**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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


**Securities
      Exchange Act of 1934**





For
      the
      quarterly period ended June 30, 2008





Commission
      File Number: 001-32503




**TELESTONE
      TECHNOLOGIES CORPORATION**


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




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




Floor
      6,
      Saiou Plaza


No.
      5
      Haiying Road


Fengtai
      Technology Park


Beijing,
      People’s Republic of China 100070


(Address
      of Principal Executive Offices)




(86
      10)
      8367-0505


(Issuer’s
      Telephone Number, Including Area Code)





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





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 filero
            Accelerated
                filero
            Non-accelerated
                filero(Do not check if a smaller reporting company)
            
            Smaller
                reporting companyx





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




As
      of August 14, 2008, 10,404,550 shares of the Issuer’s $.001 par value common
      stock were outstanding.









**TELESTONE
      TECHNOLOGIES CORPORATION**





**INDEX**





**PART
      I. FINANCIAL INFORMATION**





Page**Item
                1. Condensed Financial Statements.**Condensed
                Consolidated Statements of Operations, for the three months and six
                months
                ended June 30, 2008 and 2007 (unaudited)
            
            3Condensed
                Consolidated Balance Sheets, as of June 30, 2008 (unaudited) and
                December
                31, 2007 (audited)
            
            4Condensed
                Consolidated Statement of Stockholders’ Equity for the six months ended
                June 30, 2008 (unaudited)
            
            5Condensed
                Consolidated Statements of Cash Flows, for the six months ended June
                30,
                2008 and 2007 (unaudited)
            
            6Notes
                to Condensed Consolidated Financial Statements (unaudited)
            
            7-18**Item
                2. Management’s Discussion and Analysis or Plan of
                Operation.**
            
            19-33**Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk.**
            
            33**Item
                4. Controls and Procedures.**
            
            33**PART
                II. OTHER INFORMATION****Item
                1. Legal Proceedings.**
            
            34**Item
                1A. Risk Factors.**
            
            34**Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds.**
            
            34**Item
                3. Defaults Upon Senior Securities.**
            
            34**Item
                4. Submission of Matters to a Vote of Security
                Holders.**
            
            34**Item
                5. Other Information.**
            
            34**Item
                6. Exhibits.**
            
            34




2




**Telestone
      Technologies Corporation**





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


For
      the 6
      months ended June 30, 2008 and 2007





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





**(Unaudited)**
            
            **(Unaudited)****Three months ended**
              **June 30,**
            
            **Six****months ended**
              **June 30,****2008**
            
            2007
            
            **2008**
            
            2007*Note*
            
            ***US$’000***
            
            *US$’000*
            
            ***US$’000***
            
            *US$’000***Operating
                revenues**Sales
                of equipments
            
            
            
            
            
            **2,385**
            
            
            4,760
            
            
            **6,315**
            
            
            7,711Service
                income
            
            
            
            
            
            **3,663**
            
            
            2,096
            
            
            **6,222**
            
            
            3,941Total
                operating revenues
            
            
            
            
            
            **6,048**
            
            
            6,856
            
            
            **12,537**
            
            
            11,652**Cost
                of operating revenues**Cost
                of net sales
            
            
            
            
            
            **(1,427**
            **)**
            
            (2,557
            )
            
            **(3,530**
            **)**
            
            (4,155
            )Cost
                of service
            
            
            
            
            
            **(1,170**
            **)**
            
            (557
            )
            
            **(2,402**
            **)**
            
            (1,360
            )Total
                cost of operating revenues
            
            
            
            
            
            **(2,597**
            **)**
            
            (3,114
            )
            
            **(5,932**
            **)**
            
            (5,515
            )**Gross
                income**
            
            
            
            
            
            **3,451**
            
            
            3,742
            
            
            **6,605**
            
            
            6,137**Operating
                expenses**Sales
                and marketing
            
            
            
            
            
            **1,083**
            
            
            1,065
            
            
            **2,598**
            
            
            1,985General
                and administrative
            
            
            
            
            
            **580**
            
            
            593
            
            
            **1,253**
            
            
            1,213Research
                and development
            
            
            
            
            
            **123**
            
            
            325
            
            
            **253**
            
            
            497Depreciation
                and amortization
            
            
            
            
            
            **84**
            
            
            64
            
            
            **161**
            
            
            123Total
                operating expenses
            
            
            
            
            
            **1,870**
            
            
            2,047
            
            
            **4,265**
            
            
            3,818**Operating
                income**
            
            
            
            
            
            **1,581**
            
            
            1,695
            
            
            **2,340**
            
            
            2,319Interest
                expense
            
            
            
            
            
            **(107**
            **)**
            
            (26
            )
            
            **(143**
            **)**
            
            (51
            )Other
                income, net
            
            
            
            
            
            **625**
            
            
            11
            
            
            **943**
            
            
            11**Income
                before income taxes**
            
            
            
            
            
            **2,099**
            
            
            1,680
            
            
            **3,140**
            
            
            2,279Income
                taxes
            
            
            *4*
            
            
            **(319**
            **)**
            
            (279
            )
            
            **(522**
            **)**
            
            (430
            )**Net
                income**
            
            
            
            
            
            **1,780**
            
            
            1,401
            
            
            **2,618**
            
            
            1,849**Other
                comprehensive income**Foreign
                currency translation adjustment
            
            
            
            
            
            **29**
            
            
            42
            
            
            **1,489**
            
            
            42**Comprehensive
                income**
            
            
            
            
            
            **1,809**
            
            
            1,443
            
            
            **4,107**
            
            
            1,891**Earnings
                per share:**
            
            
            *3***Weighted
                average number of common stock outstanding**Basic
            
            
            
            
            
