UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


Securities
Exchange Act of 1934





For the
quarterly period ended March 31, 2009





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)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes xNo
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈No
 ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




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





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





As
of May 14, 2009, 10,404,550 shares of the Issuer’s $.001 par value common stock
were outstanding.





TELESTONE
TECHNOLOGIES CORPORATION





INDEX





PagePART
      I. FINANCIAL INFORMATIONItem
      1. Condensed Financial Statements.
                        
                        3Condensed
      Consolidated Statements of Operations, for the Three months ended March
      31, 2009 and 2008 (unaudited)
                        
                        3Condensed
      Consolidated Balance Sheets, as of March 31, 2009 (unaudited) and December
      31, 2008 (audited)
                        
                        4Condensed
      Consolidated Statement of Stockholders’ Equity for the Three months ended
      March 31, 2009 (unaudited)
                        
                        5Condensed
      Consolidated Statements of Cash Flows, for the Three months ended March
      31, 2009 and 2008 (unaudited)
                        
                        6Notes
      to Condensed Consolidated Financial Statements (unaudited)
                        
                        7Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations.
                        
                        19Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk.
                        
                        27Item
      4. Controls and Procedures.
                        
                        27PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings.
                        
                        27Item 1A. Risk
      Factors.
                        
                        27Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.
                        
                        27Item
      3. Defaults Upon Senior Securities.
                        
                        27Item
      4. Submission of Matters to a Vote of Security Holders.
                        
                        28Item
      5. Other Information.
                        
                        28Item
      6. Exhibits.
                        
                        28


2


ITEM
1. FINANCIAL STATEMENTS





Telestone
Technologies Corporation
 
 Condensed
Consolidated Statements of Operations and Other Comprehensive
Income
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
 
 (Unaudited)Three months ended
                            March 31,2009
                          
                          
                          2008Note
                          
                          US$’000
                          
                          
                          US$’000Operating
      revenues:Net
      sales of equipment
                          
                          
                          
                          
                          3,263
                          
                          
                          
                          3,930Service
      income
                          
                          
                          
                          
                          4,633
                          
                          
                          
                          2,559Total
      operating revenues
                          
                          
                          
                          
                          7,896
                          
                          
                          
                          6,489Cost
      of operating revenues:Cost
      of net sales
                          
                          
                          
                          
                          1,898
                          
                          
                          
                          2,100Cost
      of service
                          
                          
                          
                          
                          1,298
                          
                          
                          
                          1,235Total
      cost of operating revenues
                          
                          
                          
                          
                          3,196
                          
                          
                          
                          3,335Gross
      income
                          
                          
                          
                          
                          4,700
                          
                          
                          
                          3,154Operating
      expenses:Sales
      and marketing
                          
                          
                          
                          
                          2,181
                          
                          
                          
                          1,515General
      and administrative
                          
                          
                          
                          
                          843
                          
                          
                          
                          674Research
      and development
                          
                          
                          
                          
                          136
                          
                          
                          
                          130Depreciation
      and amortization
                          
                          
                          
                          
                          90
                          
                          
                          
                          77Total
      operating expenses
                          
                          
                          
                          
                          3,250
                          
                          
                          
                          2,396Operating
      income
                          
                          
                          
                          
                          1,450
                          
                          
                          
                          758Interest
      expense
                          
                          
                          
                          
                          (41
                          )
                          
                          
                          (36
                          )Other
      income, net
                          
                          
                          
                          
                          267
                          
                          
                          
                          318Income
      before income taxes
                          
                          
                          
                          
                          1,676
                          
                          
                          
                          1,040Income
      taxes
                          
                          4
                          
                          
                          (529
                          )
                          
                          
                          (203
                          )Net
      income
                          
                          
                          
                          
                          1,147
                          
                          
                          
                          837Other
      comprehensive incomeForeign
      currency translation adjustment
                          
                          
                          
                          
                          245
                          
                          
                          
                          1,460Comprehensive
      income
                          
                          
                          
                          
                          1,392
                          
                          
                          
                          2,297Earnings
      per share:
                          
                          3Weighted
      average number of common stock outstandingBasic
                          
                          
                          
                          
                          10,404,550
                          
                          
                          
                          10,404,550Dilutive
      effect of warrants
                          
                          
                          
                          
                          -
                          
                          
                          
                          81,366Diluted
                          
                          
                          
                          
                          10,404,550
                          
                          
                          
                          10,485,916Net
      income per share of common stockBasic
      and diluted (US$)
                          
                          
                          
                          
                          0.11
                          
                          
                          
                          0.08
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  3
  Telestone
Technologies Corporation
 
 Condensed
Consolidated Balance Sheets
 As of
March 31, 2009 and December 31, 2008
 (Dollars
in thousands except share data and per share amounts)
 
 (Unaudited)
                                  As of
                                  March 31,
                                
                                
                                As of
                                  December 31,2009
                                
                                
                                2008Note
                                
                                US$’000
                                
                                
                                US$’000ASSETSCurrent
      assets:Cash
      and cash equivalents
                                
                                
                                
                                
                                4,636
                                
                                
                                
                                7,866Accounts
      receivable, net of allowance
                                
                                6
                                
                                
                                68,002
                                
                                
                                
                                62,136Due
      from related parties
                                
                                13
                                
                                
                                2,004
                                
                                
                                
                                1,826Inventories
                                
                                10
                                
                                
                                10,313
                                
                                
                                
                                7,843Prepayment
                                
                                
                                
                                
                                1,484
                                
                                
                                
                                2,347Other
      current assets
                                
                                
                                
                                
                                1,327
                                
                                
                                
                                1,352Total
      current assets
                                
                                
                                
                                
                                87,766
                                
                                
                                
                                83,370Goodwill
                                
                                7
                                
                                
                                3,119
                                
                                
                                
                                3,119Property,
      plant and equipment, net
                                
                                8
                                
                                
                                1,174
                                
                                
                                
                                1,0504,293
                                
                                
                                
                                4,169Total
      assets
                                
                                
                                
                                
                                92,059
                                
                                
                                
                                87,539LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short-term
      bank loans
                                
                                9,
      13
                                
                                
                                1,758
                                
                                
                                
                                2,918Accounts
      payable – Trade
                                
                                
                                
                                
                                14,685
                                
                                
                                
                                11,776Customer
      deposits for sales of equipment
                                
                                
                                
                                
                                777
                                
                                
                                
                                739Due
      to related parties
                                
                                13
                                
                                
                                1,711
                                
                                
                                
                                1,673Taxes
      payable
                                
                                
                                
                                
                                7,623
                                
                                
                                
                                6,805Accrued
      expenses and other accrued liabilities
                                
                                
                                
                                
                                11,682
                                
                                
                                
                                11,197Total
      current liabilities
                                
                                
                                
                                
                                38,236
                                
                                
                                
                                35,108Commitments
      and contingencies
                                
                                14
                                
                                
                                -
                                
                                
                                
                                -Stockholders’
      equity:Preferred
      stock, US$0.001 par value, 10,000,000 shares authorized, no shares
      issued
                                
                                
                                
                                
                                -
                                
                                
                                
                                -Common
      stock and paid-in-capital, US$0.001 par value:Authorized
      - 100,000,000 shares as of March 31, 2009 and December 31,
      2008
                                
                                
                                
                                
                                -
                                
                                
                                
                                -Issued
      and outstanding - 10,404,550 shares as of March 31, 2009 and December 31,
      2008
                                
                                12
                                
                                
                                11
                                
                                
                                
                                11Additional
      paid-in capital
                                
                                
                                
                                
                                18,989
                                
                                
                                
                                18,989Dedicated
      reserves
                                
                                
                                
                                
                                3,978
                                
                                
                                
                                3,787Other
      comprehensive income
                                
                                
                                
