**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 September 30, 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 x No  ̈




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




As
      of
      September 30, 2007, 9,604,550 shares of the Issuer’s $.001 par value common
      stock were outstanding.




Transitional
      Small Business Disclosure Format : Yes  ̈ No x









**TELESTONE
      TECHNOLOGIES CORPORATION**





**INDEX**





**PART
      I. FINANCIAL INFORMATION**





Page**Item
                1. Condensed Financial Statements.**Condensed
                Consolidated Statements of Operations, for the three and six months
                ended
                September 30, 2007 and 2006
            
            2Condensed
                Consolidated Balance Sheets, as of September 30, 2007 (unaudited)
                and
                December 31, 2006 (audited)
            
            3Condensed
                Consolidated Statement of Stockholders’ Equity for the period from January
                1, 2007 to September 30, 2007 (unaudited)
            
            4Condensed
                Consolidated Statements of Cash Flows, for the six months ended September
                30, 2007 and 2006
            
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            
            6-18**Item
                2. Management’s Discussion and Analysis or Plan of
                Operation.**
            
            19**Item
                3A(T). Controls and Procedures.**
            
            34**PART
                II. OTHER INFORMATION****Item
                1. Legal Proceedings.**
            
            36**Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds.**
            
            36**Item
                3. Defaults Upon Senior Securities.**
            
            36**Item
                4. Submission of Matters to a Vote of Security
                Holders.**
            
            36**Item
                5. Other Information.**
            
            36**Item
                6. Exhibits.**
            
            37







**Telestone
      Technologies Corporation**





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





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




***(Unaudited)***
            
            **(Unaudited)*****Three
                months ended***
              ***September
                30,***
            
            **Nine
                months ended**
              **September
                30,****2007**
            
            2006
            
            **2007**
            
            2006***Note***
            
            ***US$’000***
            
            *US$’000*
            
            ***US$’000***
            
            *US$’000***Operating
                revenues**Net
                sales of equipment
            
            
            
            
            
            **7,344**
            
            
            4,026
            
            
            **15,055**
            
            
            10,851Service
                income
            
            
            
            
            
            **1,956**
            
            
            1,208
            
            
            **5,898**
            
            
            3,377**9,300**
            
            
            5,234
            
            
            **20,953**
            
            
            14,228**Operating
                expenses**Equipment
                and services
            
            
            
            
            
            **4,655**
            
            
            3,115
            
            
            **10,170**
            
            
            7,560Sales
                and marketing
            
            
            
            
            
            **1,462**
            
            
            780
            
            
            **3,447**
            
            
            2,010General
                and administrative
            
            
            
            
            
            **713**
            
            
            256
            
            
            **1,893**
            
            
            764Research
                and development
            
            
            
            
            
            **165**
            
            
            111
            
            
            **662**
            
            
            391Depreciation
                and amortization
            
            
            
            
            
            **61**
            
            
            60
            
            
            **217**
            
            
            158Total
                operating expenses
            
            
            
            
            
            **7,056**
            
            
            4,322
            
            
            **16,389**
            
            
            10,883**Operating
                income**
            
            
            
            
            
            **2,244**
            
            
            912
            
            
            **4,564**
            
            
            3,345Interest
                expense
            
            
            
            
            
            **(12**
            **)**
            
            (30
            )
            
            **(64**
            **)**
            
            (30
            )Other
                income, net
            
            
            
            
            
            **5**
            
            
            21
            
            
            **17**
            
            
            167**Income
                before income taxes**
            
            
            
            
            
            **2,237**
            
            
            903
            
            
            **4,517**
            
            
            3,482Income
                taxes
            
            
            *11*
            
            
            **(369**
            **)**
            
            (164
            )
            
            **(800**
            **)**
            
            (506
            )**Net
                income**
            
            
            
            
            
            **1,868**
            
            
            739
            
            
            **3,717**
            
            
            2,976**Other
                comprehensive income**Foreign
                currency translation adjustment
            
            
            
            
            
            **34**
            
            
            -
            
            
            **63**
            
            
            -**Comprehensive
                income**
            
            
            
            
            
            **1,902**
            
            
            739
            
            
            **3,780**
            
            
            2,976**Earnings
                per share:**
            
            
            *4***Weighted
                average number of shares outstanding**Basic
            
            
            
            
            
            **9,604,550**
            
            
            8,608,128
            
            
            **9,479,489**
            
            
            8,597,981Dilutive
                effect of warrants
            
            
            
            
            
            **108,506**
            
            
            85,495
            
            
            **102,735**
            
            
            106,993Diluted
            
            
            
            
            
            **9,713,056**
            
            
            8,693,623
            
            
            **9,582,224**
            
            
            8,704,974**Net
                income per share of common stock****Basic:**Net
                income (US$)
            
            
            
            
            
            **0.19**
            
            
            0.09
            
            
            **0.39**
            
            
            0.35**Diluted:**Net
                income (US$)
            
            
            
            
            
            **0.19**
            
            
            0.09
            
            
            **0.39**
            
            
            0.34




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




2




**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Balance Sheets**


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





**(Unaudited)**
              **As of**
              **September 30,**
              **2007**
            
            As of
              December 31,
              2006*Note*
            
            ***US$’000***
            
            *US$’000***ASSETS****Current
                assets**Cash
                and cash equivalents
            
            
            
            
            
            **4,416**
            
            
            3,380Accounts
                receivable
            
            
            *6*
            
            
            **41,095**
            
            
            29,777Due
                from related parties
            
            
            *14*
            
            
            **2,268**
            
            
            1,409Inventories,
                net
            
            
            *10*
            
            
            **6,134**
            
            
            5,048Prepayment
            
            
            
            
            
            **1,642**
            
            
            315Other
                current assets
            
            
            
            
            
            **758**
            
            
            373Total
                current assets
            
            
            
            
            
            **56,313**
            
            
            40,302Goodwill
            
            
            *8*
            
            
            **3,119**
            
            
            -Property,
                plant and equipment, net
            
            
            *7*
            
            
            **1,145**
            
            
            821**Total
                assets**
            
            
            
            
            
            **60,577**
            
            
            41,123**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities**Short-term
                bank loan
            
            
            
            
            
            **2,193**
            
            
            1,279Accounts
                payable – Trade
            
            
            
            
            
            **6,969**
            
            
            6,314Customer
                depositsfor sales of equipment
            
            
            
            
            
            **663**
            
            
            20Due
                to related parties
            
            
            *14*
            
            
            **2,055**
            
            
            2,001Taxes
                payable
            
            
            
            
            
            **6,266**
            
            
            2,571Accrued
                expenses and other accrued liabilities
            
            
            
            
            
            **3,803**
            
            
            4,668Total
                current liabilities
            
            
            
            
            
            **21,949**
            
            
            16,853**Long-term
                loan from related parties**
            
            
            *15*
            
            
            **62**
            
            
            -**22,011**
            
            
            16,853**Commitments
                and contingencies**
            
            
            *16***Stockholders’
                equity**Preferred
                stock, US$0.001 par value, 10,000,000 shares authorized, no shares
                issued
            
            
            
            
            
            **-**
            
            
            -Common
                stock and paid-in capital, US$0.001 par value:
              Authorized –
                100,000,000 shares as of September 30, 2007
              and
                December 31, 2006
            
            
            *13*
            
            
            **-**
            
            
            -Issued
                and outstanding – 9,604,550 shares as of September 30, 2007 and
                8,935,106 shares as of December 31, 2006
            
            
            
            
            
            **10**
            
            
            9Reserved
                and to be issued – 800,000 sharesas
                of September 30, 2007
            
            
            *8*
            
            
            **1**
            
            
            -Dedicated
                reserves
            
            
            
            
            
            **2,619**
            
            
            2,619Additional
                paid-in capital
            
            
            
            
            
            **18,989**
            
            
            8,475Other
                comprehensive income
            
            
            
            
            
            **1,078**
            
            
            1,015Retained
                earnings
            
            
            
            
            
            **15,869**
            
            
            12,152Total
                stockholders’ equity
            
            
            
            
            