            **10,404,550**
            
            
            9,604,550
            
            
            **10,404,550**
            
            
            9,415,919Dilutive
                effect of warrants
            
            
            
            
            
            **62,072**
            
            
            123,606
            
            
            **72,259**
            
            
            91,833Diluted
            
            
            
            
            
            **10,466,622**
            
            
            9,728,156
            
            
            **10,476,809**
            
            
            9,507,752**Net
                income per share of common stock**Basic
                (US$)
            
            
            
            
            
            **0.17**
            
            
            0.15
            
            
            **0.25**
            
            
            0.20Diluted
                (US$)
            
            
            
            
            
            **0.17**
            
            
            0.14
            
            
            **0.25**
            
            
            0.19




3


**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Balance Sheets**


As
      of
      June 30, 2008 and December 31, 2007


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





**(Unaudited)**
              **As of June**
              **30,**
            
            As of
              December 31,**2008**
            
            2007***Note***
            
            
            ***US$’000***
            
            
            *US$’000***ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            
            
            
            
            **4,853**
            
            
            5,473Accounts
                receivable, net of allowance
            
            
            *6*
            
            
            **51,936**
            
            
            45,013Due
                from related parties
            
            
            *13*
            
            
            **1,839**
            
            
            1,792Inventories
            
            
            *10*
            
            
            **7,759**
            
            
            8,023Prepayment
            
            
            
            
            
            **1,611**
            
            
            1,169Other
                current assets
            
            
            
            
            
            **1,246**
            
            
            1,332Total
                current assets
            
            
            
            
            
            **69,244**
            
            
            62,802Goodwill
            
            
            *7*
            
            
            **3,119**
            
            
            3,119Property,
                plant and equipment, net
            
            
            *8*
            
            
            **1,092**
            
            
            1,170**4,211**
            
            
            4,289**Total
                assets**
            
            
            
            
            
            **73,455**
            
            
            67,091**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities:**Current
                portion of long term loan from related parties
            
            
            *13*
            
            
            **31**
            
            
            28Short-term
                bank loans
            
            
            *9,
                13*
            
            
            **2,856**
            
            
            2,051Accounts
                payable – Trade
            
            
            
            
            
            **8,328**
            
            
            7,614Customer
                depositsfor sales of equipment
            
            
            
            
            
            **793**
            
            
            262Due
                to related parties
            
            
            *13*
            
            
            **1,855**
            
            
            2,318Taxes
                payable
            
            
            
            
            
            **5,434**
            
            
            4,741Accrued
                expenses and other accrued liabilities
            
            
            
            
            
            **7,211**
            
            
            7,221Total
                current liabilities
            
            
            
            
            
            **26,508**
            
            
            24,235**Non-current
                liabilities:**Long
                term loan from related parties
            
            
            *13*
            
            
            **14**
            
            
            30**26,522**
            
            
            24,265**Commitments
                and contingencies**
            
            
            *14*
            
            
            **-**
            
            
            -**Stockholders’
                equity:**Preferred
                stock, US$0.001 par value, 10,000,000 shares authorized, no shares
                issued
            
            
            
            
            
            **-**
            
            
            -Common
                stock and paid-in-capital, US$0.001 par value:
              Authorized
                - 100,000,000 shares as of June 30, 2008
            
            
            
            
            
            **-**
            
            
            -Issued
                and outstanding – 10,404,550 shares as of
              June
                30, 2008 and December 31, 2007
            
            
            *12*
            
            
            **11**
            
            
            11Additional
                paid-in capital
            
            
            
            
            
            **18,989**
            
            
            18,989Dedicated
                reserves
            
            
            
            
            
            **3,199**
            
            
            3,199Other
                comprehensive income
            
            
            
            
            
            **4,506**
            
            
            3,017Retained
                earnings
            
            
            
            
            
            **20,228**
            
            
            17,610Total
                stockholders’ equity
            
            
            
            
            
            **46,933**
            
            
            42,826**Total
                liabilities and stockholders’ equity**
            
            
            
            
            
            **73,455**
            
            
            67,091




4


**Telestone
      Technologies Corporation**





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


For
      the 6
      months ended June 30, 2008


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


**Common stock issued**
                
                **Additional**
                
                
                
                **Other****Number**
                
                
                
                **paid-in**
                
                **Dedicated**
                
                **comprehensive**
                
                **Retained****of shares**
                
                **Amount**
                
                **capital**
                
                **reserves**
                
                **income**
                
                **earnings**
                
                **Total***US$’000*
                
                *US$’000*
                
                *US$’000*
                
                *US$’000*
                
                *US$’000*
                
                *US$’000*Balance
                    at January 1, 2007
                
                
                8,935,106
                
                
                9
                
                
                8,475
                
                
                2,619
                
                
                1,015
                
                
                12,152
                
                
                24,270Issuance
                    of stock (net of expenses)
                
                
                1,469,444
                
                
                2
                
                
                10,514
                
                
                -
                
                
                -
                
                
                -
                
                
                10,516Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                6,038
                
                
                6,038Foreign
                    currency translationadjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,002
                
                
                -
                
                
                2,002Transfer
                    to indicated reserves
                
                
                -
                
                
                -
                
                
                -
                
                
                580
                
                
                -
                
                
                (580
                )
                
                -Balance
                    at December 31, 2007
                
                
                10,404,550
                
                
                11
                
                
                18,989
                
                
                3,199
                
                
                3,017
                
                
                17,610
                
                
                42,826Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,618
                
                
                2,618Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,489
                
                
                -
                
                
                1,489**Balance
                    at June 30, 2008 (unaudited)**
                
                
                **10,404,550**
                
                
                **11**
                
                
                **18,989**
                
                
                **3,199**
                
                
                **4,506**
                
                
                **20,228**
                
                
                **46,933**




5


**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Statements of Cash Flows**


For
      the 6
      months ended June 30, 2008 and 2007


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





**(Unaudited)****Six months ended June 30,****2008**
            
            2007***US$’000***
            
            *US$’000***Cash
                flows from operating activities****Net
                income**
            
