize and project maintenances
      in the first quarter of the year 2007.





22


For
      the
      three months ended March 31, 2007, revenues generated from product sales
      accounted for 57.24% of total revenues, compared to 86.23% for the corresponding
      period of 2006. For the three months ended March 31, 2007, revenues generated
      from service sales accounted for 38.46% of total revenues, compared to 13.77%
      for the same period of 2006.





**Breakdown
      by Customers**





Three
      months ended March 31, 2007




**2007**
              
              **2006**
              
              **Growth****$’000**
              
              **%
                  of Revenue**
              
              **$’000**
              
              **%
                  of Revenue**
              
              **$’000**
              
              %China
                  Mobile
              
              
              1,841
              
              
              38.39
              %
              
              1,132
              
              
              29.99
              %
              
              709
              
              
              62.63
              %China
                  Unicom
              
              
              1,557
              
              
              32.47
              %
              
              1,668
              
              
              44.19
              %
              
              -111
              
              
              -6.65
              %China
                  Netcom
              
              
              519
              
              
              10.82
              %
              
              433
              
              
              11.47
              %
              
              86
              
              
              19.86
              %China
                  Telecom
              
              
              671
              
              
              13.99
              %
              
              540
              
              
              14.30
              %
              
              131
              
              
              24.26
              %Others
              
              
              207
              
              
              4.32
              %
              
              2
              
              
              0.05
              %
              
              205
              
              
              10,250.00
              %Total
              
              
              4,795
              
              
              
              
              
              3,775
              
              
              
              
              
              1,020
              
              
              27.02
              %




For
      the
      three months ended March 31, 2007, our revenues generated from China Mobile
      and
      China Telecom were $1,841,000 and $671,000 respectively, representing an
      increase of 62.63% and 24.26%, respectively, as compared to the same period
      in
      2006. The increase in our revenues from China Mobile and China Telecom was
      primarily due our increased business with Guizhou Mobile, Guang Xi Mobile,
      Xiamen Telecom and Xinjiang Telecom. For the three months ended March 31, 2007,
      our revenues generated from China Netcom were $519,000, representing an increase
      of 19.86% compared to $433,000 as the same period of last year.





For
      the
      three months ended March 31, 2007, our revenues generated from China Unicom
      were
      $1,557,000, representing a decrease of 6.65% as compared to the same period
      in
      2006.





For
      the
      three months ended March 31, 2006, the total of sales to other customers was
      $207,000, as compared to $2,000 generated same period in 2006, representing
      an
      increase of 10,250.00% for the corresponding period of the previous year. This
      increase in sales to other customers is a primarily due to the expansion of
      our
      overseas businesses and the positive results progress in Vietnam and the United
      States.





Revenue
      from carriers was the Company’s major source of revenue during the reporting
      period, the majority of such revenue was generated from China Mobile and China
      Unicom. The change in the composition of the Company’s revenues as compared to
      the corresponding period in 2006 was due to the mixed effect of: (i) the
      increase in revenues received from China Mobile and China Telecom, and (2)
      the
      decrease in capital expenditures by China Unicom.





23


**Breakdown
      by Solutions**





Three
      months ended March 31, 2007




**2007**
              
              **2006**
              
              **Growth****$’000**
              
              **%
                  of Revenue**
              
              **$’000**
              
              **%
                  of Revenue**
              
              **$’000**
              
              %Indoors
              
              
              2,963
              
              
              61.79
              %
              
              2,991
              
              
              79.23
              %
              
              -28
              
              
              -0.94
              %Outdoors
              
              
              537
              
              
              11.20
              %
              
              436
              
              
              11.55
              %
              
              101
              
              
              23.17
              %Others
              
              
              1,295
              
              
              27.01
              %
              
              348
              
              
              9.22
              %
              
              947
              
              
              272.13
              %Total
              
              
              4,795
              
              
              
              
              
              3,775
              
              
              
              
              
              1,020
              
              
              27.02
              %




For
      the
      three months ended March 31, 2007, revenues generated from indoor wireless
      coverage solutions were $2,963,000, representing a decrease of 0.94% as compared
      to the corresponding period of 2006. For the three months ended March 31, 2007,
      our revenues generated from outdoor wireless coverage solutions were $537,000,
      representing an increase of 23.17% as compared to the same period in 2006.
      Our
      indoor coverage revenues and outdoor coverage revenues accounted for 61.79%
      and
      11.20% of our total revenues for the three months ended March 31, 2007,
      respectively, compared to 79.23% and 11.55% for the same period in 2006.