                                
                                5,818
                                
                                
                                
                                5,573Retained
      earnings
                                
                                
                                
                                
                                25,027
                                
                                
                                
                                24,071Total
      stockholders’ equity
                                
                                
                                
                                
                                53,823
                                
                                
                                
                                52,431Total
      liabilities and stockholders’ equity
                                
                                
                                
                                
                                92,059
                                
                                
                                
                                87,539
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  4
  Telestone
Technologies Corporation
 
 Condensed
Consolidated Statements of Changes in Stockholders' Equity
 For the 3
months ended March 31, 2009
 (Dollars
in thousands except share data and per share amounts)
 
 Common stock issuedNumber
                  of shares
                
                
                Amount
                
                
                Additional
                  paid-in
                  capital
                
                
                Dedicated
                  reserves
                
                
                Other
                  compre-
                  hensive
                  income
                
                
                Retained
                  earnings
                
                
                TotalUS$’000
                
                
                US$’000
                
                
                US$’000
                
                
                US$’000
                
                
                US$’000
                
                
                US$’000Balance
      at January 1, 2008
                
                
                10,404,550
                
                
                
                11
                
                
                
                18,989
                
                
                
                3,199
                
                
                
                3,017
                
                
                
                17,610
                
                
                
                42,826Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,049
                
                
                
                7,049Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,556
                
                
                
                -
                
                
                
                2,556Transfer
      to dedicated reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                588
                
                
                
                -
                
                
                
                (588
                )
                
                
                -Balance
      at December 31, 2008
                
                
                10,404,550
                
                
                
                11
                
                
                
                18,989
                
                
                
                3,787
                
                
                
                5,573
                
                
                
                24,071
                
                
                
                52,431Balance
      at January 1, 2009Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,147
                
                
                
                1,147Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                245
                
                
                
                -
                
                
                
                245Transfer
      to dedicated reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                191
                
                
                
                -
                
                
                
                (191
                )
                
                
                -Balance
      at March 31, 2009 (unaudited)
                
                
                10,404,550
                
                
                
                11
                
                
                
                18,989
                
                
                
                3,978
                
                
                
                5,818
                
                
                
                25,027
                
                
                
                53,823
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  5
  Telestone
Technologies Corporation
 
 Condensed
Consolidated Statements of Cash Flows
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
 
 (Unaudited)Three months ended March 31,2009
                      
                      
                      2008US$’000
                      
                      
                      US$’000Cash
      flows from operating activitiesNet
      income
                      
                      
                      1,147
                      
                      
                      
                      837Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
      and amortization
                      
                      
                      90
                      
                      
                      
                      77Allowance
      for doubtful accounts
                      
                      
                      307
                      
                      
                      
                      74Changes
      in assets and liabilities:Accounts
      receivable
                      
                      
                      (5,917
                      )
                      
                      
                      (1,811
                      )Due
      from related parties
                      
                      
                      (170
                      )
                      
                      
                      -Inventories
                      
                      
                      (2,438
                      )
                      
                      
                      858Prepayment
                      
                      
                      873
                      
                      
                      
                      (166
                      )Other
      current assets
                      
                      
                      30
                      
                      
                      
                      (39
                      )Accounts
      payable
                      
                      
                      2,860
                      
                      
                      
                      129Customer
      deposits for sales of equipment
                      
                      
                      35
                      
                      
                      
                      109Due
      to related parties
                      
                      
                      31
                      
                      
                      
                      (7
                      )Taxes
      payable
                      
                      
                      789
                      
                      
                      
                      198Accrued
      expenses and other accrued liabilities
                      
                      
                      440
                      
                      
                      
                      (683
                      )Net
      cash used in operating activities
                      
                      
                      (1,923
                      )
                      
                      
                      (424
                      )Cash
      flows from investing activitiesPurchase
      of property, plant and equipment
                      
                      
                      (203
                      )
                      
                      
                      (28
                      )Net
      cash used in investing activities
                      
                      
                      (203
                      )
                      
                      
                      (28
                      )Cash
      flows from financing activitiesRepayment
      of short-term bank loans
                      
                      
                      (1,172
                      )
                      
                      
                      -Repayment
      of long-term loan
                      
                      
                      -
                      
                      
                      
                      (7
                      )Net
      cash used in financing activities
                      
                      
                      (1,172
                      )
                      
                      
                      (7
                      )Net
      decrease in cash and cash equivalents
                      
                      
                      (3,298
                      )
                      
                      
                      (459
                      )Cash
      and cash equivalents, beginning of the period
                      
                      
                      7,866
                      
                      
                      
                      5,473Effect
      on exchange rate changes
                      
                      
                      68
                      
                      
                      
                      (96
                      )Cash
      and cash equivalents, end of the period
                      
                      
                      4,636
                      
                      
                      
                      4,918Supplemental
      disclosure of cash flows informationInterest
      received
                      
                      
                      7
                      
                      
                      
                      10Interest
      paid
                      
                      
                      (32
                      )
                      
                      
                      (36
                      )Tax
      paid
                      
                      
                      (1
                      )
                      
                      
                      (5
                      )
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  6
  Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
  1.           ORGANIZATION
AND PRINCIPAL ACTIVITIES
  Telestone
Technologies Corporation (“TSTC”), formerly known as Milestone Capital, Inc. was
organized under the laws of the State of Colorado in February 1987 under the
name Shield Enterprises, Inc.  In August 2004, TSTC reincorporated in
the State of Delaware under the name Telestone Technologies
Corporation.
  Success
Million International Limited (“SMI”), a company established in the Hong Kong
Special Administrative Region of the People’s Republic of China (the “PRC”) on
August 23, 2004, is a wholly owned subsidiary of TSTC and had no business
operations since incorporation. Beijing Telestone Technology Company Limited
(“Beijing Telestone”), a wholly-owned subsidiary of SMI, established in Beijing,
the PRC with an operating period until April 12, 2024, and is engaged in the
business of design, development, installation and trading of wireless
telecommunication coverage system equipment.
  Beijing
Telestone Wireless Telecommunication Company Limited (“BTWTC”)(note), a
company established in Beijing, the PRC with tenure of 20 years from June 17,
2005 to June 16, 2025 for provision of wireless telecommunication networking and
system integration services, is owned by two stockholders of TSTC, Mr. Han
Daqing and Mr. Luo Zhengbin, both are also directors of TSTC. A declaration of
trust was signed between the two stockholders and directors of TSTC and Beijing
Telestone on June 12, 2005 that BTWTC is held by the two stockholders and
directors of TSTC on behalf of Beijing Telestone which is the beneficial owner
of BTWTC. Beijing Telestone does not own any direct ownership interests in BTWTC
because Beijing Telestone is considered as a foreign entity under the PRC laws.
Due to the restrictions on foreign ownership to provide and engage in certain
wireless telecommunication services in the PRC, Beijing Telestone, through loans
to the two stockholders and directors of TSTC, established BTWTC with a view to
conduct such operations without violating the relevant PRC rules and regulations
as such BTWTC is not considered as a foreign entity. Pursuant to the declaration
of trust as described above, Beijing Telestone generally has economic control
over BTWTC and is considered as the primary beneficiary of BTWTC. In light of
the above, BTWTC is considered as a variable interest entity (“VIE”) of Beijing
Telestone and the financial statements of BTWTC are consolidated into the
financial statements of Beijing Telestone for all periods presented in
accordance with the FIN 46(R), “Consolidation of Variable Interest
Entities”.
  On July
5, 2007, BTWTC, Shandong Guolian Telecommunication Technology Limited
(“Guolian”)(note) and
owners of Guolian entered into a Share Transfer Agreement (the “Agreement”).
Under the Agreement, 100% equity ownership interests in Guolian and its wholly
owned subsidiary, Pan-pacific Telecommunication Company Limited
(“Pan-pacific”)(note),
had been transferred by the owners of Guolian to BTWTC. Guolian and Pan-pacific
were established in Jinan, Shandong Province, the PRC on February 9, 1999 and
October 22, 1999 respectively. The principal business activities of Guolian and
Pan-pacific are design, development, production and installation and trading of
wireless telecommunication coverage system equipment.
  On
October 8, 2007, BTWTC has established a wholly-owned subsidiary company named
Beijing Telestone Communication Technology Corporation Limited (“BTCTC”)(note)with operating period of 20 years until October 7, 2027. The principal
activity of BTCTC is developing and managing the business operation of the
Company outside the PRC.
  