            
            **2,618**
            
            
            1,849Adjustments
                to reconcile net income to net cash used in operating
                activities:Loss
                on disposal of property, plant and equipment
            
            
            **1**
            
            
            3Depreciation
                and amortization
            
            
            **161**
            
            
            123Provision
                for doubtful accounts
            
            
            **200**
            
            
            402Changes
                in assets and liabilities:Accounts
                receivable
            
            
            **(5,216**
            **)**
            
            (2,497
            )Due
                from related parties
            
            
            **34**
            
            
            (235
            )Inventories
            
            
            **636**
            
            
            (806
            )Prepayment
            
            
            **(397**
            **)**
            
            214Other
                current assets
            
            
            **149**
            
            
            (193
            )Accounts
                payable
            
            
            **383**
            
            
            (1,051
            )Customer
                deposits for sales of equipment
            
            
            **530**
            
            
            191Due
                to related parties
            
            
            **(579**
            **)**
            
            3Taxes
                payable
            
            
            **491**
            
            
            2,660Accrued
                expenses and other accrued liabilities
            
            
            **(340**
            **)**
            
            (3,289
            )**Net
                cash used in operating activities**
            
            
            **(1,329**
            **)**
            
            (2,626
            )**Cash
                flows from investing activities**Purchase
                of property, plant and equipment
            
            
            **(27**
            **)**
            
            (146
            )Proceeds
                from disposal of property, plant and equipment
            
            
            **23**
            
            
            30**Net
                cash used in investing activities**
            
            
            **(4**
            **)**
            
            (116
            )**Cash
                flows from financing activities**Proceeds
                from issuance of shares (net of expenses)
            
            
            **-**
            
            
            5,460Repayment
                of long-term loan
            
            
            **(16**
            **)**
            
            (1,279
            )Proceeds
                from new short-term bank loan raised
            
            
            **714**
            
            
            -**Net
                cash generated from financing**
            
            
            **698**
            
            
            4,181**Net
                (decrease) increase in cash and cash equivalents**
            
            
            **(635**
            **)**
            
            1,439**Cash
                and cash equivalents, beginning of the period**
            
            
            **5,473**
            
            
            3,380Effect
                on exchange rate changes
            
            
            **15**
            
            
            42**Cash
                and cash equivalents, end of the period**
            
            
            **4,853**
            
            
            4,861**Supplemental
                disclosure of cash flows information**Interest
                received
            
            
            **2**
            
            
            14Interest
                paid
            
            
            **(59**
            **)**
            
            (51
            )Tax
                paid
            
            
            **(50**
            **)**
            
            -




6


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


*(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”), being considered
      as a variable interest entity (“VIE”) owned
      by
      TSTC’s directors and stockholders, was established in Beijing, the PRC with a
      tenture of 20 years from 17 June 2005 to 16 June 2025. As TSTC adopted FIN
      46(R)
      for all periods presented, the financial statements of BTWTC are consolidated
      in
      the financial statements of Beijing Telestone.





On
      July
      5, 2007, BTWTC, Shandong Guolian Telecommunication Technology Limited
      (“Guolian”) (note) and
      owners of Guolian entered into a Share Transfer Agreement (the “Agreement”).
      Under the Agreement, 100% equity ownership interests in Guolian and its wholly
      owned subsidiary, Pan-pacific Telecommunication Company Limited
      (“Pan-pacific”) (note) ,
      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”) 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.





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.*


7


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


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




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




**Basis
      of presentations**




The
      accompanying unaudited condensed consolidated financial statements as of June
      30, 2008, 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 June 30, 2008 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-10KSB
      for
      the year ended December 31, 2007 filed on March 25, 2008. The results of
      operations for the six-month periods ended June 30, 2008 and 2007 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**




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




Diluted
      earnings per share is computed based on net income for the periods presented
      attributable to 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.


8


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


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





**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 is subject to PRC income tax at a rate of 24%, all income of the Company
      is subject to PRC income taxes at an unified rate of 25% in accordance with
      the
      new enterprise income tax rates, as explained in below paragraph, implemented
      in
      the PRC from January 1, 2008.




Since
      Beijing Telestone is registered as a wholly-owned foreign investment enterprise
      (“WOFIE”), Beijing Telestone has been subject to tax laws applicable to WOFIE in
      the PRC and was fully exempt from the PRC enterprise income tax of 24% for
      two
      years commencing in fiscal year 2004, followed by a 50% reduction for the next
      three years.




On
      March
      16, 2007, a New Enterprise Income Tax Law (“NEITL”) was issued in the PRC. Prior
      to the issuance of the NEITL, domestic enterprises (“DE”) and foreign invested
      enterprises (“FIE”) in the PRC were taxed under different enterprise income tax
      laws. The NEITL unifies the enterprise tax law applicable to both DE and FIE
      commencing in fiscal year beginning from January 1, 2008. The new enterprise
      income tax (“EIT”) rates effective from January 1, 2008 are as
      follows:





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




By
      virtue
      of the NEITL, except for Beijing Telestone, BTWTC, BTCTC, Guolian and
      Pan-pacific are subject to the unified EIT rate of 25% commencing from fiscal
      year 2008.




The
      Company expects that Beijing Telestone shall become subject to the unified
      EIT
      rate of 25% under the NEITL. However, the 50% tax reduction, which has already
      been obtained by Beijing Telestone under the old tax laws, can still be
      maintained and the remaining tax holiday, which was commenced before 2008,
      can
      still be enjoyed by Beijing Telestone, until the year to expiry in
      2008.