            **38,566**
            
            
            24,270**Total
                liabilities and stockholders’ equity**
            
            
            
            
            
            **60,577**
            
            
            41,123




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




3


**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Statement of Changes in Stockholders’ Equity**


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





**Common stock****Issued**
            
            **Reserved and to be issued****Number**
              **of shares**
            
            **Amount**
            
            **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*
            
            *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
            
            
            -
            
            
            -
            
            
            5,453
            
            
            -
            
            
            -
            
            
            -
            
            
            5,454Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,717
            
            
            3,717Proceeds
                on issuance of common stock where shares have not been
                issued
            
            
            -
            
            
            -
            
            
            800,000
            
            
            1
            
            
            5,061
            
            
            -
            
            
            -
            
            
            -
            
            
            5,062Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            63
            
            
            -
            
            
            63**Balance
                at****September 30, 2007
                (unaudited)**
            
            
            **9,604,550**
            
            
            **10**
            
            
            **800,000**
            
            
            **1**
            
            
            **18,989**
            
            
            **2,619**
            
            
            **1,078**
            
            
            **15,869**
            
            
            **38,566**





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




4




**Telestone
      Technologies Corporation**




**Condensed
      Consolidated Statement of Cash Flow**





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





***Note***
            
            **(Unaudited)****Nine
                months ended**
              **September
                30,****2007**
            
            2006***US$’000***
            
            *US$’000***Cash
                flows from operating activities****Net
                income**
            
            
            
            
            
            **3,717**
            
            
            2,976Adjustments
                to reconcile net income to net cash used in operating
                activities:Loss
                (gain) on disposal of property, plant and equipment
            
            
            
            
            
            **5**
            
            
            (139
            )Depreciation
                and amortization
            
            
            
            
            
            **217**
            
            
            158Provision
                for doubtful accounts
            
            
            
            
            
            **3,629**
            
            
            -Exchange
                difference
            
            
            
            
            
            **63**Changes
                in assets and liabilities:Accounts
                receivable
            
            
            
            
            
            **(10,431**
            **)**
            
            (2,362
            )Inventories,
                net
            
            
            
            
            
            **(81**
            **)**
            
            (2,148
            )Due
                from related parties
            
            
            
            
            
            **(419**
            **)**
            
            (276
            )Prepayment
            
            
            
            
            
            **(439**
            **)**
            
            127Other
                current assets
            
            
            
            
            
            **21**
            
            
            (50
            )Accounts
                payable
            
            
            
            
            
            **(1,571**
            **)**
            
            1,476Due
                to related parties
            
            
            
            
            
            **(12**
            **)**
            
            (142
            )Customer
                deposits for sales of equipment
            
            
            
            
            
            **207**
            
            
            (1
            )Taxes
                payable
            
            
            
            
            
            **1,845**
            
            
            (1,197
            )Accrued
                expenses and other accrued liabilities
            
            
            
            
            
            **(1,481**
            **)**
            
            (682
            )**Net
                cash used in operating activities**
            
            
            
            
            
            **(4,640**
            **)**
            
            (2,260
            )**Cash
                flows from investing activities**Purchase
                of property, plant and equipment
            
            
            
            
            
            **(246**
            **)**
            
            (79
            )Proceeds
                from disposal of property, plant and equipment
            
            
            
            
            
            **31**
            
            
            233Acquisition
                of a subsidiary, net of cash disbursed
            
            
            *9*
            
            
            **(186**
            **)**
            
            -**Net
                cash (used in) provided by investing activities**
            
            
            
            
            
            **(401**
            **)**
            
            154**Cash
                flows from financing activities**Proceeds
                from short-term bank loan
            
            
            
            
            
            **631**
            
            
            1,239Proceeds
                from issuance of shares
            
            
            
            
            
            **5,454**
            
            
            1,043Repayment
                of long term loan
            
            
            
            
            
            **(8**
            **)**
            
            -**Net
                cash provided by financing**
            
            
            
            
            
            **6,361**
            
            
            2,282**Net
                increase in cash and cash equivalents**
            
            
            
            
            
            **1,036**
            
            
            176**Cash
                and cash equivalents, beginning of the period**
            
            
            
            
            
            **3,380**
            
            
            3,605**Cash
                and cash equivalents, end of the period**
            
            
            
            
            
            **4,416**
            
            
            3,781**Supplemental
                disclosure of cash flow information**Interest
                income
            
            
            
            
            
            **21**
            
            
            -Interest
                expenses
            
            
            
            
            
            **64**
            
            
            -**Non-cash
                investing activity**Acquisition
                of a subsidiary
            
            
            *8*
            
            
            **5,062**
            
            
            -




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




5


**Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 **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, the Company reincorporated
        in the
        State of Delaware under the name Telestone Technologies
        Corporation.
 
 Success
        Million International Limited (“SMI”), a company established in the Hong Kong
        Special Administrative Region of the People’s Republic of China (the “PRC”) on
        August 23, 2004, is a wholly owned subsidiary of TTC and had no business
        operations since incorporation. Beijing Telestone Technology Company Limited
        (“Beijing Telestone”), a wholly-owned subsidiary of SMI, established in Beijing,
        PRC with an operating period for an initial term of 20 years until April
        12,
        2024, is engaged in the business of design, development, installation and
        trading of wireless telecommunication coverage system equipment.
 
 Beijing
        Telestone Wireless Telecommunication Company Limited (“BTWTC”), being considered
        as a variable interest entity (“VIE”) owned by TTC’s directors and stockholders,
        was established in Beijing, the PRC with a tenure of 20 years from June 17,
        2005
        to June 16, 2025. As TTC adopted FIN 46 for all periods presented, the financial
        statements of BTWTC are consolidated in the financial statements of Beijing
        Telestone.
 
 On
        July
        5, 2007, BTWTC, Shandong Guolian Telecommunication Technology Limited
        (“Guolian”) (note) and
        owners of Guolian entered into a Share Transfer Agreement (the “Agreement”).
        Under the Agreement, 100% equity ownership interests in Guolian and its wholly
        owned subsidiary, Pan-pacific Telecommunication Company Limited
        (“Pan-pacific”) (note) ,
        were
        transferred by the owners of Guolian to BTWTC. Guolian and Pan-pacific were
        established in Jinan, Shandong Province of the PRC on February 9, 1999 and
        October 22, 1999 respectively. The principal business activities of Guolian
        and
        Pan-pacific are design, development, production and installation and trading
        of
        wireless telecommunication coverage system equipment.
 
 In
        this
        report, TTC, SMI, Beijing Telestone, BTWTC, Guolian and Pan-pacific are
        collectively referred to as the “Company”.
 
 *Note
                  :*
              *These
                  are direct translation of name in Chinese for identification purpose
                  only
                  and are not the official name in
                  English.*
 
 **2.**  **PREPARATION
        OF INTERIM FINANCIAL STATEMENTS**
 
 The
        accompanying unaudited condensed consolidated financial statements as of
        September 30, 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 September
        30,
        2007 and for all periods presented.
  6
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 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 nine-month periods ended September
        30,
        2007 and 2006 are not necessarily indicative of the operating results to
        be
        expected for the full year.
 
 The
        condensed consolidated financial statements and accompanying notes are presented
        in United States dollars and prepared in conformity with accounting principles
        generally accepted in the USA ("USGAAP"), which requires management to make
        certain estimates and assumptions that affect the reported amounts of assets
        and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        financial statements and the reported amounts of revenues and expenses during
        the reporting period. Actual results could differ from those
        estimates.
 
 **3.**  **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Accounting
        principles**
 The
        condensed consolidated financial statements and accompanying notes are prepared
        in accordance with USGAAP.
 
 **Basis
        of consolidation**
 The
        consolidated financial statements include the accounts of TTC, its subsidiaries
        and a VIE. 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 when the installation has been  accepted  by  the  customer.
 
 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.
  7
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 **Research
        and development**
 All
        costs
        of research and development activities are expensed as incurred.
 