 7
 Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
 1.           ORGANIZATION
AND PRINCIPAL ACTIVITIES (CONTINUED)
  In this
report, TSTC, SMI, Beijing Telestone, BTWTC, Guolian, Pan-pacific and BTCTC are
collectively referred to as the “Company”.
 
 Note:
              These
      are direct translation of name in Chinese for identification purpose only
      and are not the official name in
English.
  2.           PREPARATION
OF INTERIM FINANCIAL STATEMENTS
  Basis
of presentations
 The
accompanying unaudited condensed consolidated financial statements as of March
31, 2009, have been prepared based upon Securities and Exchange Commission
("SEC") rules that permit reduced disclosure for interim periods and include, in
the opinion of management, all adjustments (consisting of normal recurring
adjustments and reclassifications) necessary to present fairly the financial
position, results of operations and cash flows as of March 31, 2009 and for all
periods presented.
  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("USA") have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Form-10K for
the year ended December 31, 2008 filed on March 31, 2009. The results of
operations for the three-month periods ended March 31, 2009 and 2008 are not
necessarily indicative of the operating results to be expected for the full
year.
  The
condensed consolidated financial statements and accompanying notes are presented
in United States dollars and prepared in conformity with accounting principles
generally accepted in the USA ("USGAAP") which requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
  Basis
of consolidation
 The
financial statements include the accounts of TSTC, its subsidiaries and a
VIE.  All significant intercompany accounts and transactions have been
eliminated upon consolidation.
  3.           EARNINGS
PER SHARE
  The
Company reports earnings per share in accordance with the provisions of SFAS
128, “Earnings Per Share”. SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology used in
computing such earnings per share.
  Basic
earnings per share is computed based upon the weighted average number of shares
of common stock outstanding during each period.
   8
 Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
  3.           EARNINGS
PER SHARE (CONTINUED)
  Diluted
earnings per share is computed based on net income for the periods presented
attributable to stockholders on the weighted average number of common stock
outstanding during the periods presented, adjusted for the effect of the
dilutive common stock equivalents outstanding during the periods presented. The
dilutive effect of warrants to purchase common stock which were outstanding
during the period is reflected in diluted earnings per share by application of
the treasury stock method.
 
 4.           INCOME
TAXES
 
 TSTC and
its subsidiaries are subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which each entity is
domiciled.
 
 TSTC had
a net operating loss carry-forward for income tax reporting purposes that might
be offset against future taxable income. These net operating loss carry-forwards
are severely limited when TSTC experiences a change in
control.  Therefore, following the re-capitalization in August 2005,
the amount available to offset future taxable income is limited. No tax benefit
has been reported in the financial statements, because TSTC believes that it is
more likely than not that the carry-forwards will finally expire and therefore
cannot be used.  Accordingly, the potential tax benefits of the loss
carry-forwards are offset by a valuation allowance of the same
amount.
 
 No
provision for withholding or United States federal or state income taxes or tax
benefits on the undistributed earnings and/or losses of the Company's
subsidiaries has been provided as the earnings of these subsidiaries, in the
opinion of the management, will be reinvested indefinitely.
  The
Company’s income is principally generated in the PRC by Beijing Telestone,
BTWTC, BTCTC, Guolian and Pan-pacific. Except for income from Beijing Telestone
which was still subject to the PRC concessionary income tax rate of 24% in
fiscal year 2008, all income of the Company had been taxed by the unified income
tax rate of 25% since January 1, 2008 by virtue of the New Enterprise Income Tax
Law (“NEITL”) of the PRC issued on March 16, 2007.
  The NEITL
had unified the enterprise income tax as three applicable rates as
follows:
 
 Unified
      EIT rate effective January 1, 2008
                    
                    
                    25
                    %Small
      scale / low profit enterprises
                    
                    
                    20
                    %High
      / new technology enterprises
                    
                    
                    15
                    %
 
 Beijing
Telestone has been registering as a high / new technology enterprise (“Hi-tech
enterprise”) under the NEITL in 2009 while the examination of qualifying as a
Hi-tech enterprise has still been undergoing by the local tax bureau as of the
date of these financial statements.
  All
income of the Company generated during the 3 months ended March 31, 2009 is
subject to the unified income tax rate of 25%
   9
 Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
 4.           INCOME
TAXES (CONTINUED)
  Income
tax expenses have been provided at the following rates on the respective
subsidiaries’ estimated assessable incomes arising from PRC during the periods
presented.
 (Unaudited)
                          Three months ended
                          March 31,2009
                        
                        
                        2008%
                        
                        
                        %Beijing
      Telestone
                        
                        
                        25
                        
                        
                        
                        24BTWTC
                        
                        
                        25
                        
                        
                        
                        25BTCTC
                        
                        
                        25
                        
                        
                        
                        25Guolian
                        
                        
                        25
                        
                        
                        
                        25Pan-pacific
                        
                        
                        25
                        
                        
                        
                        25
 
 (a)
              Income
      tax expenses comprised the
following:
 (Unaudited)
                        Three months ended
                        March 31,2009
                      
                      
                      2008US$’000
                      
                      
                      US$’000Current
      taxUnited
      States
                      
                      
                      -
                      
                      
                      
                      -PRC
                      
                      
                      529
                      
                      
                      
                      203529
                      
                      
                      
                      203
  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.
  By
adoption of FIN 48, the Company has analyzed its filing positions in all of
the federal, state and foreign jurisdictions where it is required to file income
tax returns. As of March 31, 2009 and December 31, 2008, the Company has
identified the jurisdictions in the United States and PRC as “major” tax
jurisdictions, as defined, in which it is required to file income tax returns.
Based on the evaluations noted above, the Company has concluded that there are
no significant uncertain tax positions requiring recognition in its consolidated
financial statements.  Based on a review of tax positions for all open
years, no reserves for uncertain income tax positions have been recorded
pursuant to FIN 48 during the three months ended March 31, 2009 and during the
year ended December 31, 2008, 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.
  
 10
 Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
 4.           INCOME
TAXES (CONTINUED)
 
 (a)
              Income
      tax expenses (Continued)
  As of
March 31, 2009 and December 31, 2008, the Company had no unrecognized tax
benefits or accruals for the potential payment or interest and penalties. The
Company’s policy is to record interest and penalties in this connection as a
component of the provision for income tax expense. For the three-month periods
ended March 31, 2009 and 2008, no interest or penalties were
recorded.
 