9


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


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




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




Guolian
      had registered as a high / new technology enterprise (“Hi-tech enterprise”)
      under the old tax laws in 2006 which was subject to tax laws applicable to
      Hi-tech enterprise in the PRC and the rate of Hi-tech enterprise income tax
      was
      reduced to 15% commencing in fiscal year 2006. Since details of the
      implementation rules to obtain / re-apply the Hi-tech enterprise status under
      the NEITL are still in the process of having further clarification from the
      government of PRC, income tax for Guolian is provided at the unified EIT rate
      of
      25% for prudence.




Income
      tax expenses have been provided at the following rates on the respective
      subsidiaries’ estimated assessable income arising from PRC during the periods
      presented.


**(Unaudited)**
              **Six months ended**
              **June 30,****2008**
            
            2007%
            
            %Beijing
                Telestone
            
            
            **24**
            
            
            24BTWTC
            
            
            **25**
            
            
            33BTCTC
            
            
            **25**
            
            
            -Guolian
            
            
            **25**
            
            
            -Pan-pacific
            
            
            **25**
            
            
            -





(a) Income
      tax expenses are comprised of the following:


**(Unaudited)**
              **Six months ended**
              **June 30,****2008**
            
            2007***US$’000***
            
            *US$’000*Current
                taxUnited
                States
            
            
            **-**
            
            
            -PRC
            
            
            **522**
            
            
            430**522**
            
            
            430





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.


10


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


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




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




(a) Income
      tax expenses (Continued)





As
      of
      January 1, 2007, upon adoption of FIN48, 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 June 30, 2008 and December 31, 2007,
      the Company has identified the above jurisdictions as “major” tax jurisdictions,
      as defined, in which it is required to file income tax returns: United States
      and PRC. Based on the evaluations noted above, the Company has concluded that
      there are no significant uncertain tax positions requiring recognition in its
      consolidated financial statements. Based on a review of tax positions for all
      open years, no reserves for uncertain income tax positions have been recorded
      pursuant to FIN 48 during the six months ended June 30, 2008 and during the
      year
      ended December 31, 2007, and the Company does not anticipate that it is
      reasonably possible that any material increase or decrease in its unrecognized
      tax benefits will occur within twelve months.





As
      of
      December 31, 2007 and June 30, 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 6 months ended June
      30, 2008, no interest or penalties were recorded.





(b) Reconciliation
      from the expected statutory tax rate in PRC of 25% *(2007:24%)* is as
      follows:


**(Unaudited)**
                **Six months ended**
                **June 30,****2008**
              
              2007%
              
              %Statutory
                  rate – PRC
              
              
              **25.0**
              
              
              24.0Differences
                  in tax rates of subsidiary of the Company
              
              
              **(0.6**
              **)**
              
              (1.8
              )Tax
                  exemption
              
              
              **(8.8**
              **)**
              
              (19.4
              )Non-deductible
                  items
              
              
              **1.4**
              
              
              13.2Others
              
              
              **(0.4**
              **)**
              
              2.9Effective
                  tax rate
              
              
              **16.6**
              
              
              18.9


11


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


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




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





(a) Concentration
      of major customers and suppliers


**(Unaudited)**
                **Six months ended**
                **June 30,****2008**
              
              2007***US$’000***
              
              *US$’000**Major
                  customers with revenues of more than 10% of the Company’s
                  sales**Sales
                  to major customers*
              
              
              **10,905**
              
              
              10,633*Percentage
                  of sales*
              
              
              **87**
              **%**
              
              91
              %*Number*
              
              
              **2**
              
              
              3*Major
                  suppliers with purchases of more than 10% of the Company’s
                  purchases**Purchases
                  from major suppliers*
              
              
              **2,002**
              
              
              1,077*Percentage
                  of purchases*
              
              
              **63**
              **%**
              
              21
              %*Number*
              
              
              **2**
              
              
              1




Accounts
      receivable related to the Company’s major customers comprised 91% and 72% of all
      accounts receivables as of June 30, 2008 and December 31, 2007
      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.


12


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


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




**5.     O** **PERATING
      RISK (CONTINUED)**





(c)
            Cash
                and time deposits





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




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


**(Unaudited)**
              **As****of**
              **June 30,**
              **2008**
            
            As of
              December 31,
              2007***US$’000***
            
            *US$’000*Completed
                contracts
            
            
            **56,178**
            
            
            48,733Retentions
            
            
            **596**
            
            
            715**56,774**
            
            
            49,448Allowance
                for doubtful accounts
            
            
            **(4,838**
            **)**
            
            (4,435
            )**51,936**
            
            
            45,013




Of
      the
      retentions balance as of June 30, 2008 and December 31, 2007, approximately
      US$439 and US$30 respectively are expected to be collected after one
      year.




**7.** **GOODWILL**




**(Unaudited)**
              **As****of**
              **June 30,**
              **2008**
            
            As of
              December 31,
              2007***US$’000***
            
            *US$’000*Goodwill
            
            
            **3,119**
            
            
            3,119




The
      goodwill, represented the excess of the purchase price over the fair value
      of
      net assets acquired, arose from the acquisition of Guolian and Pan-pacific
      by
      BTWTC on July 5, 2007 and it is not being amortized, but will be tested annually
      for impairment in accordance with SFAS No. 142.