 **Income
        taxes**
 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.
 
 **Goodwill**
 Goodwill
        on acquisition of businesses, being the excess of the cost of the acquisition
        over the Company’s share of the fair value of the identifiable assets,
        liabilities and contingent liabilities, is recognized as a separate asset.
        Goodwill is carried at cost less accumulated impairment losses, which is
        tested
        for impairment annually or more frequently if events or changes in circumstances
        indicate that the carrying value may be impaired. Goodwill is allocated to
        cash-generating units for the purpose of impairment tests and determination
        of
        gain or loss on disposal. An impairment loss on goodwill is not
        reversed.
 
 **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.
 
 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 made 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.
  8
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 **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 term.
 
 **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.
 
 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 September 30, 2007 after the Renminbi ceased to be pegged to
        the
        United States Dollars during last year.
 
 **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$3,629
        and US$2,923 as of September 30, 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.
  9
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 **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.
 
 **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)**
                **Nine months ended**
                **September
                  30,****2007**
              
              2006***US$’000***
              
              *US$’000**Major
                  customers with revenues of more than 10% of the Company’s
                  sales**Sales
                  to major customers*
              
              
              **19,048**
              
              
              13,044*Percentage
                  of sales*
              
              
              **92**
              **%**
              
              92
              %*Number*
              
              
              **3**
              
              
              3*Major
                  suppliers with purchases of more than 10% of the Company’s
                  purchases**Purchases
                  from major suppliers*
              
              
              **2,005**
              
              
              2,988*Percentage
                  of purchases*
              
              
              **25**
              **%**
              
              41
              %*Number*
              
              
              **1**
              
              
              2
 
 Accounts
        receivable related to the Company’s major customers comprised 88% and 91% of all
        accounts receivables as of September 30, 2007 and September 30, 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 would cause their ability to meet contractual obligations
        would
        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.
  10
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 (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**
                **September 30,**
                **2007**
              
              As
                  of
                December 31,
                2006***US$’000***
              
              *US$’000*Completed
                  contracts
              
              
              **43,994**
              
              
              31,568Retentions
              
              
              **730**
              
              
              1,132**44,724**
              
              
              32,700Allowance
                  for doubtful accounts
              
              
              **(3,629**
              **)**
              
              (2,923
              )**41,095**
              
              
              29,777
 
 Of
        the
        retentions balance as of September 30, 2007 and December 31, 2006, approximately
        US$1,713 and US$350, respectively, are expected to be collected within one
        year.
  11
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 **7.**  **PROPERTY,
        PLANT AND EQUIPMENT, NET**
 
 Property,
        plant and equipment are summarized as follows:
 Estimated useful life
              
              **(Unaudited)**
                **As
                  of**
                **September 30,**
                **2007**
              
              As
                  of
                December 31,
                2006(in years)
              
              ***US$’000***
              
              *US$’000*Building
              
              
              
              
              
              **271**
              
              
              -Leasehold
                  improvement
              
              
              5
              
              
              **106**
              
              
              100Plant
                  and machinery
              
              
              5
              
              
              **464**
              
              
              409Office
                  equipment
              
              
              5
              
              
              **771**
              
              
              602Motor
                  vehicles
              
              
              5
              
              
              **558**
              
              
              438**2,170**
              
              
              1,549Accumulated
                  depreciation
              
              
              
              
              
              **(1,025**
              **)**
              
              (728
              )**1,145**
              
              
              821
 
 All
        building properties are pledged to secure the long-term loan from related
        parties as set out in note 14(c) to the financial statements.
 
 **8.**  **ACQUISTIONS**
 
 On
        July
        5, 2007, BTWTC entered into an agreement to acquire 100% of equity interests
        of
        Guolian and Pan-pacific (collective referred to as “Guolian”). BTWTC closed the
        transaction with Guolian on November 13, 2007. Such transaction was accounted
        for by using purchase accounting method. The acquisition of Guolian has been
        recorded using the purchase method of accounting in accordance with SFAS
        No.
        141. The Company has allocated the purchase price to the assets and liabilities
        based on the fair value of the net assets at the effective date of the
        acquisition. At July 5, 2007, the fair value of identifiable assets, less
        the
        amount of liabilities of Guolian, was approximately $2,443, which comprised
        gross assets of approximately $7,990 less total liabilities of about $5,547.
        Goodwill of approximately $3,119 was recorded as part of the acquisition.
        This
        amount represented the excess of the purchase price over the fair value of
        net
        assets acquired. The goodwill is not being amortized, but will be tested
        annually for impairment in accordance with SFAS No. 142. The purchase
        consideration consisted of cash of US$500 and 800,000 equity shares of common
        stocks of TTC. The value of the equity shares was determined by taking the
        average market price of two trading days before and after the date on which
        the
        terms of the acquisition were agreed and announced. At the balance sheet
        date,
        the 800,000 equity shares have not been issued. The results of Guolian have
        been
        included in the consolidated financial statements since the date of acquisition.
  12
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 The
        fair
        values of the assets and liabilities acquired and purchase price was allocated
        as follows:
 
 *US$’000**Cash
                  consideration*
              
              
              500*800,000
                  equity shares of common stock of TTC*
              
              
              5,062*Total
                  purchase consideration*
              
              
              5,562*Fair
                  value of net assets acquired*
              
              
              (2,443
              )*Goodwill
                  arising on acquisition*
              
              
              3,119
 
 Under
                  the agreement, in addition to the above purchase consideration,
                  the
                  Company may provide for the issuance of 100,000 additional equity
                  shares
                  of common stock, contingent on the earnings of Guolian, which could
                  be
                  increased at least by a specified percentage by one year after
                  the date of
                  acquisition. When the contingency is resolved and the additional
                  consideration is distributable, the Company shall record the fair
                  value of
                  the contingent consideration as an additional cost of
                  acquisition.
  The
        following unaudited pro forma information assumes the acquisition of Guolian
        occurred at the beginning of each period presented. The unaudited pro forma
        information is provided for informational purposes only. It is based on
        historical information and does not necessarily reflect the actual results
        that
        would have occurred nor is it necessarily indicative of future results of
        the
        operations of the Company.
  **(Unaudited)**
                **Three months ended**
                **September 30**
              
              **(Unaudited)**
                **Nine months ended**
                **September 30****2007**
              
              2006
              
              **2007**
              
              2006***US$’000***
              
              *US$’000*
              
              ***US$’000***
              
              *US$’000*Revenue
              
              
              **9,300**
              
              
              6,433
              
              
              **23,085**
              
              
              16,865Income
                  before extraordinary gain and income taxes
              
              
              **2,237**
              
              
              1,100
              
              
              **4,808**
              
              
              3,919Net
                  income
              
              
              **1,868**
              
              
              921
              
              
              **4,271**
              
              
              3,379Net
                  income per share of common stock-
                  Basic and diluted earnings per share
              
              
              **0.19**
              
              
              0.11
              
              
              **0.45**
              
              
              0.39
 
 13
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 **9.**  **SUPPLEMENTARY
        DISCLOSURE OF CASH FLOW INFORMATION**
 
 Analysis
        of the net cash outflow in respect of the acquisition of a subsidiary is
        as
        follows:
 
 **As
                  of**
                **September 30,**
                **2007***US$’000**Cash
                  consideration for acquisition of a subsidiary*
              
              
              **(500**
              **)***Bank
                  balances and cash acquired*
              
              
              **314***Net
                  cash outflow from the acquisition*
              
              
              **(186**
              **)**
 
 **10.**  **INVENTORIES**
 
 Inventories
        consisted of the followings:
  **(Unaudited)**
                **As
                  of**
                **September 30,**
                **2007**
              
              As
                  of
                December 31,
                2006***US$’000***
              
              *US$’000*Raw
                  materials
              
              
              **5**
              
              
              -Finished
                  goods
              
              
              **6,129**
              
              
              5,048**6,134**
              
              
              5,048
 
 **11.**  **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.
 
 No
        provision for withholding of United States federal or state income taxes
        or tax
        benefits on the undistributed earnings and/or losses of the Company's
        subsidiaries has been provided as the earnings of these subsidiaries, in
        the
        opinion of the management, will be reinvested indefinitely.
 