 (b)
              Reconciliation
      from the expected statutory tax rate in PRC of 25% (2008:25%) is as
      follows:
 
 (Unaudited)
                          Three months ended
                          March 31,2009
                        
                        
                        2008%
                        
                        
                        %Statutory
      rate – PRC
                        
                        
                        25.0
                        
                        
                        
                        25.0Difference
      in tax rate of a subsidiary of the Company
                        
                        
                        -
                        
                        
                        
                        (0.6
                        )Tax
      exemption
                        
                        
                        -
                        
                        
                        
                        (12.9
                        )Non-deductible
      items
                        
                        
                        7.4
                        
                        
                        
                        9.3Others
                        
                        
                        (0.8
                        )
                        
                        
                        (1.3
                        )Effective
      tax rate
                        
                        
                        31.6
                        
                        
                        
                        19.5
  5.           OPERATING
RISK
 
 (a)
                Concentration
      of major customers and
suppliers
 (Unaudited)
                            Three months ended
                            March 31,2009
                          
                          
                          2008US$’000
                          
                          
                          US$’000Major
      customers with revenues of more than 10% of the Company’s total
      revenuesSales
      to major customers
                          
                          
                          7,447
                          
                          
                          
                          5,448Percentage
      of sales
                          
                          
                          94
                          %
                          
                          
                          84
                          %Number
                          
                          
                          3
                          
                          
                          
                          2Major
      suppliers with purchases of more than 10% of the Company’s
      purchasesPurchases
      from major suppliers
                          
                          
                          1,073
                          
                          
                          
                          8,064Percentage
      of purchases
                          
                          
                          25
                          %
                          
                          
                          93
                          %Number
                          
                          
                          2
                          
                          
                          
                          3
  
 11
 Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
 5.           OPERATING
RISK (CONTINUED)
 
 (a)
              Concentration
      of major customers and suppliers
(Continued)
  Accounts
receivable related to the Company’s major customers comprised 99% and 96% of all
accounts receivables as of March 31, 2009 and December 31, 2008
respectively.
 
 Credit
      risk represents the accounting loss that would be recognized at the
      reporting date if counter parties failed to perform as contracted.
      Concentrations of credit risk (whether on or off balance sheet) that arise
      from financial economic characteristics that would cause their ability to
      meet contractual obligations to be similarly affected by changes in
      economic or other conditions. The major concentrations of credit risk
      arise from the Company’s accounts receivable. Even though the Company has
      major concentrations, it does not consider itself exposed to significant
      risk with regards to the related
receivables.
 
 (b)
              Country
      risks
 
 The
      Company may also be exposed to the risks as a result of its principal
      operation being primarily in the PRC. These include risks associated with,
      among others, the political, economic and legal environmental and foreign
      currency exchange. The Company’s results may be adversely affected by
      change in the political and social conditions in the PRC, and by changes
      in governmental policies with respect to laws and regulations,
      anti-inflationary measures, currency conversion and remittance abroad, and
      rates and methods of taxation, among other things. The Company’s
      management does not believe these risks to be significant. There can be no
      assurance, however, those changes in political and other conditions will
      not result in any adverse impact.
 
 (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.
  
 12
 Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
 6.           ACCOUNTS
RECEIVABLE
 (Unaudited)
                        As of
                        March 31,
                        2009
                      
                      
                      As of
                        December 31,
                        2008US$’000
                      
                      
                      US$’000Completed
      contracts
                      
                      
                      67,437
                      
                      
                      
                      65,454Retentions
                      
                      
                      6,648
                      
                      
                      
                      2,45874,085
                      
                      
                      
                      67,912Allowance
      for doubtful accounts
                      
                      
                      (6,083
                      )
                      
                      
                      (5,776
                      )68,002
                      
                      
                      
                      62,136
  Of the
retentions balance as of March 31, 2009 and December 31, 2008, approximately
US$2,770 and US$368 respectively are expected to be collected after one
year.
  7.           GOODWILL
 
 Goodwill
acquired in connection with the acquisition of Guolian and Pan-pacific by BTWTC
on July 5, 2007 represented the excess of the purchase cost over the fair value
of identifiable net assets acquired at acquisition date. Goodwill is tested at
least annually for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets.
 
 8.           PROPERTY,
PLANT AND EQUIPMENT, NET
 
 Property, plant and equipment are
summarized as follows:
 Estimated useful life
                          
                          (Unaudited)
                            As of
                            March 31,
                            2009
                          
                          
                          As of
                            December 31,
                            2008(in
      years)
                          
                          US$’000
                          
                          
                          US$’000Buildings
                          
                          30
                          
                          
                          311
                          
                          
                          
                          311Leasehold
      improvement
                          
                          5
                          
                          
                          86
                          
                          
                          
                          86Plant
      and machinery
                          
                          5
                          
                          
                          650
                          
                          
                          
                          599Office
      equipment
                          
                          5
                          
                          
                          1,016
                          
                          
                          
                          934Motor
      vehicles
                          
                          5
                          
                          
                          622
                          
                          
                          
                          5002,685
                          
                          
                          
                          2,430Accumulated
      depreciation
                          
                          
                          
                          
                          (1,511
                          )
                          
                          
                          (1,380
                          )1,174
                          
                          
                          
                          1,050
  
 13
  Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
  9.           SHORT-TERM
BANK LOANS
  All
      bank loans are secured by guarantees provided by a director, Mr. Han
      Daqing and an independent guaranty company.  The bank loans are
      charged at interest rate of 7.47% per annum and wholly repayable within
      one year.
  10.           INVENTORIES
  Inventories consisted of the
followings:
 (Unaudited)
                      As of
                      March 31,
                      2009
                    
                    
                    As of
                      December 31,
                      2008US$’000
                    
                    
                    US$’000Raw
      materials
                    
                    
                    -
                    
                    
                    
                    5Finished
      goods
                    
                    
                    10,313
                    
                    
                    
                    7,83810,313
                    
                    
                    
                    7,843
 
 11.           SEGMENT
INFORMATION
 
 During
the period ended March 31, 2009 and the year ended December 31, 2008, all
revenues of the Company are from its network installation and optimization
services and trading of wireless telecommunication products.  No
financial information by business segment is presented.
 
 As the
Company operates mainly in the PRC and over 98% of its revenue and operating
profit are from the PRC, no geographical analysis is presented.
 
 12.
              COMMON
      STOCK
 
 As of
March 31, 2009 and December 31, 2008, the authorized capital of TSTC is
110,000,000 shares within which 100,000,000 being shares of common stock with a
par value of $0.001, and 10,000,000 being shares of preferred stock with a par
value of $0.001.
 
 TSTC had
10,404,550 shares of outstanding common stock and 192,403 outstanding warrants
as of March 31, 2009 and December 31, 2008.
  
 14
 Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
 13.           RELATED
PARTY TRANSACTIONS
 
 Summary
of related party transactions
 Note
                                    
                                    
                                    (Unaudited)
                                      As
      of
                                      March
      31,
                                      2009
                                    
                                    
                                    As
      of
                                      December
      31,
                                      2008US$’000
                                    
                                    
                                    US$’000Due
      from related partiesEmployees
                                    
                                    
                                    a
                                    
                                    
                                    
                                    572
                                    
                                    
                                    
                                    430Ex-stockholders
      of SMI/Guolian
                                    
                                    
                                    b
                                    
                                    
                                    
                                    1,432
                                    
                                    
                                    
                                    1,3962,004
                                    
                                    
                                    
                                    1,826Due
      to related partiesDirectors
                                    
                                    
                                    a
                                    
                                    
                                    
                                    201
                                    
                                    
                                    
                                    200Ex-stockholders
      of Beijing Telestone/Guolian
                                    
                                    
                                    b
                                    
                                    
                                    
                                    1,510
                                    
                                    
                                    
                                    1,4731,711
                                    
                                    
                                    
                                    1,673Guarantor
      of short term loanA
      director
                                    
                                    
                                    9
                                    
                                    
                                    
                                    1,758
                                    
                                    
                                    
                                    2,918
 
 Note:
 
 (a)
              The
      amounts due from employees and due to directors represent unsecured
      advances made to those parties from time to time. These amounts are
      interest free and repayable on
demand.
 