13


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


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





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





Property,
      plant and equipment is summarized as follows:





Estimated useful life
            
            **(Unaudited)**
              **As of**
              **June 30,**
              **2008**
            
            As of
              December 31,
              2007(in
                years)
            
            ***US$’000***
            
            *US$’000*Buildings
            
            
            30
            
            
            **305**
            
            
            287Leasehold
                improvement
            
            
            5
            
            
            **85**
            
            
            81Plant
                and machinery
            
            
            5
            
            
            **555**
            
            
            515Office
                equipment
            
            
            5
            
            
            **875**
            
            
            838Motor
                vehicles
            
            
            5
            
            
            **541**
            
            
            545**2,361**
            
            
            2,266Accumulated
                depreciation
            
            
            
            
            
            **(1,269**
            **)**
            
            (1,096
            )**1,092**
            
            
            1,170




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




All
                bank loans are secured by guarantees provided by the director, Mr.
                Han
                Daqing and an independent guaranty company. The bank loans are charged
                at
                interest rate of 6.57% to 7.47% per annum and wholly repayable within
                one
                year.




**10.** **INVENTORIES**




Inventories
      consisted of the followings:


**(Unaudited)**
              **As****of**
              **June 30,**
              **2008**
            
            As of
              December 31,
              2007***US$’000***
            
            *US$’000*Raw
                materials
            
            
            **30**
            
            
            29Finished
                goods
            
            
            **7,729**
            
            
            7,994**7,759**
            
            
            8,023


14


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


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





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





During
      the period ended June 30, 2008 and year ended December 31, 2007, all revenues
      of
      the Company are from its installation and trading of wireless telecommunication
      coverage system equipment. No financial information by business segment is
      presented.





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





**12.**
            **COMMON
                STOCK**





As
      of
      June 30, 2008 and December 31, 2007, 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.





On
      February 20, 2007, TSTC issued 669,444 shares of common stock and 177,403
      warrants for total net proceeds of US$5,454. The warrants are exercisable over
      a
      4-year period at a per share exercise price of US$11.6.





On
      November 30, 2007, TSTC further issued 800,000 shares of common stock for total
      net proceeds of US$5,062 in connection with the acquisition of Guolian and
      Pan-pacific.





TSTC
      had
      10,404,550 shares of outstanding common stock and 192,403 outstanding warrants
      as of June 30, 2008 and December 31, 2007.





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





**Summary
      of related party transactions**


***Note***
            
            **(Unaudited)**
              **As of**
              **June 30,**
              **2008**
            
            As of
              December 31,
              2007***US$’000***
            
            *US$’000***Due
                from related parties**Other
                employees
            
            
            *a*
            
            
            **443**
            
            
            456Ex-stockholders
                of SMI/Guolian
            
            
            *b*
            
            
            **1,396**
            
            
            1,336**1,839**
            
            
            1,792**Due
                to related parties**Directors
            
            
            *a*
            
            
            **368**
            
            
            887Ex-stockholders
                of Beijing Telestone/Guolian
            
            
            *b*
            
            
            **1,487**
            
            
            1,431**1,855**
            
            
            2,318


15


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


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





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





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


***Note***
              
              **(Unaudited)**
                **As of**
                **June 30,**
                **2008**
              
              As of
                December 31,
                2007***US$’000***
              
              *US$’000***Loan
                  from related parties**A
                  director of Beijing Telestone
              
              
              *c*
              
              
              **22**
              
              
              29A
                  close family member of a director of Beijing Telestone
              
              
              *c*
              
              
              **23**
              
              
              29**45**
              
              
              58**Current
                  portion of long term loan from related parties**
              
              
              
              
              
              **(31**
              **)**
              
              (28
              )**Long
                  term loan from related parties**
              
              
              
              
              
              **14**
              
              
              30**Guarantor
                  of short term loan**A
                  director
              
              
              *9*
              
              
              **2,856**
              
              
              2,051





Note:





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





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





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




16


**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


*(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, Beijing Telestone 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 Beijing Telestone has made full tax provision in the financial
      statements, Beijing Telestone may be subject to a penalty for the deferred
      reporting of tax obligations. The exact amount of penalty cannot be estimated
      with any reasonable degree of certainty. The board of directors considers it
      is
      more-likely-than-not that the penalty 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 period ended June 30, 2008
      and as of the date of these financial statements.





**16.**
            **RECENT
                ACCOUNTING PRONOUNCEMENTS**





In
      December 2007, the FASB issued SFAS No. 141 (Revised), *Business
      Combinations* .  SFAS
      No. 141(R) improves the relevance, representational faithfulness, and
      comparability of the information that a reporting entity provides in its
      financial reports about a business combination and requires an acquirer to
      recognize the assets acquired, the liabilities assumed, and any noncontrolling
      interest in the acquiree at the acquisition date, measured at their fair values
      as of that date.  This Statement applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15,
      2008.  The adoption of this Statement is not expected to have a
      material impact on the Company’s financial position or results of
      operations.


17




**Telestone
      Technologies Corporation**





**Notes
      to Condensed Consolidated Financial Statements**


For
      the 6
      months ended June 30, 2008 and 2007


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





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




In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial*  *Statements* .  SFAS
      No. 160 amends ARB 51 to establish accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary and clarifies that a noncontrolling interest in a subsidiary is
      an
      ownership interest in the consolidated entity that should be reported as equity
      in the consolidated financial statements.  This Statement is effective
      for fiscal years beginning on or after December 15, 2008.  The
      adoption of this Statement is not expected to have a material impact on the
      Company’s financial position or results of operations.





In
      March
      2008, the FASB issued SFAS No. 161, *Disclosures
      about Derivative Instruments and Hedging*  *Activities* ,
      an
      Amendment of FASB Statement No. 133.  SFAS No. 161 amends SFAS No. 133
      and requires entities to enhance their disclosures about (a) how and why an
      entity uses derivative instruments, (b) how derivative instruments and related
      hedged items are accounted for under SFAS No. 133 and its related
      interpretations, and (c) how derivative instruments and related hedged items
      affect an entity’s financial position, financial performance, and cash
      flows.  SFAS No. 161 is effective for fiscal years beginning on or
      after November 15, 2008.  The adoption of SFAS No. 161 is not expected
      to have a material impact on the Company’s financial position or results of
      operations.