 The
        Company’s income, which 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 is 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, commencing
        in
        fiscal year 2004, followed by a 50% reduction for the next three years.
  14
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 Income
        generated in the PRC by Guolian and Pan-pacific are subject to PRC income
        taxes
        at a rate of 33%. Since Guolian was registered as a “High technology business
        corporation” in 2006, it is subject to tax laws applicable to the enterprise in
        the PRC and their tax rate has been reduced to 15%, commencing in fiscal
        year
        2006.
 
 Income
        tax expenses have been provided at the rate of 24% *(2006:
        24%)* on
        Beijing Telestone’s, 33% *(2006:
        33%)* on
        BTWTC’s, 15% *(2006:
        15%)* on
        Guolian’s and 33% *(2006:
        33%)* on
        Pan-pacific’s estimated assessable incomes arising from PRC during the period
        and are comprised of the following:
 
 **(Unaudited)**
                **Nine months ended September 30,****2007**
              
              2006***US$’000***
              
              *US$’000**Current
                  tax**Hong
                  Kong*
              
              
              **-**
              
              
              -*PRC*
              
              
              **800**
              
              
              506**800**
              
              
              506
 
 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 September 30, 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 PRC. Based on the
        evaluations noted above, the Company has concluded that there are no significant
        uncertain tax positions requiring recognition in its consolidated financial
        statements. Based on a review of tax positions for all open years, no reserves
        for uncertain income tax positions have been recorded pursuant to FIN 48
        during
        the nine months ended September 30, 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**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 Upon
        adoption of FIN 48 on January 1, 2007, and as of September 30, 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 nine months ended September 30, 2007, no interest or penalties were
        recorded.
 
 **12.**  **SEGMENT
        INFORMATION**
 
 During
        the period ended September 30, 2007, all revenues of the Company are from
        its
        installation and trading of wireless telecommunication. No financial information
        by business segment is presented.
 
 The
        Company operates mainly in the PRC and over 90% of its revenue and operating
        profit are from the PRC. Accordingly, no geographical analysis is
        presented.
  **13.** **COMMON
            STOCK**
 
 As
        of
        September 30, 2007, the authorized capital of TTC is 110,000,000 shares,
        comprised of 100,000,000 shares of common stock with a par value of $0.001,
        and
        10,000,000 shares of preferred stock with a par value of $0.001.
 
 TTC
        had
        9,604,550 and 8,935,106, shares of common stock outstanding as of September
        30,
        2007 and December 31, 2006, respectively, and 192,403 and 15,000 warrants
        outstanding as of September 30, 2007 and December 31, 2006,
        respectively.
 
 On
        July
        5, 2007, the Company reserved the issuance of 100,000 shares of common stock,
        par value US $0.001, in connection with the acquisition of a subsidiary,
        as set
        out in note 8 to the financial statements.
  **14.**  **RELATED
        PARTY TRANSACTION**
 
 **Summary
        of related party transactions**
  **(Unaudited)**
                **As
                  of**
                **September 30,**
                **2007**
              
              As
                  of
                December 31,
                2006***US$’000***
              
              *US$’000***Due
                  from related parties**Other
                  employees (Note (a))
              
              
              **1,017**
              
              
              161Ex-stockholders
                  of SMI/Guolian (Note (b))
              
              
              **1,251**
              
              
              1,248**2,268**
              
              
              1,409**Due
                  to related parties**Directors
                  (Note (a))
              
              
              **716**
              
              
              714Ex-stockholders
                  of Beijing Telestone/Guolian (Note (b))
              
              
              **1,339**
              
              
              1,287**2,055**
              
              
              2,001**Long
                  term loan from related parties**A
                  director of Beijing Telestone (Note (c))
              
              
              **31**
              
              
              -A
                  related party (Note (c))
              
              
              **31**
              
              
              -**62**
              
              
              -**Guarantor
                  of short term loan**A
                  director
              
              
              **256**
              
              
              1,279
 
 16
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 Note :
 (a)
              The
                  amounts due from/to directors and employees represent unsecured
                  advances
                  made to those parties from time to time. These amounts are interest
                  free
                  and repayable on demand.
 
 (b)
              The
                  amounts due to ex-stockholders of Beijing Telestone of
                  US$1,287****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 initiated a lawsuit against
                  SMI
                  alleging that the consideration amount had not been settled. The
                  trial
                  court hearing commenced on May 10, 2006 and was finalized on December
                  19,
                  2006. The trial court ruled that SMI and Beijing Telestone were
                  not
                  required to compensate the ex-stockholder of SMI. On October 23,
                  2007, the
                  appellate court issued a final ruling affirming the decision made
                  by the
                  trial court.
 
 (c)
              The
                  long-term loan was advanced to Pan-pacific by a director of Beijing
                  Telestone and a close family member of the director. The loan was
                  collateralized by the Company’s building properties and bears monthly
                  interest rate at 0.57% and repayable by
                  installments.
 
 **15.**  **LONG-TERM
        LOAN FROM RELATED PARTIES**
  **(Unaudited)**
                **As
                  of**
                **September 30,**
                **2007**
              
              As
                  of
                December 31,
                2006***US$’000***
              
              *US$’000*Secured
                  loan (Note 14 (c))
              
              
              **62**
              
              
              -Current
                  portion
              
              
              **26**
              
              
              -Non-current
                  portion
              
              
              **36**
              
              
              -**62**
              
              
              -
 
 17
  **Telestone
        Technologies Corporation**
 
 **Notes
        to Condensed Consolidated Financial Statements**
 *(Dollars
        in thousands except share data and per share amounts)*
 
 **16.**  **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 when 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.
 
 **17.**  **STOCK
        OPTION PLAN**
 
 On
        June
        27, 2005, a Stock Option Plan (the “Plan”) was approved at the 2005 annual
        meeting of stockholders. The purpose of the Plan is to promote the growth
        and
        general prosperity of the Company by permitting the Company to grant 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 September
        30,
        2007 and as of the date of these financial statements.
 
 **18.**  **POST
        BALANCE SHEET EVENT**
 
 On
        October 8, 2007, BTWTC established a wholly-owned subsidiary company named
        Beijing Telestone Communication Technology Corporation Limited (“BTCTC”), with
        an operating period of 20 years until October 7, 2027. The initial investment
        cost, which was included in prepayment, amounted to US$640 (equivalent to
        RMB5,000) and was made before the balance sheet date. The principal activity
        of
        BTCTC is developing and managing the overseas business operation of the Company
        since October 8, 2007.
 
 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 (the “SEC”) from time to time, which could cause actual
        results or outcomes to differ materially from those projected. Undue reliance
        should not be placed 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 through services networks 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 as well as in vast countryside
        regions.
 
 Our
        wireless coverage solutions business is comprised of research, development
        and
        application of wireless communications technology. In addition to the 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”), all of
        which are currently our main customers. Since our inception, we have improved
        our business relationships with wireless system equipment vendors within
        the
        PRC. We have been exploring the wireless system equipment industry over the
        past
        year and have continued to expand our business into overseas markets, such
        as
        Vietnam, India, Indonesia and the United States. In October 2007, we formed
        a
        subsidiary company named Beijing Telestone Communication Technology Corp.
        Ltd.
        (the ''Subsidiary''), focused on developing and managing Telestone's overseas
        businesses. The Subsidiary will be responsible for all of Telestone's overseas
        businesses and aims to provide greater focus to the Company's international
        expansion efforts and simplify current reporting lines. The Subsidiary will
        also
        seek to identify new opportunities for delivering consistent growth to
        Telestone's overseas businesses.
  19
 
 In
        2006,
        the Company completed its research and development into various third generation
        (“3G”) application equipment standards such as WCDMA, CDMA2000 and TD-SCDMA,
        which are the three 3G standards that are expected to be licensed and operated
        by our customers. Previously, 3G licensed Chinese domestic carriers faced
        the
        problems of multi-carriers and multi-mobile telecommunication systems. Our
        research and development center has developed a new 3G 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 trading on the NASDAQ Global
        Market. The Company believes that listing on the NASDAQ Global Market will
        help
        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 September
        30,
        2007:
 2007
                