The
      significant increase in outdoor coverage revenues is due to our increased sales
      and business transactions with Shanghai Mobile and Xinjiang Unicom, and the
      increase in “other” sales was due to the Company’s expansion of direct products
      sales.





**Breakdown
      by regions**





Three
      months ended March 31, 2007




**2007**
              
              **2006**
              
              **Growth****$’000**
              
              **%
                  of Revenue**
              
              **$’000**
              
              **%
                  of Revenue**
              
              **$’000**
              
              %North
              
              
              2,870
              
              
              59.85
              %
              
              2,233
              
              
              59.15
              %
              
              637
              
              
              28.53
              %South
              
              
              843
              
              
              17.58
              %
              
              671
              
              
              17.77
              %
              
              172
              
              
              25.63
              %East
              
              
              876
              
              
              18.27
              %
              
              871
              
              
              23.07
              %
              
              5
              
              
              0.57
              %Overseas
              
              
              206
              
              
              4.30
              %
              
              -
              
              
              
              
              
              206Total
              
              
              4,795
              
              
              
              
              
              3,775
              
              
              
              
              
              1,020
              
              
              27.02
              %




24




For
      the
      three months ended March 31, 2007, our revenues generated from the North
      (covering areas like Beijing, Tianjin, Xinjiang, etc.) were $2,870,000,
      representing an increase of 28.53% compared to the corresponding period of
      2006.
      For the three months ended March 31, 2007, our revenues generated from the
      South
      (covering areas like Guangdong, Fujian, Hubei, etc.) were $843,000, representing
      an increase of 25.63% compared to the corresponding period of 2006. For the
      three months ended March 31, 2007, our revenues generated from the East
      (covering areas like Shanghai, etc.) were $876,000, representing an increase
      of
      0.57% compared to the corresponding period of 2006. For the three months ended
      March 31, 2007, our revenues generated from Overseas were $206,000, and there
      were no revenues generated from Overseas in the corresponding period of
      2006.





For
      the
      three months ended March 31, 2007, our revenues generated from the North
      accounted for 59.85% of total revenues, compared to 59.15% for the corresponding
      period of 2006. For the three months ended March 31, 2007, our revenues
      generated from the South accounted for 17.58% of total revenues, compared to
      17.77% for the corresponding period of 2006. For the three months ended March
      31, 2007, our revenues generated from the East accounted for 18.27% of total
      revenues, compared with 23.07% for the corresponding period of 2006. For the
      three months ended March 31, 2007, our revenues generated from Overseas
      accounted for 4.30% of total revenues, and there were no revenues generated
      from
      Overseas in the corresponding period of 2006.





For
      the
      reporting period, revenue increases in the North and South areas were mainly
      due
      sales to businesses transactions with Beijing Unicom and Mobile, Tianjin Unicom,
      Xiamen Telcom and Shanghai Mobile.





**Cost
      Analysis**





Three
      months ended March 31, 2007




**2007**
              
              **2006**
              
              **Growth****$’000**
              
              **%
                  of Costs**
              
              **$’000**
              
              **%
                  of Costs**
              
              **$’000**
              
              %Products
                  Sales Cost
              
              
              1,485
              
              
              61.85
              %
              
              1,538
              
              
              85.07
              %
              
              -53
              
              
              -3.45
              %Service
                  Cost
              
              
              804
              
              
              33.49
              %
              
              270
              
              
              14.93
              %
              
              534
              
              
              197.78
              %Export
                  Sales Cost
              
              
              112
              
              
              4.66
              %
              
              
              
              
              
              
              
              112Total
              
              
              2,401
              
              
              
              
              
              1,808
              
              
              
              
              
              593
              
              
              32.80
              %




25


For
      the
      three months ended March 31, 2007, our total costs were $2,401,000, representing
      an increase of 32.80% as compared to the corresponding period of 2006. The
      increase in our total costs is attributable to our service sales revenues which
      significantly increased in the first quarter of 2007.