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. The Company is currently evaluating the impact of the adoption
      of
      SFAS No. 162 on its consolidated financial statements.




In
      May
      2008, the FASB issued SFAS 163, Accounting for Financial Guarantee Insurance
      Contracts, an interpretation of FASB Statement No. 60 to requires 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 clarifies how Statement 60 applies to
      financial guarantee insurance contracts. The adoption of this Statement is
      not
      expected to have a material impact on the Company’s financial position or
      results of operations.




18




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




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





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





**BUSINESS
      DESCRIPTION**





We
      are a
      wireless communications coverage solutions provider in the People’s Republic of
      China (the “PRC”). We principally provide mobile telecommunication coverage
      solutions 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
      Mobile Group (“China Mobile”), China Unicom Group (“China Unicom”), China
      Telecom Group (“China Telecom”) and China Netcom Group (“China Netcom”), which
      are currently our main customers. During 2007 and the six months ended June
      30,
      2008, there was a significant increase in our revenue from China Mobile. During
      that time we also 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
      nineteen (19) 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 our products and services will allow
      Telestone to be increasingly competitive internationally.


19


In
      May
      2008, China announced a restructuring plan for the country’s telecom operators
      (“Restructuring”). As a result of China Telecom restructuring, Chinese operators
      will increase network expenditures significantly in expanding network coverage
      and improving network quality, which will provide a huge opportunity for
      wireless equipment suppliers. As a leading wireless coverage equipment and
      service provider, Telestone will benefit greatly from this increase in
      expenditure in the China wireless coverage market.




In
      July
      2008, Telestone had completed installation at seven Beijing Olympic venues
      and
      their matching establishments. Theses contracts are valued at more than one
      million dollars. Among these buildings, the China Athletic Training Base for
      the
      Disabled is operated using the Wireless Fiber Distribution System (WFDS), one
      of
      the leading indoor wireless coverage products in the world, which is applicable
      to 2G, 3G, Broadband access and CATV networks.





**BUSINESS
      REVIEW**





The
      following is a chart of our operations for the three months ended June 30,
      2008
      and 2007:


2008
              
              2007
              
              ComparisonsItem
              
              $'000
              
              % of revenue
              
              $'000
              
              % of revenue
              
              $'000
              
              %Revenue
              
              
              6048
              
              
              
              
              
              6856
              
              
              
              
              
              (808
              )
              
              -11.79
              %Cost
                  of equipment and services
              
              
              2597
              
              
              42.94
              %
              
              3114
              
              
              45.42
              %
              
              (517
              )
              
              -16.60
              %Gross
                  profit
              
              
              3451
              
              
              57.06
              %
              
              3742
              
              
              54.58
              %
              
              (291
              )
              
              -7.78
              %Sales
                  and marketing expenses
              
              
              1083
              
              
              17.91
              %
              
              1065
              
              
              15.53
              %
              
              18
              
              
              1.69
              %General
                  and administrative
              
              
              580
              
              
              9.59
              %
              
              593
              
              
              8.65
              %
              
              (13
              )
              
              -2.19
              %Research
                  and development
              
              
              123
              
              
              2.03
              %
              
              325
              
              
              4.74
              %
              
              (202
              )
              
              -62.15
              %Depreciation
                  and Amortization
              
              
              84
              
              
              1.39
              %
              
              64
              
              
              0.93
              %
              
              20
              
              
              31.25
              %Interest
                  expenses
              
              
              107
              
              
              1.77
              %
              
              26
              
              
              0.38
              %
              
              81
              
              
              311.54
              %Other
                  income
              
              
              625
              
              
              10.33
              %
              
              11
              
              
              0.16
              %
              
              614
              
              
              5581.82
              %Income
                  before tax
              
              
              2099
              
              
              34.72
              %
              
              1680
              
              
              24.50
              %
              
              419
              
              
              25.00
              %Income
                  tax
              
              
              319
              
              
              5.27
              %
              
              279
              
              
              4.07
              %
              
              40
              
              
              14.34
              %Net
                  income
              
              
              1780
              
              
              29.45
              %
              
              1401
              
              
              20.43
              %
              
              379
              
              
              27.05
              %





20




Six
      months ended June 30, 2008 and 2007:


2008
              
              2007
              
              ComparisonsItem
              
              $'000
              
              % of revenue
              
              $'000
              
              % of
                revenue
              
              $'000
              
              %Revenue
              
              
              12537
              
              
              
              
              
              11652
              
              
              
              
              
              885
              
              
              7.60
              %Cost
                  of equipment and services
              
              
              5932
              
              
              47.32
              %
              
              5515
              
              
              47.33
              %
              
              417
              
              
              7.56
              %Gross
                  profit
              
              
              6605
              
              
              52.68
              %
              
              6137
              
              
              52.67
              %
              
              468
              
              
              7.63
              %Sales
                  and marketing expenses
              
              
              2598
              
              
              20.72
              %
              
              1985
              
              
              17.04
              %
              
              613
              
              
              30.88
              %General
                  and administrative
              
              
              1253
              
              
              9.99
              %
              
              1213
              
              
              10.41
              %
              
              40
              
              
              3.30
              %Research
                  and development
              
              
              253
              
              
              2.02
              %
              
              497
              
              
              4.27
              %
              
              (244
              )
              