                2006
                
                ComparisonsItem
                
                USD'000
                
                % of
                  revenue
                
                USD'000
                
                % of
                  revenue
                
                USD'000
                
                %Operating
                    Revenue
                
                
                9,300
                
                
                
                
                
                5,234
                
                
                
                
                
                4066
                
                
                77.68
                %Equipment
                    and service costs
                
                
                4,655
                
                
                50.05
                %
                
                3,115
                
                
                59.51
                %
                
                1540
                
                
                49.44
                %Gross
                    profit
                
                
                4,645
                
                
                49.95
                %
                
                2,119
                
                
                40.49
                %
                
                2526
                
                
                119.21
                %Sales
                    and marketing
                
                
                1,462
                
                
                15.72
                %
                
                780
                
                
                14.90
                %
                
                682
                
                
                87.44
                %General
                    and administrative
                
                
                713
                
                
                7.67
                %
                
                256
                
                
                4.89
                %
                
                457
                
                
                178.52
                %Research
                    and development
                
                
                165
                
                
                1.77
                %
                
                111
                
                
                2.12
                %
                
                54
                
                
                48.65
                %Depreciation
                    and amortization
                
                
                61
                
                
                0.66
                %
                
                60
                
                
                1.15
                %
                
                1
                
                
                1.67
                %Interest
                    expense
                
                
                (12
                )
                
                -0.13
                %
                
                (30
                )
                
                -0.57
                %
                
                18
                
                
                -60.00
                %Other
                    income, net
                
                
                5
                
                
                0.05
                %
                
                21
                
                
                0.40
                %
                
                (16
                )
                
                -76.19
                %Income
                    before income taxes
                
                
                2,237
                
                
                24.05
                %
                
                903
                
                
                17.25
                %
                
                1334
                
                
                147.73
                %Income
                    taxes
                
                
                (369
                )
                
                -3.97
                %
                
                (164
                )
                
                -3.13
                %
                
                (205
                )
                
                125.00
                %Net
                    Income
                
                
                1,868
                
                
                20.09
                %
                
                739
                
                
                14.12
                %
                
                1129
                
                
                152.77
                %
  20
  Our
        revenues during the three month period ended September 30, 2007 were derived
        from our system integration services 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 this 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 revenues for the three month period ended September 30, 2007 were
        $9,300,000, as compared to $5,234,000 from the corresponding period of the
        previous year.
 
 For
        the
        current reporting period, Shandong Guolian has contributed revenue of
        US$1,423,000. Apart from the revenue from Shandong Guolian, Telestone’s revenue
        increased 50% compared to the corresponding period of the previous
        year.
 
 For
        the
        current 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
        have already established a strong presence and are continuing to penetrate
        new
        overseas markets in South-East Asia, specifically; Vietnam, Indonesia and
        India,
        through our established business relationships with local telecommunication
        carriers in the region. We expect these new products, solutions and markets
        to
        enhance our business prospects in the medium to long-term.
 
 The
        Company is promoting Wireless Fiber Distribution System (“WFDS”), a leading
        wireless indoor coverage solution, applied to all the modes of the wireless
        network, such as 2G and 3G, to the major wireless carriers in the PRC.
 
 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 cost of raw materials, which we expect will slow the pressure
        of
        rising costs and improve our gross margin.
  21
 
 **CRITICAL
        ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES**
 
 The
        discussion and analysis of our financial situation and results of operations
        are
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with generally accepted accounting principles 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
        September 30, 2007, compared to those discussed in our Annual Report on Form
        10-KSB for the year ended December 31, 2006.
 
 **RESULTS
        OF OPERATIONS**
 
 **REVENUES**
 
 For
        the
        three months and nine months ended September 30, 2007, revenues were $9,300,000
        and $20,953,000, representing an increase of 77.70% and 47.26%, respectively,
        when compared to the corresponding periods of 2006. The increase in net revenues
        was due to a mixed effect of: China Mobile and China Unicom increasing their
        capital investment in the Company and Shandong Guolian Telecommunication
        Technology Company Ltd. contributing USD 1,423,000 to the Company.
 
 For
        the
        third quarter 2007 reporting period, we expanded our revenue stream from
        the
        sales of indoor coverage solutions (including products and system integration
        services) to China Mobile and China Unicom, which resulted in an increase
        in
        total revenues for the third quarter of 2007.
 
 **BREAKDOWN
        BY NATURE**
  Three
        months ended September 30, 2007
  2007
              
              2006
              
              IncreaseUSD'000
              
              % of
                revenue
              
              USD'000
              
              % of
                revenue
              
              USD'000
              
              %product
                  sales
              
              
              6,698
              
              
              72.02
              %
              
              4,026
              
              
              76.92
              %
              
              2,672
              
              
              66.37
              %service
                  sales
              
              
              2,602
              
              
              27.98
              %
              
              1,208
              
              
              23.08
              %
              
              1,394
              
              
              115.40
              %total
              
              
              9,300
              
              
              
              
              
              5,234
              
              
              
              
              
              4,066
              
              
              77.69
              %
 
 22
 
 Nine
        months ended September 30, 2007
  2007
              
              2006
              
              IncreaseUSD'000
              
              % of
                revenue
              
              USD'000
              
              % of
                revenue
              
              USD'000
              
              %Product
                  sales
              
              
              14,409
              
              
              68.77
              %
              
              10,851
              
              
              76.27
              %
              
              3,558
              
              
              32.79
              %Service
                  sales
              
              
              6,543
              
              
              31.23
              %
              
              3,377
              
              
              23.73
              %
              
              3,166
              
              
              93.76
              %total
              
              
              20,953
              
              
              
              
              
              14,228
              
              
              
              
              
              6,725
              
              
              47.26
              %
  For
        the
        three months and nine months ended September 30, 2007, revenues generated
        from
        product sales were $6,698,000 and $14,409,000, which represented an increase
        of
        66.37% and 32.79%, respectively, compared to the corresponding periods of
        2006.
        For the aforementioned periods, revenues generated from system integration
        service sales were $2,602,000 and $6,543,000, which represented an increase
        of
        115.40% and 93.76% respectively, compared to the same periods of 2006.
 
 For
        the
        three months and nine months ended September 30, 2007, revenues generated
        from
        product sales accounted for 72.02% and 68.77% of total revenues, respectively,
        compared to 76.92% and 76.27% for the corresponding periods of 2006. For
        the
        aforementioned periods, revenues generated from system integration service
        sales
        accounted for 27.98% and 31.23% of total revenues, respectively, compared
        to
        23.08% and 23.73% for the same periods of 2006.
 
 **BREAKDOWN
        BY CUSTOMERS**
 
 Three
        months ended September 30, 2007
  2007
              
              2006
              
              IncreaseUSD'000
              
              % of
                revenue
              
              USD'000
              
              % of
                revenue
              
              USD'000
              
              %China
                  Mobile Group
              
              
              4,189
              
              
              45.05
              %
              
              1,347
              
              
              25.74
              %
              
              2,842
              
              
              211.02
              %China
                  Unicom Group
              
              
              3,029
              
              
              32.57
              %
              
              2,033
              
              
              38.84
              %
              
              996
              
              
              48.98
              %China
                  Netcom Group
              
              
              275
              
              
              2.96
              %
              
              232
              
              
              4.43
              %
              
              43
              
              
              18.57
              %China
                  Telecom Group
              
              
              1,469
              
              
              15.80
              %
              
              1,344
              
              
              25.68
              %
              
              125
              
              
              9.34
              %Others
              
              
              337
              
              
              3.62
              %
              
              278
              
              
              5.31
              %
              
              59
              
              
              21.22
              %Total
              
              
              9,300
              
              
              
              
              
              5,234
              
              
              
              
              