 (b)
              Included
      in the amounts due to ex-stockholders of Beijing Telestone, US$1,287
      represented the consideration arising from the consummation of the
      business combination. The ex-stockholders of SMI had represented that they
      had fully settled the amount with the ex-stockholders of Beijing Telestone
      and also undertaken to fully indemnify SMI against any claims from the
      ex-stockholders of Beijing Telestone (the “Undertaking”). However, an
      ex-stockholder of Beijing Telestone has initiated lawsuit against SMI
      alleging that the consideration amount has not been settled. The court
      hearing commenced on May 10, 2007 and finalized on December 19, 2007.
      Verdict has been issued by the Second Intermediate People’s Court of
      Beijing (“北京市第二中級人民法院”)
      and announced that SMI and Beijing Telestone are not required to
      compensate for the ex-stockholder of SMI.  On 23 October 23,
      2008, another verdict was issued by the High People’s Court of Beijing
      (“北京市高級人民法院”)
      to announce that the verdict from Second Intermediate People’s Court of
      Beijing was kept and SMI was not require to compensate for the
      ex-shareholder.
  
 15
  Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
 
 14.          COMMITMENTS
AND CONTINGENCIES
 
 The
Company recognizes its revenue upon the completion of contract and has made full
tax provision in accordance with relevant national and local laws and
regulations of the PRC.  A contract is considered completed upon
completion of all essential contract work and the installation has been accepted
by the customer. It is the common practice in the PRC that invoices are not
issued to customers until payments are received. The Company follows the
practice of reporting its revenue for PRC tax purposes when invoices are issued.
All unbilled revenue will become taxable when invoices are issued. For PRC tax
reporting purpose, PRC subsidiaries of the Company recognized revenue on an
“invoice basis” instead of when goods are delivered and services are rendered.
This is not in strict compliance with the relevant laws and
regulations.  Accordingly, despite the fact that the PRC subsidiaries
of the Company had made full tax provision in the financial statements, these
PRC subsidiaries may be subject to penalties for the deferred reporting of tax
obligations. The exact amount of penalties cannot be estimated with any
reasonable degree of certainty.  The board of directors considers it
is more-likely-than-not that the tax penalties will not be imposed.
 
 15.          STOCK
OPTION PLAN
  On June
27, 2005, a Stock Option Plan was approved at the 2005 annual meeting of
stockholders. The purpose of the Plan is to promote the growth and general
prosperity of the Company by permitting the Company to grant options to purchase
common stock and restricted stock of the Company to key employees, non-employee
directors, and advisors.  The Plan is designed to help the Company and
its subsidiaries and affiliates attract and retain superior personnel for
positions of substantial responsibility and to provide key employees,
non-employee directors, and advisors with an additional incentive to contribute
to the success of the Company.
  No
options have been granted to any parties during the three-month periods ended
March 31, 2009 and 2008 and as of the date of these financial
statements.
 
 16.
              RECENT
      ACCOUNTING PRONOUNCEMENTS
 
 In
May 2008, the FASB issued Statement of Financial Accounting Standards
No. 162 (SFAS No. 162), The Hierarchy of Generally Accepted
Accounting Principles. The new standard is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
non-governmental entities. SFAS No. 162 is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. This statement does not change the
Company’s current accounting practices.
  
 16
 Telestone
Technologies Corporation
 
 Notes
to Condensed Consolidated Financial Statements
 For the 3
months ended March 31, 2009 and 2008
 (Dollars
in thousands except share data and per share amounts)
 16.
                RECENT ACCOUNTING
      PRONOUNCEMENTS
(CONTINUED )
 
 In May
2008, the FASB issued SFAS 163, Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60 to
require that an insurance enterprise recognize a claim liability prior to an
event of default (insured event) when there is evidence that credit
deterioration has occurred in an insured financial obligation and clarify how
Statement 60 applies to financial guarantee insurance contracts. This FAS 163 is
effective for financial statements issued after December 15, 2008. The adoption
of this Statement did not have any impacts on the Company’s financial position
or results of operations because the Company did not have such financial
contracts.
 
 In June
2008, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force
(“EITF”) Issue No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities.
This FSP clarified that unvested share-based payment awards that contain
non-forfeitable rights to distributions or distribution equivalents, whether
paid or unpaid, are participating securities as defined in Statement of
Financial Accounting Standard (“SFAS”) No. 128, Earnings Per Share and are
to be included in the computation of earnings per unit pursuant to the two-class
method of calculating earnings per unit as described in SFAS No. 128. This
FSP is effective for financial statements issued after December 15, 2008.
The adoption of this FSP did not have any impacts on the Company’s financial
position or results of operations because the Company did not have such
share-based payment.
  In
September 2008, the FASB issued for comment revisions to SFAS No. 140 and FASB
Interpretation No. 46, as revised (“FIN 46R”), “Consolidation of Variable Interest
Entities”. The changes proposed include a removal of the scope exemption
from FIN 46R for QSPEs, a revision of the current risks and rewards-based FIN
46R consolidation model to a qualitative model based on control and a
requirement that consolidation of VIEs be re-evaluated on an ongoing basis.
Although the revised standards have not yet been finalized, these changes may
have a significant impact on the Company’s consolidated financial statements as
the Company may be required to deconsolidate certain assets and liabilities due
to the ongoing evaluation of its primary beneficiary status. In addition, the
Company may also be required to consolidate other VIEs that are not currently
consolidated based an analysis under the current FIN 46R consolidation model.
The proposed revisions would be effective, if approved, for fiscal years that
begin after November 15, 2009. The Company is currently evaluating the impact of
the adoption of this proposed revision on its consolidated financial
statements.
  In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of a
Financial Asset When The Market for That Asset Is Not Active”
(“FSP 157-3”), to clarify the application of the provisions of
SFAS 157 in an inactive market and how an entity would determine fair value
in an inactive market. FSP 157-3 became effective on October 10, 2008. The
application of the provisions of FSP 157-3 does not materially affect the
Company’s financial condition or results of operations.
  In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4 and
FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for financial statements
issued after December 15, 2008. The application of the provisions of FSP FAS
140-4 and FIN 46(R)-8, does not change the Company’s current accounting
practices and disclosures.
  
 17
  Condensed
      Consolidated Financial StatementsTelestone
      Technologies CorporationThree
      months ended March 31, 2009 and
2008
  18


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




The
following is management’s discussion and analysis of certain significant factors
which have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as well
as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words “believes,”
“anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents we file with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not be
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 in services network to our customers in the PRC.





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





Our
wireless coverage solutions business is comprised of research, development and
the application of wireless communications technology. In addition to sales of
our internally designed wireless communication equipment, including repeaters,
antennas and radio frequency accessories, we also provide project design,
project management, installation, maintenance and other after-sales services in
accordance with our customers’ requirements.





Since the
establishment of Telestone in 1997, we have gradually developed business
relationships with China’s dominant telecommunication groups: China Mobile Group
(“China Mobile”), China Unicom Group (“China Unicom”), China Telecom Group
(“China Telecom”) and China Netcom Group (“China Netcom”).  Due to the
reconstruction of the Chinese telecom industry, China Netcom was acquired by
China Unicom on October 15, 2008. As a result, there was no corresponding sales
revenue from China Netcom in the current period. We have combined the revenue of
China Unicom and China Netcom in this report.





During
the three months ended March 31, 2009 we improved our business relationships
with our wireless system equipment vendors within China. We have been exploring
the wireless system equipment industry over the past year and have continued to
expand our business into overseas markets as well. So far, our marketing effort
has been expanded to twenty eight (28) countries in the world, including the
U.S., Vietnam, Mexico, Brazil, Russia, India, The Philippines, Thailand,
Ireland, Ecuador, Mongolia, South Africa, Turkey, Indonesia and New Zealand.
Expansion outside of China is a relatively new strategy for Telestone. The
Company is pleased with the initial results and believes that the quality of the
products and services will allow Telestone to be increasingly competitive
internationally.