              -49.09
              %Depreciation
                  and Amortization
              
              
              161
              
              
              1.28
              %
              
              123
              
              
              1.06
              %
              
              38
              
              
              30.89
              %Interest
                  expenses
              
              
              143
              
              
              1.14
              %
              
              51
              
              
              0.44
              %
              
              92
              
              
              180.39
              %Other
                  income
              
              
              943
              
              
              7.52
              %
              
              11
              
              
              0.09
              %
              
              932
              
              
              8472.73
              %Income
                  before tax
              
              
              3140
              
              
              25.05
              %
              
              2279
              
              
              19.56
              %
              
              861
              
              
              37.78
              %Income
                  tax
              
              
              522
              
              
              4.16
              %
              
              430
              
              
              3.69
              %
              
              92
              
              
              21.40
              %Net
                  income
              
              
              2618
              
              
              20.88
              %
              
              1849
              
              
              15.87
              %
              
              769
              
              
              41.59
              %




Our
      revenues during the three month period ended June 30, 2008 were derived from
      system integration service to domestic telecom carriers, direct product sales
      to
      system integration providers and direct product sales to overseas markets.
      Our
      major customers include China Mobile, China Unicom, China Telecom and China
      Netcom. 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 this reporting period decreased as compared to the same period
      in
      2007. Our revenues for the three months period ended June 30, 2008 were
      $6,048,000, down from $6,856,000 for the corresponding period of the previous
      year. The reason of revenue decrease is that the reduced network expenditure
      of
      China Unicom, China Telecom and China Netcom during the Restructuring period
      as
      these companies were affected tremendously by the Restructuring. However, China
      Mobile’s expenditure had increased a lot because it was not affected greatly by
      the Restructuring. Therefore, our revenue from China Mobile increased
      tremendously in the second quarter of 2008. We believe that, with the expected
      completion of the Restructuring and launch of the 3G wireless network, Chinese
      carriers’ total capital investment in year 2008 will continue to increase over
      that of 2007.


21


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





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





**CRITICAL
      ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates based on historical experience and
      on
      various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. We believe critical accounting policies as disclosed
      in our Annual Report on Form 10-KSB for the year ended December 31, 2007 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 June 30, 2008 compared to those
      discussed in our Annual Report on Form 10-KSB for the year ended December 31,
      2007.





**RESULTS
      OF OPERATION**





**Revenues**




For
      the
      three months ended June 30, 2008, our revenues were $ 6,048,000, representing
      a
      decrease of 11.79% as compared to the same period in 2007. The reason of revenue
      decrease is that the reduced network expenditures of China Unicom, China
      Telescom and China Netcom during the Restructuring period as these companies
      were affected tremendously according to the China Telecom Restructuring
      Plan.


22


In
      light
      of the Restructuring currently under way and the promotion plan for Telestone's
      new products, we believe that our revenues in year 2008 will continue to improve
      and eventually eclipse fiscal year 2007’s revenue totals with the continued
      development and application of our new products, solutions and the contribution
      of our newly developing markets.




**Breakdown
      by Nature**





Three
      months ended June 30, 2008 and 2007




2008
              
              2007
              
              Growth$'000
              
              % of revenue
              
              $'000
              
              % of
                revenue
              
              $'000
              
              %product
                  sales
              
              
              2385
              
              
              39.43
              %
              
              4760
              
              
              69.43
              %
              
              -2375
              
              
              -49.89
              %service
                  sales
              
              
              3663
              
              
              60.57
              %
              
              2096
              
              
              30.57
              %
              
              1567
              
              
              74.76
              %Total
              
              
              6048
              
              
              
              
              
              6856
              
              
              
              
              
              -808
              
              
              -11.79
              %





Six
      months ended June 30, 2008 and 2007




2008
              
              2007
              
              Growth$'000
              
              % of revenue
              
              $'000
              
              % of revenue
              
              $'000
              
              %product
                  sales
              
              
              6315
              
              
              50.37
              %
              
              7711
              
              
              66.18
              %
              
              -1396
              
              
              -18.10
              %service
                  sales
              
              
              6222
              
              
              49.63
              %
              
              3941
              
              
              33.82
              %
              
              2281
              
              
              57.88
              %Total
              
              
              12537
              
              
              
              
              
              11652
              
              
              
              
              
              885
              
              
              7.60
              %





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





For
      the
      three months and six months ended June 30, 2008, revenues generated from product
      sales were $2,385,000 and $6,315,000, which represented a decrease of 49.89%
      and
      18.10%, respectively, compared to the corresponding periods of 2007. For the
      aforementioned periods, revenues generated from system integration service
      sales
      were $3,663,000 and $6,222,000, which represented an increase of 74.76% and
      57.88% respectively, compared to the same periods of 2007.





For
      the
      three months and six months ended June 30, 2008, revenues generated from product
      sales accounted for 39.43% and 50.37% of total revenues, respectively, compared
      to 69.43% and 66.18% for the corresponding periods of 2007. For the
      aforementioned periods, revenues generated from system integration service
      sales
      accounted for 60.56% and 49.63% of total revenues, respectively, compared to
      30.57% and 33.82% for the same periods of 2007.