              4,066
              
              
              77.68
              %
 
 23
  Nine
        months ended September 30, 2007
  2007
              
              2006
              
              IncreaseUSD'000
              
              % of
                revenue
              
              USD'000
              
              % of
                revenue
              
              USD'000
              
              %China
                  Mobile Group
              
              
              8,398
              
              
              40.08
              %
              
              3,513
              
              
              24.69
              %
              
              4885
              
              
              139.04
              %China
                  Unicom Group
              
              
              7,583
              
              
              36.19
              %
              
              5,759
              
              
              40.48
              %
              
              1824
              
              
              31.67
              %China
                  Netcom Group
              
              
              980
              
              
              4.68
              %
              
              894
              
              
              6.28
              %
              
              86
              
              
              9.62
              %China
                  Telecom Group
              
              
              3,340
              
              
              15.94
              %
              
              3,773
              
              
              26.52
              %
              
              (433
              )
              
              -11.47
              %Others
              
              
              652
              
              
              3.11
              %
              
              289
              
              
              2.03
              %
              
              363
              
              
              125.62
              %Total
              
              
              20,953
              
              
              
              
              
              14,228
              
              
              
              
              
              6725
              
              
              47.26
              %
  For
        the
        three months and nine months ended September 30, 2007, revenues generated
        from
        China Mobile were $4,189,000 and $8,398,000, which represented an increase
        of
        211.02% and 139.04%, respectively, compared to the corresponding periods
        of
        2006. For the aforementioned periods, revenues generated from China Unicom
        were
        $3,029,000 and $7,583,000, which represented an increase of 48.98% and 31.67%
        respectively, compared to the same periods of 2006. The increase in revenues
        from China Mobile was due to our increased business with Beijing Mobile,
        Guizhou
        Mobile, and Guangxi Mobile. Due to China Unicom’s infrastructure investments, we
        received more business from Beijing Unicom and Guizhou Unicom in the third
        quarter of 2007.
 
 For
        the
        three months and nine months ended September 30, 2007, revenues generated
        from
        China Netcom were $275,000 and $980,000, which represented an increase of
        18.57%
        and an increase of 9.62% respectively, compared to the corresponding periods
        of
        2006. For the aforementioned periods, revenues generated from China Telecom
        were
        1,469,000 and 3,340,000, which represented an increase of 9.34% and a decrease
        of 11.47% respectively, compared to the corresponding periods of 2006.
 
 Revenues
        from telecom carriers were our major revenue source for the nine months ended
        September 30, 2007, with China Mobile and China Unicom accounting for this
        majority. Compared to the corresponding period in 2006, the change in the
        composition ratio of revenues was primarily driven by the following factors:
        (1)
        an increase in revenues received from China Mobile and China Unicom; and
        (2) a
        decrease of revenues of PHS (Personal Handy-phone System) coverage solutions
        derived from China Telecom.
  24
 
 **BREAKDOWN
        BY SOLUTIONS**
 Three
        months ended September 30, 2007
  2007
              
              2006
              
              IncreaseUSD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %Indoor
              
              
              7,967
              
              
              85.67
              %
              
              4,639
              
              
              88.63
              %
              
              3,328
              
              
              71.74
              %Outdoor
              
              
              52
              
              
              0.56
              %
              
              302
              
              
              5.77
              %
              
              (250
              )
              
              -82.80
              %Others
              
              
              1,281
              
              
              13.77
              %
              
              293
              
              
              5.60
              %
              
              988
              
              
              337.20
              %Total
              
              
              9,300
              
              
              
              
              
              5,234
              
              
              
              
              
              4,066
              
              
              77.68
              %
  Nine
        months ended September 30, 2007
  2007
              
              2006
              
              IncreaseUSD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %Indoor
              
              
              17,767
              
              
              84.80
              %
              
              12,471
              
              
              87.65
              %
              
              5296
              
              
              42.47
              %Outdoor
              
              
              1,102
              
              
              5.26
              %
              
              841
              
              
              5.91
              %
              
              261
              
              
              31.02
              %Others
              
              
              2,083
              
              
              9.94
              %
              
              916
              
              
              6.44
              %
              
              1167
              
              
              127.46
              %Total
              
              
              20,953
              
              
              
              
              
              14,228
              
              
              
              
              
              6725
              
              
              47.26
              %
  For
        the
        three months and nine months ended September 30, 2007, revenues generated
        from
        indoor wireless coverage solutions were $7,967,000 and $17,767,000, which
        represented an increase of 71.74% and 42.47%, respectively, compared to the
        corresponding periods of 2006. For the aforementioned periods, revenues
        generated from outdoor wireless coverage solutions were $52,000 and $1,102,000,
        which represented a decrease of 82.80% and a decrease of 31.02% respectively,
        compared to the same periods of 2006.
 
 For
        the
        three months and nine months ended September 30, 2007, revenues generated
        from
        indoor wireless coverage solutions accounted for 85.66% and 84.80% of total
        revenues, respectively, compared to 88.63% and 87.65% for the corresponding
        periods of 2006. For the aforementioned periods, revenues generated from
        outdoor
        wireless coverage solutions accounted for 0.56% and 5.26% of total revenues,
        respectively, compared to 5.77% and 5.91% for the same periods of 2006.
 
 25
 
 **BREAKDOWN
        BY REGIONS**
 
 Three
        months ended September 30, 2007
  2007
              
              2006
              
              IncreaseUSD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %North
              
              
              5,950
              
              
              63.99
              %
              
              2,452
              
              
              46.85
              %
              
              3,498
              
              
              142.68
              %South
              
              
              2,721
              
              
              29.26
              %
              
              1,820
              
              
              34.77
              %
              
              901
              
              
              49.51
              %East
              
              
              497
              
              
              5.35
              %
              
              962
              
              
              18.38
              %
              
              (465
              )
              
              -48.33
              %Oversea
              
              
              131
              
              
              1.41
              %
              
              0
              
              
              
              
              
              131Total
              
              
              9,300
              
              
              
              
              
              5,234
              
              
              
              
              
              4,066
              
              
              77.68
              %
  Nine
        months ended September 30, 2007
  2007
              
              2006
              
              IncreaseUSD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %North
              
              
              12,461
              
              
              59.47
              %
              
              6,494
              
              
              45.64
              %
              
              5967
              
              
              91.89
              %South
              
              
              5,769
              
              
              27.53
              %
              
              4,916
              
              
              34.55
              %
              
              853
              
              
              17.35
              %East
              
              
              2,322
              
              
              11.08
              %
              
              2,818
              
              
              19.81
              %
              
              (496
              )
              
              -17.60
              %Oversea
              
              
              401
              
              
              1.91
              %
              
              0
              
              
              
              
              
              401Total
              
              
              20,953
              
              
              
              
              
              14,228
              
              
              
              
              
              6725
  For
        the
        three months and nine months ended September 30, 2007, revenues generated
        from
        the North (covering areas such as Beijing, Tianjin, Xinjiang etc.) were
        $5,950,000 and $12,461,000, which represented an increase of 142.68% and
        91.89%,
        respectively, compared to the corresponding periods of 2006. For the
        aforementioned periods, revenues generated from the south (covering areas
        such
        as Guangdong, Fujian, Sichuan etc.) were $2,721,000 and $5,769,000, which
        represented an increase of 49.51% and 17.35% respectively, compared to the
        same
        periods of 2006. For the identical periods, revenues generated from the east
        (covering areas such as Shanghai, Nanjing, etc.) were $497,000 and $2,322,000,
        which represented a decrease of 48.33% and 17.60%, respectively, compared
        to the
        corresponding periods of 2006. Revenues from overseas were $131,000 and $401,000
        respectively.
 
 For
        the
        three months and nine months ended September 30, 2007, revenues generated
        from
        the north accounted for 63.98% and 59.47% of total revenues, respectively,
        compared to 46.85% and 45.64% for the corresponding periods of 2006. For
        the
        aforementioned periods, revenues generated from the south accounted for 29.26%
        and 27.53% of total revenues, respectively, compared to 34.77% and 34.55%
        for
        the same periods of 2006. For the identical periods, revenues generated from
        the
        east accounted for 5.34% and 11.08% of total revenues, respectively, compared
        to
        18.38% and 19.81% for the corresponding periods of 2006, and revenues generated
        from outside the mainland of the PRC accounted for 1.42% and 1.91%
        respectively.
 