Our major
achievements during the three months ended March 31, 2009 are summarized as
follows:





First, we standardized our
internal code of standard parts of products and issued our product list for our
proprietary WFDSTM
products launched in 2008 for customers. In total, 43 products are categorized
within three categories, namely: main equipment, extension equipment and remote
equipment.


19


Second,
we have entered into a strategic cooperation with Huawei Technologies Corp.,
which we believe formed a solid foundation for future market
expansion.





Third, in
February 2009, the Company started to declare our independent innovative
products to the Beijing municipal government’s panel of experts in order to win
listing on the third edition of the independent innovative products catalog. The
catalog is the chosen list for government procurement organized by the municipal
government of Beijing, including 107 independent innovative
products.  Six of our independent innovative products are currently
selected. Selection to the catalog would increase future cooperation with the
Chinese government and our market share.





In
addition, a RMB 45,000,000 (about $6,592,500) bank credit facility was approved
for the Company, which will increase liquidity and facilitate business expansion
opportunities.





Business
Strategy





In order
to maintain our position as one of the leading companies in the PRC’s wireless
coverage solutions sector, and expand and diversify our revenue, we have adopted
a three-pronged strategy to achieve our goals:




1. We
plan to continue to invest in research and development for our key technologies
and our products to enhance our leading position in wireless coverage technology
and take full advantage of the PRC’s investment in the 3G networks. We have
dedicated research and development to wireless coverage solutions for the
continued development of our business. Our proprietary WFDSTM product
is one of the leading indoor wireless coverage products in China. Compared with
other traditional wireless distribution systems, the WFDSTM system
has many advantages. First, WFDSTM adopts
fiber to transport signals. Based on the low signal loss characteristic of
fiber, through which signals can transmit long distances, the main unit (MU) can
be placed closer to the signal source and the remote unit (RU) can be placed
closer to subscribers.  Therefore, a micro power signal source can be
used, which reduces interference and noise, purifies the electromagnetic
environment, and expands the coverage area. Second, due to the input port of the
MU connecting to the signal combiner, WFDSTM systems
can support multiple signals access and network integration. WFDSTM
provides all communication services access in 500kHz~3GHz broadband bandwidth
for subscribers. Third, due to the fact that each node of the system has the
same bandwidth and flow characteristics, WFDSTM
provides the same communication services for every subscriber. WFDSTM systems
are also convenient and flexible for implementing expansion and upgrading of the
systems with minimum cost.





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




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


20


BUSINESS
OUTLOOK





We
believe the fact that the Chinese telecom restructuring and the issuance of 3G
licenses in China with an investment in the construction of the 3G system of
approximately $ 60 billion over the next three years, an average of
approximately $20 billion per year, presents an excellent opportunity for our
business development. With our advanced technologies, close relationships with
the telecom operators in China and strong management team, we believe that we
will continue to demonstrate increasingly impressive growth in the
future.





CRITICAL
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES





Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe critical accounting policies as disclosed
in our Annual Report on Form 10-K for the year ended December 31, 2008 reflect
the judgments and estimates used in preparation of our financial statements. We
believe there have been no material changes to our critical accounting policies
and estimates during the three months ended March 31, 2009 compared to those
discussed in our Annual Report on Form 10-K for the year ended December 31,
2008.





BUSINESS
OVERVIEW





The
following is a chart summarizing our results of operations for the three months
ended March 31, 2009 and 2008:




2009 Q1
                                          
                                          
                                          2008 Q1
                                          
                                          
                                          ComparisonsItem
                                          
                                          $'000
                                          
                                          
                                          % of
                                            revenue
                                          
                                          
                                          $'000
                                          
                                          
                                          % of
                                            revenue
                                          
                                          
                                          $'000
                                          
                                          
                                          %Revenue
                                          
                                          
                                          7,896
                                          
                                          
                                          
                                          
                                          
                                          
                                          6,489
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,407
                                          
                                          
                                          
                                          21.68
                                          %Cost
      of equipment and services
                                          
                                          
                                          3,196
                                          
                                          
                                          
                                          40.48
                                          %
                                          
                                          
                                          3,335
                                          
                                          
                                          
                                          51.39
                                          %
                                          
                                          
                                          -139
                                          
                                          
                                          
                                          -4.17
                                          %Gross
      profit
                                          
                                          
                                          4,700
                                          
                                          
                                          
                                          59.52
                                          %
                                          
                                          
                                          3,154
                                          
                                          
                                          
                                          48.61
                                          %
                                          
                                          
                                          1,546
                                          
                                          
                                          
                                          49.02
                                          %Sales
      and marketing expenses
                                          
                                          
                                          2,181
                                          
                                          
                                          
                                          27.62
                                          %
                                          
                                          
                                          1,515
                                          
                                          
                                          
                                          23.35
                                          %
                                          
                                          
                                          666
                                          
                                          
                                          
                                          43.96
                                          %General
      and administrative
                                          
                                          
                                          843
                                          
                                          
                                          
                                          10.68
                                          %
                                          
                                          
                                          674
                                          
                                          
                                          
                                          10.39
                                          %
                                          
                                          
                                          169
                                          
                                          
                                          
                                          25.07
                                          %Research
      and development
                                          
                                          
                                          136
                                          
                                          
                                          
                                          1.72
                                          %
                                          
                                          
                                          130
                                          
                                          
                                          
                                          2.00
                                          %
                                          
                                          
                                          6
                                          
                                          
                                          
                                          4.62
                                          %Depreciation
      and Amortization
                                          
                                          
                                          90
                                          
                                          
                                          
                                          1.14
                                          %
                                          
                                          
                                          77
                                          
                                          
                                          
                                          1.19
                                          %
                                          
                                          
                                          13
                                          
                                          
                                          
                                          16.88
                                          %Interest
      expenses
                                          
                                          
                                          41
                                          
                                          
                                          
                                          0.52
                                          %
                                          
                                          
                                          36
                                          
                                          
                                          
                                          0.55
                                          %
                                          
                                          
                                          5
                                          
                                          
                                          
                                          13.89
                                          %Other
      income
                                          
                                          
                                          267
                                          
                                          
                                          
                                          3.38
                                          %
                                          
                                          
                                          318
                                          
                                          
                                          
                                          4.90
                                          %
                                          
                                          
                                          -51
                                          
                                          
                                          
                                          -16.04
                                          %Income
      before tax
                                          
                                          
                                          1,676
                                          
                                          
                                          
                                          21.23
                                          %
                                          
                                          
                                          1,040
                                          
                                          
                                          
                                          16.03
                                          %
                                          
                                          
                                          636
                                          
                                          
                                          
                                          61.15
                                          %Income
      tax
                                          
                                          
                                          529
                                          
                                          
                                          
                                          6.70
                                          %
                                          
                                          
                                          203
                                          
                                          
                                          
                                          3.13
                                          %
                                          
                                          
                                          326
                                          
                                          
                                          
                                          160.59
                                          %Net
      income
                                          
                                          
                                          1,147
                                          
                                          
                                          
                                          14.53
                                          %
                                          
                                          
                                          837
                                          
                                          
                                          
                                          12.90
                                          %
                                          
                                          
                                          310
                                          
                                          
                                          
                                          37.04
                                          %


21


Our
revenues for the three months ended March 31, 2009 were derived from system
integration services to domestic telecom carriers, direct product sales to
system integration providers and direct product sales to overseas markets. Our
operating revenues are composed of sales of wireless equipment and service
income that includes system integration, engineering services, technical
support, wireless network optimization and network maintenance.





Our
revenues for the three months ended March 31, 2009 was $7,896,000, increasing by
$1,407,000, or 21.68%, as compared to the same period of the previous year. The
main reason of revenues increase is the increase in the number of construction
projects from our major customers with 3G launching projects in 55 cities in
China on May 17, 2009, which was known as “world telecommunication day” in
China.  Meanwhile, additional efforts were made on marketing to gain
market share.