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





For
      the
      three months ended March 31, 2007, our product sales costs were $1,485,000,
      representing a decrease of 3.45% as compared to the same period in 2006.
      However, during the reporting period our product sales costs accounted for
      only
      61.85% of our total cost, as compared to 85.07% for the same period in 2006.
      We
      intend to take measures to slow the pressure of rising cost associated with
      product sales, including reducing our purchase costs through large scale
      procurement, decreasing the use of raw materials through optimization of our
      system design, regularly improving our system integration technologies, and
      optimizing our supply chain to in turn receive better terms from
      suppliers.





For
      the
      three months ended March 31, 2007, our service costs were $804,000, representing
      an increase of 197.78% as compared to the same period in 2006. The increase
      in
      service costs was mainly due to the growth of network-optimization and project
      maintenance incurred in the first quarter of the year 2007.





Our
      product sales costs and our service costs accounted for 61.85% and 33.49% of
      the
      total costs, respectively, for the first quarter in 2007, compared to 85.07%
      and
      14.93%, respectively, for the corresponding period in 2006. Our export sales
      costs were $112,000 and accounted for 4.66% of the total costs for the first
      quarter in 2007.





**Gross
      Profit and Gross Margin**





For
      the
      three months ended March 31, 2007, our gross profit was $2,394,000, representing
      an increase of 21.71% as compared to the same period in 2006. Our gross margin
      for the reporting period was 49.93% as compared to 52.11% for the same period
      in
      2006.





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





26


**Operating
      Expenses**




**2007**
              
              **2006**
              
              **Comparisons****Item**
              
              **$’000**
              
              **%
                  of revenue**
              
              **$’000**
              
              **%
                  of revenue**
              
              **$’000**
              
              **%**Sales
                  and Marketing Expenses
              
              
              920
              
              
              19.19
              %
              
              654
              
              
              17.32
              %
              
              266
              
              
              40.67
              %General
                  and Administrative Expenses
              
              
              620
              
              
              12.93
              %
              
              304
              
              
              8.05
              %
              
              316
              
              
              103.95
              %Research
                  and Development Expenses
              
              
              172
              
              
              3.59
              %
              
              113
              
              
              2.99
              %
              
              59
              
              
              52.21
              %Total
              
              
              1,712
              
              
              
              
              
              1,071
              
              
              
              
              
              641
              
              
              59.85
              %





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





**Sales
      and Marketing Expenses**





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





For
      the
      three months ended March 31, 2007, sales and marketing expenses were $920,000,
      accounting for 19.19% of the total revenues, as compared to $654,000, or 17.32%
      of total revenues for the corresponding period in 2006. Sales and marketing
      expenses had a period-to-period increase of 40.67%.





Sales
      and
      marketing expenses increased because of our efforts to expand our business
      range
      and penetrate into new markets, as well as investments related to business
      expansion in new markets. We expect the increase in sales and marketing expenses
      during the reporting period will benefit our income growth in the coming
      quarters.





**General
      and Administrative Expenses**





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





27


For
      the
      three months ended March 31, 2007, general and administrative expenses were
      $620,000, accounting for 12.93% of the total revenues, as compared to $304,000,
      or 8.05% of the total revenues for the corresponding period in 2006. General
      and
      administrative expenses had a period-to-period increase of 103.95%.





The
      significant increase in general and administrative expenses was attributable
      to
      expenses related to the enhancement in management and control systems, and
      the
      increased expenses of the compliance requirements of Section 404 of the
      Sarbanes-Oxley Act of 2002.





**Research
      & Development Expenses**





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





For
      the
      three months ended March 31, 2007, research and development expenses were
      $172,000, accounting for 3.59% of the total revenues, as compared to $113,000,
      or 2.99% of the total revenues for the corresponding period in 2006. Research
      and development expenses had a period-to-period increase of 52.21%.





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





**Net
      Income**





For
      the
      three months ended March 31, 2007, our net income was $448,000, representing
      a
      decrease of 37.52% as compared to the same period in 2006. The period-to-period
      decrease in net income was primarily due to the increased expenses in sales
      and
      marketing expenses incurred in the reporting period, which will benefit our
      income growth in the coming quarters.





Our
      income before tax was $599,000 for the three months ended March 31, 2007, as
      compared to $845,000 for the corresponding period last year, which represented
      decrease of 29.11%. The decrease in the income before tax was primarily due
      to
      the increased expenses that were incurred in order to benefit our income growth
      in the coming quarters.