 26
  For
        the
        three month 2006 reporting period, the revenue increase in the north was
        mainly
        due to an increase in sales made to Beijing Mobile and Shandong Mobile. The
        revenue increase in the south was primarily due to an increase in business
        in
        the Guizhou and Fujian province.
 
 **COSTS
        OF REVENUES**
 
 Three
        months ended September 30, 2007
  2007
              
              2006
              
              IncreaseUSD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %Costs
                  of product sales
              
              
              3,928
              
              
              42.23
              %
              
              1,979
              
              
              37.81
              %
              
              1,949
              
              
              98.48
              %Costs
                  of system integration service sales
              
              
              727
              
              
              7.82
              %
              
              1,136
              
              
              21.70
              %
              
              (409
              )
              
              -36.00
              %total
              
              
              4,655
              
              
              
              
              
              3,115
              
              
              
              
              
              1,540
              
              
              49.44
              %
  Nine
        months ended September 30, 2007
  2007
              
              2006
              
              IncreaseUSD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %Costs
                  of product sales
              
              
              8082
              
              
              38.57
              %
              
              5378
              
              
              37.80
              %
              
              2704
              
              
              50.28
              %Costs
                  of system integration service sales
              
              
              2088
              
              
              9.97
              %
              
              2182
              
              
              15.34
              %
              
              (94
              )
              
              -4.31
              %total
              
              
              10170
              
              
              
              
              
              7560
              
              
              
              
              
              2610
              
              
              34.52
              %
  For
        the
        three months and nine months ended September 30, 2007, our total costs were
        $4,655,000 and $10,170,000, which represented an increase of 49.44% and 34.52%,
        respectively, as compared to the corresponding periods of 2006.
 
 Costs
        of
        revenues include costs of product sales and costs of system integration service
        sales.
  27
  For
        the
        three months and nine months ended September 30, 2007, our costs of product
        sales were $3,928,000 and $8,082,000, which represented an increase of 98.48%
        and 50.28%, respectively, as compared to the same periods of 2006. The
        percentage increase in costs of product sales was mainly due to increased
        revenue growth and the cost of original materials. We are continuously working
        to lower our costs of product sales through a series of effective cost control
        measures which include; reducing purchasing costs through large scale
        procurement, decreasing the use of raw materials through system design
        optimization, regularly improving our system integration technologies, and
        optimizing our supply chain to in turn receive better terms from suppliers.
 
 For
        the
        three months and nine months ended September 30, 2007, our costs of service
        sales were $727,000 and $2,088,000, representing a decrease of 36% and 4.31%,
        respectively, as compared to the same periods of 2006. For the aforementioned
        periods, the decrease in costs of service sales was mainly due to a change
        in
        our service model, whereby system integration services are now carried out
        by
        local technicians instead of technicians sent from our headquarters in Beijing.
        The new service model will reduce service costs and increase the gross margin
        on
        services provided.
 
 **GROSS
        PROFIT AND GROSS MARGIN**
 
 For
        the
        three months and nine months ended September 30, 2007, our gross profit was
        $4,645,000 and $10,783,000, which represented an increase of 119.21% and
        61.71%,
        respectively, as compared to the same periods of 2006. Our gross margin for
        the
        aforementioned periods was 50% and 51%, respectively, compared to 40% and
        47%
        for the same periods of last year.
 
 Our
        gross
        profit increase during the reporting period is attributable to a growth of
        revenue and the gross margin of service sales increasing. We will take the
        necessary effective measures to control product costs,
        and will
        utilize our research and development capabilities to develop high margin
        products.
 
 **OPERATING
        EXPENSES**
 
 Three
        months ended September 30, 2006
  2007
              
              2006
              
              ComparisonsItem
              
              USD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %Sales
                  and marketing
              
              
              1,462
              
              
              15.72
              %
              
              780
              
              
              14.90
              %
              
              682
              
              
              87.44
              %General
                  and administrative
              
              
              713
              
              
              7.67
              %
              
              256
              
              
              4.89
              %
              
              457
              
              
              178.52
              %Research
                  and development
              
              
              165
              
              
              1.77
              %
              
              111
              
              
              2.12
              %
              
              54
              
              
              48.65
              %
 
 28
 
 Nine
        months ended September 30, 2007
  2007
              
              2006
              
              ComparisonsItem
              
              USD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %
                  of
                revenue
              
              USD'000
              
              %Sales
                  and marketing
              
              
              3,447
              
              
              16.45
              %
              
              2,010
              
              
              14.13
              %
              
              1437
              
              
              71.49
              %General
                  and administrative
              
              
              1,893
              
              
              9.03
              %
              
              764
              
              
              5.37
              %
              
              1129
              
              
              147.77
              %Research
                  and development
              
              
              662
              
              
              3.16
              %
              
              391
              
              
              2.75
              %
              
              271
              
              
              69.31
              %
  Operating
        expenses mainly include sales and marketing expenses, general and administrative
        expenses and research and development expenses.
 
 **SALES
        AND MARKETING EXPENSES**
 
 Sales
        and
        marketing expenses include all related expenses and remunerations for sales
        personnel and travel expenses related to sales of products and market
        development.
 
 For
        the
        three months and nine months ended September 30, 2007, sales and marketing
        expenses were $1,462,000 and $3,447,000, accounting for 15.72% and 16.45%
        of
        total revenues, as compared to $780,000 and $2,010,000, or 14.90% and 14.13%
        of
        total revenues, respectively, for the corresponding periods of 2006.
 
 The
        sales
        and marketing expenses increase in the third quarter of 2007 was due to our
        efforts to promote WFDS, expand our product sales range, penetrate into new
        markets, open new branches and representative offices, as well as introduce
        investments related to business expansion in new markets.
 
 **GENERAL
        AND ADMINISTRATIVE EXPENSES**
 
 General
        and administrative expenses consist primarily of compensation for personnel,
        travel expenses, material expenses related to ordinary administration, fees
        for
        professional services, and allowance for doubtful accounts.
 
 For
        the
        three months and nine months ended September 30, 2007, general and
        administrative expenses were $713,000 and $1,893,000, accounting for 7.67%
        and
        9.03% of total revenues, as compared to $256,000 and $764,000, or 4.89% and
        5.37% of total revenues, respectively, for the corresponding periods of 2006.
        General and administrative expenses for the aforementioned periods increased
        178.52% and 147.77%, respectively, as compared to the same periods of last
        year.
 
 29


The
        major
        reasons for the increase in general and administrative expenses were due
        to
        expenses related to the enhancement in management and control systems, the
        growth of staff levels and the increase in expenses incurred as a result
        of
        compliance requirements of Section 404 of the Sarbanes-Oxley Act of
        2002.
 
 **RESEARCH
        AND DEVELOPMENT EXPENSES**
 
 Research
        and development expenses include remunerations for research and development
        staff, material expenses, travel expenses and facilities.
 
 For
        the
        three months and nine months ended September 30, 2007, research and development
        expenses were $165,000 and $662,000, accounting for 1.77% and 3.16% of total
        revenues, as compared to $111,000 and $391,000, or 2.12% and 2.75% of total
        revenues, respectively, for the corresponding periods of 2006. Research and
        development expenses for the aforementioned periods increased 48.65% and
        69.31%,
        respectively, as compared to the same periods of last year.
 
 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 and nine months ended September 30, 2007, our net income was $1,868,000
        and $3,717,000, respectively, which represented an increase of 152.77% and
        24.90%, as compared to the same period in 2006. The increase in the net income
        was primarily due to our
        growth of revenue and successful acquisition of Shandong Guolian
        Telecommunication Technology Company Ltd., whose net income in the third
        quarter
        was $271,164.
 