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





RESULTS
OF OPERATION





Revenue





For the
three months ended March 31, 2009, our revenues were $7,896,000, representing an
increase of 21.68% as compared to the same period in 2008. The main reason for
the increase in our revenues is the increase in the amount of construction
projects from our major customers with 3G launching projects in 55 cities in
China.





Breakdown by
Nature





Three
months ended March 31, 2009 and 2008





2009 Q1
                                        
                                        
                                        2008 Q1
                                        
                                        
                                        Growth$'000
                                        
                                        
                                        % of
                                          revenue
                                        
                                        
                                        $'000
                                        
                                        
                                        % of
                                          revenue
                                        
                                        
                                        $'000
                                        
                                        
                                        %Product
      sales
                                        
                                        
                                        3,263
                                        
                                        
                                        
                                        41.32
                                        %
                                        
                                        
                                        3,930
                                        
                                        
                                        
                                        60.56
                                        %
                                        
                                        
                                        -667
                                        
                                        
                                        
                                        -16.97
                                        %Service
      sales
                                        
                                        
                                        4,633
                                        
                                        
                                        
                                        58.68
                                        %
                                        
                                        
                                        2,559
                                        
                                        
                                        
                                        39.44
                                        %
                                        
                                        
                                        2,074
                                        
                                        
                                        
                                        81.05
                                        %Total
                                        
                                        
                                        7,896
                                        
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        6,489
                                        
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        1,407
                                        
                                        
                                        
                                        21.68
                                        %





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





For the three months ended
March 31, 2009, revenues generated from product sales were $3,263,000, which
represented a decrease of 16.97% as compared to the same period of 2008. The
decreased products sales resulted from the reduction of purchasing prices
offered by telecommunication carriers. The purchasing prices of main equipment
were decreased by our major customers.  For the three months ended
March 31, 2009, revenues generated from service sales were $4,633,000, which
represented an increase of 81.05% as compared to the same period of
2008.  The significant increase in service sales resulted from two
main factors: the increasing quantity of integration services and the
significant increase in service prices offered by our major customers according
to their new policies on project management.


22


For the
three months ended March 31, 2009, revenues generated from product sales
accounted for 41.32% of total revenues, compared to 60.56% of total revenues in
the same period of 2008. For the three months ended March 31, 2009, revenue
generated from service sales accounted for 58.68% of total revenues, compared to
39.44% of total revenues in the same period of 2008.





Breakdown
by Customers





Three
months ended March 31, 2009 and 2008


2009 Q1
                                        
                                        
                                        2008 Q1
                                        
                                        
                                        Growth$'000
                                        
                                        
                                        % of
                                          revenue
                                        
                                        
                                        $'000
                                        
                                        
                                        % of
                                          revenue
                                        
                                        
                                        $'000
                                        
                                        
                                        %China
      Mobile
                                        
                                        
                                        2,777
                                        
                                        
                                        
                                        35.17
                                        %
                                        
                                        
                                        2,667
                                        
                                        
                                        
                                        41.10
                                        %
                                        
                                        
                                        110
                                        
                                        
                                        
                                        4.12
                                        %China
      Unicom
                                        
                                        
                                        3,183
                                        
                                        
                                        
                                        40.31
                                        %
                                        
                                        
                                        3,080
                                        
                                        
                                        
                                        47.47
                                        %
                                        
                                        
                                        103
                                        
                                        
                                        
                                        3.34
                                        %China
      Telecom
                                        
                                        
                                        1,486
                                        
                                        
                                        
                                        18.82
                                        %
                                        
                                        
                                        132
                                        
                                        
                                        
                                        2.03
                                        %
                                        
                                        
                                        1,354
                                        
                                        
                                        
                                        1,025.76
                                        %Overseas
                                        
                                        
                                        171
                                        
                                        
                                        
                                        2.17
                                        %
                                        
                                        
                                        169
                                        
                                        
                                        
                                        2.60
                                        %
                                        
                                        
                                        2
                                        
                                        
                                        
                                        1.18
                                        %Others
                                        
                                        
                                        279
                                        
                                        
                                        
                                        3.53
                                        %
                                        
                                        
                                        441
                                        
                                        
                                        
                                        6.80
                                        %
                                        
                                        
                                        -162
                                        
                                        
                                        
                                        -36.73
                                        %Total
                                        
                                        
                                        7,896
                                        
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        6,489
                                        
                                        
                                        
                                        100
                                        %
                                        
                                        
                                        1,407
                                        
                                        
                                        
                                        21.68
                                        %





Revenues
from telecom carriers were our major source of revenues during the reporting
period, and the majority of such revenues was generated from China Mobile and
China Unicom. For the three months ended March 31, 2009, our revenue generated
from China Mobile and China Unicom were $2,777,000 and $3,183, 000,
respectively, representing percentages of total revenues of 35.17% and 40.31%,
respectively.





Revenues
from China Unicom for the three months ended March  31, 2009 were
$3,183,000, representing an increase of $103,000 or 3.34%, as compared to the
same period of 2008.





Revenues
from China Mobile were $2,777,000 for the three months ended March 31, 2009,
representing an increase of  4.12% as compared to the same period of
2008.





Revenues
from China Telecom  increased to $1,486,000 for the three months ended
March 31, 2009 from $132,000 for the same period of 2008, representing an
increase of 1,025.76%. The significant increase was mainly due to the
reconstruction of Chinese Telecom industry. China Telecom has taken over the C
network previously held by China Unicom and has strengthened the construction of
the C network this year, enhancing the C network’s domestic coverage. Thus, the
revenues derived from the C network are now attributed to China Telecom rather
than China Unicom.




For the
three months ended March 31, 2009, our revenues generated from overseas were
$171,000, representing a slight increase of 1.18% compared to the same period of
2008. Despite the decreasing purchasing power in the Commonwealth of Independent
States and Southeast Asia due to the influence of the financial crisis, the
revenues of the Company generated from overseas has slightly improved as we
achieved successful development in South American markets. Revenues from Brazil,
Argentina, Mexico, and Colombia have all increased. We plan to continue seeking
new overseas markets in 2009.





For the
three months ended March 31, 2009, the total sales to other customers were
$279,000, as compared to $441,000 of the same period in 2008, representing a
decrease of 36.73% for the same period of 2008.


23


Cost
of Revenues





Three
months ended March 31, 2009 and 2008





2009 Q1
                                        
                                        
                                        2008 Q1
                                        
                                        
                                        GrowthItem
                                        
                                        $'000
                                        
                                        
                                        % of
                                          revenue
                                        
                                        
                                        $'000
                                        
                                        
                                        % of
                                          revenue
                                        
                                        
                                        $'000
                                        
                                        
                                        %Products
      sales cost
                                        
                                        
                                        1,898
                                        
                                        
                                        
                                        24.04
                                        %
                                        
                                        
                                        2,100
                                        
                                        
                                        
                                        32.36
                                        %
                                        
                                        
                                        -202
                                        
                                        
                                        
                                        -9.62
                                        %Service
      cost
                                        
                                        
                                        1,298
                                        
                                        
                                        
                                        16.44
                                        %
                                        
                                        
                                        1,235
                                        
                                        
                                        
                                        19.03
                                        %
                                        
                                        
                                        63
                                        
                                        
                                        
                                        5.10
                                        %Total
                                        
                                        
                                        3,196
                                        
                                        
                                        
                                        40.48
                                        %
                                        
                                        
                                        3,335
                                        
                                        
                                        
                                        51.39
                                        %
                                        
                                        
                                        -139
                                        
                                        
                                        
                                        -4.17
                                        %





Costs of revenues include costs of
product sales and costs of system integration service sales.