**LIQUIDITY
      AND SOURCE OF CAPITAL**





We
      generally finance our operations from cash flow generated internally. As of
      March 31, 2007, we had current assets of $44,765,000. Current assets are
      comprised of inventories of $4,165,000, accounts receivable of $30,603,000,
      prepayments, deposits and other receivables of $2,279,000, and cash and cash
      equivalents of $7,718,000. Current liabilities comprised accounts payable of
      $4,627,000, tax payables of $5,882,000, a short-term bank loan of $1,279,000,
      and other payables and accruals of $3,561,000.





28


Our
      trading terms with our customers are mainly on credit. As of March 31, 2007,
      our
      accounts receivable were $30,603,000 compared to $29,277,000 as of December
      31,
      2006. The credit period is generally less than one year. The gradually increase
      in the accounts receivable is mainly due to: 1) steady growth in revenues
      resulting from growth in business scale, and 2) change in the settlement pattern
      of the mobile operators 3) one account receivable with China Unicom, whose
      payment has been delayed.





For
      the
      three months ended March 31, 2007, although the company experienced long
      accounts receivable turnover period, the collection of accounts receivable
      had a
      better performance compared to the same period of last year, and we believe
      the
      outstanding accounts receivable could be recovered because our major customers,
      China Unicom and China Mobile, are reputable and sizeable mobile operators
      in
      the PRC. Additionally, the Company has not experienced significant bad debts
      in
      the past. Notwithstanding this, we have paid special attention to lowering
      the
      turnover period of our accounts receivable balances and have taken the following
      measures:





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





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





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





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





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





29


As
      of
      March 31, 2007, our inventories were $4,165,000, as compared to $5,048,000
      as of
      December 31, 2006, which represented a decrease of 17%. The decrease in the
      inventories was mainly due to meeting the operation requirement, controlling
      the
      balance of inventories, and enhancing the management and acceleration of
      inventory turnover.





As
      of
      March 31, 2007, our cash and bank balances were mainly denominated in Renminbi
      (“RMB”) and United States dollars (“US$”) while our bank borrowings were mainly
      denominated in RMB. Our revenue and expenses, assets and liabilities are mainly
      denominated in RMB and US$. Recently, the exchange rate fluctuations in the
      PRC
      have led to an appreciation of currency. This may result in certain exchange
      risks.





We
      have
      experienced negative cash flows from operating activities for the periods ended
      March 31, 2007 and 2006, which is primarily the result of extended turnover
      periods related to our accounts receivable, as mentioned above. A continuation
      of this situation could negatively impact our liquidity and in turn our overall
      results of operations. In order to address this issue, apart from the
      implementation of the above-mentioned measures to reduce the turnover period,
      we
      are also exploring the possibility of obtaining third parties financing and
      considering raising additional capital through debt or equity
      financings.





Our
      gearing ratio, calculated as total debts over total assets, was 34% as of March
      31, 2007 and 41% as of December 31, 2006, respectively.





**CONTINGENT
      LIABILITIES**





We
      recognize our revenue upon the completion of contracts and have made full tax
      provision in accordance with relevant national and local laws and regulations
      of
      the PRC. A contract is considered completed upon completion of all essential
      contract work and when installation has been accepted by the customer. It is
      the
      common practice in the PRC that invoices are not issued to customers until
      payments are received. We follow the practice of reporting our revenue for
      PRC
      tax purposes when invoices are issued. All unbilled revenue will become taxable
      when invoices are issued. For PRC tax reporting purposes, we recognize revenue
      on an “invoice basis” instead of when goods are delivered and services are
      rendered. This is not in strict compliance with the relevant laws and
      regulations. Accordingly, despite the fact that we have made full tax provision
      in the financial statements, we may be subject to a penalty for the deferred
      reporting of tax obligations. The exact amount of any penalty cannot be
      estimated with any reasonable degree of certainty. The Board of Directors
      considers it is unlikely that the tax penalty will be imposed.





30


**EMPLOYMENT
      AND REMUNERATIONS**





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





**Item
      3A(T). Controls and Procedures**





Prior
      to
      the conclusion of the period covered by this report, we carried out an
      evaluation, under the supervision and with the participation of our management,
      including our Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures pursuant to Exchange Act Rule 13(a)-14(c). Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures are effective in timely alerting
      them to material information relating to us (including our consolidated
      subsidiaries) required to be included in our periodic SEC filings.