 **LIQUIDITY
        AND SOURCE OF CAPITAL**
  We
        generally finance our operations from cash flow generated internally and
        through
        bank loans. As of September 30, 2007, we had current assets of $56,313,000.
        Current assets are comprised of inventories of $6,134,000, accounts receivable
        of $41,095,000, prepayments, deposits and other receivables of $4,668,000,
        and
        cash and cash equivalents of $4,416,000. Current liabilities are comprised
        of
        accounts payable of $6,969,000, tax payables of $6,266,000, other payables
        and
        accruals of $8,714,000.
  Our
        trading terms with our customers are mainly on credit. As of September 30,
        2007,
        our accounts receivable were $41,095,000, compared to $29,777,000 as of December
        31, 2006. The credit period is generally less than one year. The
        gradual increase in the accounts receivables is mainly due to: 1) steady
        growth
        in revenues; 2) a change in the settlement pattern of the mobile operators,
        and
        3) one account receivable with China Unicom, whose payment has been
        delayed.
  30
  For
        the
        three months ended September 30, 2007, although the Company experienced long
        accounts receivable turnover periods, our ability to settle these accounts
        receivables improved when compared to the same period of last year. We believe
        that the outstanding accounts receivables can be recovered because our major
        customers, China Unicom and China Mobile, are large reputable operators in
        the
        PRC, and long-term clients with whom we have not experienced significant
        bad
        debts in the past. Following the principle of prudence, we believe that we
        have
        fully provisioned for doubtful accounts. 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 an incentive for collecting 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
                  have
                  consistently demonstrated good payment track-records to us.
  We
        believe that these measures will optimize the structure of our accounts
        receivables, minimize our financial risks in the future as well as help 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.
  As
        of
        September 30, 2007, our inventories were $6,134,000, as compared to $5,048,000
        as of December 31, 2006, which represented an increase of 21.51%. This increase
        in the inventory levels was a result of the following factors: (1) inventory
        reservations based in anticipated of growth in the third quarter; and (2)
        our
        ability to acquire a lower purchasing pricing through large scale procurement.
  As
        of
        September 30, 2007, our cash and bank balances were mainly denominated in
        Renminbi ("RMB") and United States dollars ("US$"), 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 be a result of certain exchange
        risks.
  31
  We
        have
        experienced negative cash flows from operating activities for the periods
        ended
        September 30, 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 aforementioned measures to reduce the turnover period,
        we
        are also exploring the possibility of obtaining third party financing and are
        also considering
        raising additional capital through debt or equity financing .
  Our
        gearing ratio, calculated as total debts over total assets, was 36% as of
        September 30, 2007 and 41% as of December 31, 2006, respectively.
  **Business
        Strategy**
  In
        order
        to maintain our leading position in the PRC’s wireless coverage solutions
        sector, and expand and diversify our revenue streams, Telestone will adopt
        a
        three pronged strategy to ensure value for its shareholders:
 
 1.
        The
        Company will continue to invest in research and development for our key
        technologies and our products to enhance its leading position in wireless
        coverage technology and take full advantage of the PRC’s investment in the 3G
        networks. The Company has dedicated research and development to wireless
        coverage solutions and in the next three years the main business will continue
        to be wireless coverage solutions for mobile telecommunications.
 
 2.
        In the
        domestic market, Telestone will maintain strong relationships with Chinese
        mobile carriers and potentially make selective acquisitions in major provincial
        markets where the Company does not have the leading market share. Our potential
        targets are companies that occupy a leading market position and have strong
        business networks in their provincial markets or that have strong production
        capability. The Company is confident that it will deepen its penetration
        of
        provincial markets and raise its overall market share through selective
        acquisitions and the promotion of new solutions.
 
 3.
        Telestone will also focus on building up its presence in markets outside
        the
        PRC. Telestone has opened offices in Vietnam and the United States, and has
        sold
        products in Vietnam, Indonesia, Thailand, Philippines and the United States.
        The
        Company will continue to strengthen its presence in these exciting new markets
        by leveraging its expertise and leading wireless coverage products and
        solutions. Our strategies in the United States and the developing countries
        are
        slightly different. In the United States, we seek cooperation with peers
        that
        have strong research and development ability, and then develop technology
        and
        products that fit within the market of the PRC. However, we will also find
        partners within the integration business and then sell our products, as
        Telestone’s products have a significant cost advantage. In the developing
        countries, we only seek cooperation with a local integration partner to deliver
        our leading wireless coverage solution technology, whom we then work with
        to set
        up our local products distribution channels.
 
 32
  **Recent
        Developments**
 
 On
        November 13, 2007, Telestone completed the acquisition of Shandong Guolian.
        The
        financial results of Shandong Guolian were consolidated in our third quarter
        2007 results. Shandong Guolian is a leading provider of wireless coverage
        services for carriers in the Shandong Province of the PRC. The principal
        business activities of Guolian and its subsidiary are design, development,
        production and installation and trading of wireless telecommunication coverage
        system equipment.
 
 We
        have
        announced the formation of a subsidiary focused on international business
        development. The Subsidiary will be responsible for all of Telestone's overseas
        businesses and aims to provide greater focus to the Company's international
        expansion efforts and simplify current reporting lines. The Subsidiary will
        also
        seek to identify new opportunities for delivering consistent growth to
        Telestone's overseas businesses.
 
 In
        the
        United States, the Company has won the license agreements from the Federal
        Communication Commission on  CDMA
        repeater products. The Company’s CDMA repeater products have passed the trials
        conducted by Verizon.
 
 Telestone
        announced a positive response from China Mobile on WFDS field tests. These
        trials, which were carried out by China Mobile on TD-SCDMA networks in Xiamen
        and Beijing during the third quarter of 2007, covered a comprehensive range
        of
        criteria and applied strict testing standards on the WFDS equipment supplied.
        The application costs of WFDS were also carefully analyzed and
        assessed.
 
 **Business
        Outlook**
 
 The
        Company will raise the full-year revenue estimate to at least US$ 30 million
        for
        2007. This expectation is based on the revenue contributed by Shandong Guolian,
        anticipated sales of new products and solutions in both the PRC and new
        geographical markets.
  33
  **CONTINGENT
        LIABILITIES**
 
 We
        recognize our revenue upon the completion of contracts and have made full
        tax
        provision in accordance with relevant national and local laws and regulations
        of
        the PRC. A contract is considered completed upon completion of all essential
        contract work and when installation has been accepted by the customer. It
        is
        common practice in the PRC that 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.
 
 **EMPLOYMENT
        AND REMUNERATIONS**
 
 We
        offer
        competitive remuneration schemes to our employees based on common industry
        practices as well as the employees and the Company’s overall performance.
 
 **ITEM
        3A(T). CONTROLS AND PROCEDURES**
 
 **A.**
              **Evaluation
                  of Disclosure 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 the evaluation,
        our Chief Executive Officer and Chief Financial Officer concluded that our
        disclosure controls and procedures are effective in 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
        in accomplishing their objectives, we intend to continue to examine, refine
        and
        formulize our disclosure controls and procedures and to monitor ongoing
        developments in this area.
 
 34
 **B.**
              **Changes
                  in Internal Control over Financial
                  Reporting:**
 
 During
        the quarter ended September 30, 2007, there were no changes to our internal
        controls over financial reporting that have materially affected, or are
        reasonably likely to materially affect, our internal control over financial
        reporting.
  35
 
 **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 Success Million International
        Limited
        (“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 was nearly $1 million.
  The
        trial
        court (the Second Intermediate People’s Court of Beijing) hearing commenced on
        May 10, 2006 and was finalized on December 19, 2006. The trial court ruled
        that
        SMI and Beijing Telestone were not required to compensate the ex-stockholder
        of
        SMI. On October 23, 2007, the appellate court (the Higher People’s Court Of
        Beijing Municipality) issued a final ruling affirming the decision made by
        the
        trial court.
  **Item
                  2.**
              **Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds.**
  None.
 
 **Item
                  3.**
              **Defaults
                  Upon Senior Securities.**
  None.
  **Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders.**
  None.
  **Item
                  5.**
              **Other
                  Information.**
  None.
  36
 **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
  37
  **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:
                  November 14, 2007
              By:
              /s/
                  Han DaqingHan
                  Daqing, Chief Executive Officer(Principal
                  Executive Officer)Date:
                  November 14, 2007
              By:
              /s/
                  Liu DongpingLiu
                  Dongping, Chief Financial Officer(Principal
                  Financial Officer)
  38