For the
three months ended March 31, 2009, our total costs were $3,196,000, representing
a decrease of 4.17% as compared to the same period of 2008. The decrease was
caused by the decrease in product costs.





For the
three months ended March 31, 2009, our costs of product sales were $1,898,000,
representing a decrease of 9.62%, as compared to the same period of 2008. The
decrease in product costs was mainly the result of reducing purchasing costs
through large scale and centralized procurement.





For the
three months ended March 31, 2009, our costs of service sales were $1,298,000,
representing an increase of 5.10% as compared to the same period of 2008. The
increased costs of service sales were primarily attributable to the rising cost
of human resources and rising construction fees.





Gross
Profit and Gross Profit Margin





For the
three months ended March 31, 2009, our gross profit was $4,700,000 which
represented an increase of 49.02 % as compared to the same period of 2008. Our
gross profit margin for the three months ended March 31, 2009 was 59.52%, as
compared to 48.61% for the same period of 2008.





Our gross
profit increase during the reporting period is attributable to the same factors
as those for the increases in integration service revenues described
above.





Operating
Expenses




Three months ended March 31, 2009 and
2008





2009 Q1
                                            
                                            
                                            2008 Q1
                                            
                                            
                                            ComparisonsItem
                                            
                                            $'000
                                            
                                            
                                            % of
                                              revenue
                                            
                                            
                                            $'000
                                            
                                            
                                            % of
                                              revenue
                                            
                                            
                                            $'000
                                            
                                            
                                            %Sales
      and marketing expenses
                                            
                                            
                                            2,181
                                            
                                            
                                            
                                            27.62
                                            %
                                            
                                            
                                            1,515
                                            
                                            
                                            
                                            23.35
                                            %
                                            
                                            
                                            666
                                            
                                            
                                            
                                            43.96
                                            %General
      and administrative expenses
                                            
                                            
                                            843
                                            
                                            
                                            
                                            10.68
                                            %
                                            
                                            
                                            674
                                            
                                            
                                            
                                            10.39
                                            %
                                            
                                            
                                            169
                                            
                                            
                                            
                                            25.07
                                            %Research
      and development expenses
                                            
                                            
                                            136
                                            
                                            
                                            
                                            1.72
                                            %
                                            
                                            
                                            130
                                            
                                            
                                            
                                            2.00
                                            %
                                            
                                            
                                            6
                                            
                                            
                                            
                                            4.62
                                            %Total
                                            
                                            
                                            3,160
                                            
                                            
                                            
                                            40.02
                                            %
                                            
                                            
                                            2,319
                                            
                                            
                                            
                                            35.74
                                            %
                                            
                                            
                                            841
                                            
                                            
                                            
                                            36.27
                                            %


24


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




Sales
and Marketing Expenses





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





For the
three months ended March 31, 2009, sales and marketing expenses were $2,181,000,
representing  27.62% of total revenues, as compared to $1,515,000 or
23.35% of total revenues for the same period of 2008.  Sales and
marketing expenses for the three months ended March 31, 2009 increased by 43.96%
as compared to the same period of 2008.  Based on the forecasting of
future market growth, we increased sales and marketing expenses through the
expansion of our marketing team by recruiting additional experienced sales
persons.





General
and Administrative Expenses





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





For the
three months ended March 31, 2009, general and administrative expenses were
$843,000 representing 10.68% of total revenues, as compared to $674,000 or
10.39% of total revenues for the same period of 2008.  General and
administrative expenses for the three months ended March 31, 2009 increased by
25.07% as compared to the same period of 2008.   In order to
match long term and sustainable development, we increased the number of
experienced management personnel.





Research
& Development Expenses





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





For the
three months ended March 31, 2009, research and development expenses were
$136,000, representing 1.72% of total revenues, as compared to $130,000 or 2.00%
of total revenues, for the same period of 2008. Research and development
expenses for the three months ended March 31, 2009 increased by 4.62% compared
to the same period of 2008.





Net
Income





Due to
the increase of the gross profit, for the three months ended  March
31, 2009, our net income was $1,147,000, which represented an increase of 37.04%
, as compared to the same period of 2008.





LIQUIDITY
AND CAPITAL RESOURCES





We
generally fund our operations from internally generated cash flow. As of March
31, 2009, we had current assets of $87,766,000. Current assets comprised of
inventories of $10,313,000, accounts receivable of $68,002,000, prepayments,
deposits and other receivables of $4,815,000, and cash and cash equivalents of
$4,636,000. Current liabilities are comprised of accounts payable of
$14,685,000, tax payables of $7,623, 000, a short-term bank loan of $1,758,000,
and other payables and accruals of $14,170,000.


25


Our
trading terms with our customers are mainly on credit. As of  March
31, 2009, our account receivable were $68,002, 000 compared to $62,136,000 as of
December 31, 2008. The increase in accounts receivable is mainly due
to the  steady growth in business expansion, postponement of
project inspection and postponement of  payment by our customers due
to their concentration in the 3G network construction. We expect that the
collection of accounts receivables will be improved in the near
future.





Although
we experienced a longer accounts receivable turnover period, this is due to
traditionally long payment periods from China’s state-controlled telecom
carriers. Telestone continues to believe that all of our outstanding accounts
receivables will be paid as the Company’s major customers, China Mobile and
China Unicom, are state-owned and the Company has not experienced any
significant debts in the past.


As of
March 31, 2009, our inventories were $10,313, 000, as compared to $7,843,000 as
of December 31, 2008, which represented an increase of 31.49%. The increase in
our inventories was mainly attributable to meeting operational requirements
under the current 3G trail launching period in the
domestic market.





As of
March 31, 2009, our cash and bank balances were mainly denominated in Renminbi
(“RMB”) and United States dollars (“US$”) while our bank loans were mainly
denominated in RMB. Our revenue and expenses, assets and liabilities are mainly
denominated in RMB and US$. Recently, the exchange rate fluctuations in the PRC
have led to an appreciation of RMB. This may result in certain exchange
risks.





We have
experienced negative cash flows from operating activities for the three month
period ended March 31, 2009, which is due to extended accounts receivable
turnover period and an increase in inventory, 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 measures to reduce the turnover period, we are also exploring
the possibility of obtaining third party financing or to raise additional
capital through debt and equity financing.A RMB 45,000,000
(approximately $6,592,500) bank credit facility has been approved for the
Company in the three month period ended March 31, 2009.





Our
gearing ratio, calculated as total debt over total assets, was 41.53% as of
March 31, 2009 and 40.11% as of December 31, 2008.





CONTINGENT
LIABILITIES





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





EMPLOYMENT
AND REMUNERATIONS





We offer
competitive remunerations to our employees based on industry standards as well
as the employees’ and our performance.




OFF-BALANCE
SHEET ARRANGEMENTS




We do not
have any off-balance sheet arrangements.


26


Item
3. Quantitative and Qualitative Disclosures About Market Risk





None.





Item
4. Controls and Procedures





(a)
Evaluation of disclosure controls and procedures.




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




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




(b)
Changes in internal control over financial reporting.




During the quarter ended March 31,
2009, 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.





PART
II




OTHER
INFORMATION




Item
1.  Legal Proceedings.




None.




Item
1A. Risk Factors.





Not
required.





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




None.





Item
3.  Defaults Upon Senior Securities.




None.


27


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




None.




Item
5.   Other Information.




None.





Item
      6.
            Exhibits.




The
following documents are filed as part of this report:




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




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




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




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




SIGNATURES





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




TELESTONE
      TECHNOLOGIES CORPORATIONDate:
      May 15, 2009
                        By:
                        /s/
      Han DaqingHan
      Daqing, Chief Executive Officer(Principal
      Executive Officer)Date:
      May 15, 2009
                        By:
                        /s/
      Hong LiHong
      Li, Chief Financial Officer(Principal
      Financial
Officer)




28