There
      have been no significant changes in our internal controls or in other factors
      that could significantly affect internal controls subsequent to the date we
      carried out this evaluation





While
      we
      believe that our existing disclosure controls and procedures have been effective
      to accomplish their objectives, we intend to continue to examine, refine and
      formulize our disclosure controls and procedures and to monitor ongoing
      developments in this area.





During
      the quarter ended March 31, 2007, there were no changes in our internal controls
      over financial reporting that have materially affected, or are reasonably likely
      to materially affect, our internal control over financial
      reporting.





**PART
      I** **I**




**OTHER
      INFORMATION**




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


On
        December 24, 2004, a former stockholder of Beijing Telestone initiated
        arbitration proceedings in the PRC against SMI alleging the failure of SMI
        to
        settle the payment of the consideration owed to said stockholder as a result
        of
        the transaction pursuant to which SMI acquired all of the outstanding share
        capital of Beijing Telestone. The value of the above claim is approximately
        $1.2
        million. The claim was rejected based on lack of jurisdiction.
 
 As
        a
        result of the rejected claim, the former shareholder initiated a new legal
        court
        proceeding in the PRC against SMI and Beijing Telestone based on the same
        claim.
        The value of this claim is nearly $1 million. A court hearing commenced on
        May
        10, 2006. The court of first instance, the Second Intermediate People’s Court of
        Beijing, ruled in favor of SMI and Beijing Telestone on December 19, 2006.
        The
        Company believes that the former stockholder of Beijing Telestone still has
        right to appeal and/or file another lawsuit against SMI and Beijing Telestone.
        No court summons has been received by the Company as of May 14, 2007. See
        also
        footnote (b) of Note 12 to the Consolidated Financial Statements contained
        in
        this Quarterly Report.


31




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




Each
      issuance set forth below was made in reliance upon the exemptions from
      registration requirements of the Securities Act of 1933, as amended, contained
      in Section 4(2) on the basis that such transactions did not involve a public
      offering. When appropriate, we determined that the purchasers of securities
      described below were sophisticated investors who had the financial ability
      to
      assume the risk of their investment in our securities and acquired such
      securities for their own account and not with a view to any distribution thereof
      to the public. Where required by applicable law, the certificates evidencing
      the
      securities bear legends stating that the securities are not to be offered,
      sold
      or transferred other than pursuant to an effective registration statement under
      the Securities Act or an exemption from such registration
      requirements.





On
      February 23, 2007, we completed a Securities Purchase Agreement with certain
      institutional and other accredited investors, as defined in Rule 501 of
      Regulation D promulgated under the Securities Act of 1933, as amended, pursuant
      to which we sold in a private placement an aggregate of 669,444 shares of our
      common stock and warrants to purchase an aggregate of 133,889 shares of our
      common stock (the “Investor Warrants”). The price paid for the common stock was
      $9.00 per share. The Investor Warrants are exercisable for a period of four
      years, beginning six months after the date of issuance, at an exercise price
      of
      $11.60 per share. The exercise price for the Investor Warrants is subject to
      an
      adjustment upon certain issuances by the Company of its common stock below
      the
      price per share paid by the investors; provided, however, that the exercise
      price may not be adjusted below $10.10 per share. In addition, we issued our
      placement agent in connection with private placement a warrant (the “Agent
      Warrant”) to purchase 43,514 shares of our common stock. The Agent Warrant is on
      the same terms as the Investor Warrants.





The
      offer
      and sale of the securities was made to a limited number of institutional and
      other accredited investors in reliance upon exemptions from the registration
      requirements pursuant to Section 4(2) under the Securities Act of 1933, as
      amended, and Regulation D promulgated thereunder. There was no general
      solicitation or advertising with respect to the private placement and each
      of
      the purchasers provided written representations of an intent to acquire the
      securities for investment only and not with a view to or for sale in connection
      with any distribution of the securities.





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




None.




32




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




None.




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




None.




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




The
      following documents are filed as part of this report:




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




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




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




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




33


**SI** G **NATURES**





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




**TELESTONE
              TECHNOLOGIES CORPORATION**Date: May
              15,
              2007
            By:
            /s/ Han
              DaqingHan
              Daqing, Chief Executive Officer(Principal
              Executive Officer)




Date: May
              15,
              2007
            By:
            /s/ Liu
              DongpingLiu
              Dongping, Chief Financial Officer(Principal
              Financial Officer)




34