23


**Breakdown
      by Customers**





Three
      months ended June 30, 2008 and 2007




2008
            
            2007
            
            Growth$’000
            
            % of revenue
            
            $'000
            
            % of
              revenue
            
            $'000
            
            %China
                Mobile
            
            
            4031
            
            
            66.65
            %
            
            2367
            
            
            34.52
            %
            
            1664
            
            
            70.30
            %China
                Unicom
            
            
            1603
            
            
            26.50
            %
            
            2898
            
            
            42.27
            %
            
            -1295
            
            
            -44.69
            %China
                Netcom
            
            
            93
            
            
            1.54
            %
            
            186
            
            
            2.71
            %
            
            -93
            
            
            -50.00
            %China
                Telecom
            
            
            187
            
            
            3.09
            %
            
            1298
            
            
            18.93
            %
            
            -1111
            
            
            -85.59
            %Overseas
            
            
            54
            
            
            0.89
            %
            
            63
            
            
            0.92
            %
            
            -9
            
            
            -14.29
            %Others
            
            
            80
            
            
            1.32
            %
            
            44
            
            
            0.64
            %
            
            36
            
            
            81.82
            %Total
            
            
            6048
            
            
            100.00
            %
            
            6856
            
            
            100.00
            %
            
            -808
            
            
            -11.79
            %





Six
      months ended June 30, 2008 and 2007




2008
            
            2007
            
            Growth$' 000
            
            % of Revenue
            
            $'000
            
            % of revenue
            
            $'000
            
            %China
                Mobile
            
            
            6698
            
            
            53.43
            %
            
            4208
            
            
            36.11
            %
            
            2490
            
            
            59.17
            %China
                Unicom
            
            
            4384
            
            
            34.97
            %
            
            4455
            
            
            38.23
            %
            
            -71
            
            
            -1.59
            %China
                Netcom
            
            
            392
            
            
            3.13
            %
            
            705
            
            
            6.05
            %
            
            -313
            
            
            -44.40
            %China
                Telecom
            
            
            319
            
            
            2.54
            %
            
            1970
            
            
            16.91
            %
            
            -1651
            
            
            -83.81
            %Overseas
            
            
            223
            
            
            1.78
            %
            
            269
            
            
            2.31
            %
            
            -46
            
            
            -17.10
            %Others
            
            
            521
            
            
            4.16
            %
            
            45
            
            
            0.39
            %
            
            476
            
            
            1057.78
            %Total
            
            
            12537
            
            
            100.00
            %
            
            11652
            
            
            100.00
            %
            
            885
            
            
            7.60
            %





Revenue
      from carriers was the Company’s major source of revenue during the reporting
      period, and the majority of such revenue was generated from China Mobile and
      China Unicom. For the three months ended June 30, 2008, our revenues generated
      from China Mobile and China Unicom was $4,031,000 and $1,603,000 respectively,
      representing a revenue ratio of 66.65% and 26.50% respectively.





For
      the
      three months ended June 30, 2008, our revenues generated from China Telecom
      and
      China Netcom were $187,000 and $ 93,000 representing decreases of 85.59% and
      50.00% compared to $1,298,000 and $ 186,000 as of the same period of last year.
      The revenue from China Unicom was decreased of 44.69% compared to $ 2,898,000
      of
      the corresponding period of 2007. The reduced revenues from China Unicom, China
      Netcom and China Telecom were mainly because their decreased network expenditure
      during the Restructuring period as these companies would be affected
      tremendously with the completion of the Restructuring. What is more, China
      Netcom stopped their expenditure in PHS (Personal Handy-phone System). These
      changes lead to our significant decreased revenues from China Netcom and China
      Telecom.


24


As
      China
      Mobile is not greatly affected by the China Telecom Restructuring, for the
      three
      months ended June 30, 2008, our revenue generated from China Mobile increased
      70.30% from $ 2,367,000 of the same period of 2007. The increase in our revenues
      from China Mobile was primarily due to our increased business with Beijing
      Mobile, Shanghai Mobile, Guizhou Mobile and Shandong Mobile, which revenue
      increase is due to the acquisition of Shandong Guolian.




For
      the
      three months ended June 30, 2008, our revenues generated from overseas were
      $54,000, representing a decrease of 14.29% compared to the same period of 2007.
      The overseas revenue was mainly from Vietnam market in first quarter 2007.
      The
      decreased revenue from Overseas market is because of the following three facors:
      (1) the economic crisis of Vietnam greatly affected the overseas revenue from
      Vietnam market which was the most important part of the overseas revenue; (2)
      Product price is decreased because of the fierce competition among equipment
      suppliers;(3) finally, product sales of Telestone in the overseas market started
      shifting from passive product sales to WFDS sales. However, the business
      expansion of WFDS is still in the marketing exploratory stage. Nonetheless,
      we
      still believe that there will be a substantial progress of WFDS sales in the
      third and forth quarter in light of higher gross profits from our new product
      with its technological advantages.





For
      the
      three months ended June 30, 2008, the total sales to other customers was
      $80,000, as compared to $44,000 generated as of the same period in 2007,
      representing an increase of 81.82% for the corresponding period of the previous
      year. This significant increase in sales to other customers is primarily due
      to
      the expansion of our system integration business. The business department of
      the
      Private Network Operator was established to strengthen the business of system
      equipment and special network.





Revenues
      from telecom carriers were our major revenue source for the six months ended
      June 30, 2008, with China Mobile and China Unicom accounting for the majority.
      Compared to the corresponding period in 2007, the change in the composition
      ratio of revenues was primarily driven by the following factors: (1) a
      significant increase in revenues received from China Mobile and other customers
      and (2) a significant decrease of revenues from China Netcom, China Telecom
      based on the Restructuring.





**Cost
      Analysis**





Three
      months ended June 30, 2008 and 2007


2008
              
              2007
              
              Growth$'000
              
              % of revenue
              
              $'000
              
              % of
                revenue
              
              $'000
              
              %products
                  sales cost
              
              
              1427
              
              
              23.59
              %
              
              2557
              
              
              37.30
              %
              
              -1130
              
              
              -44.19
              %service
                  cost
              
              
              1170
              
              
              19.35
              %
              
              557
              
              
              8.12
              %
              
              613
              
              
              110.05
              %Total
              
              
              2597
              
              
              42.94
              %
              
              3114
              
              
              45.42
              %
              
              -517
              
              
              -16.60
              %


25




Six
      months ended June 30, 2008 and 2007


2008
              
              2007
              
              Growth$'000
              
              % of revenue
              
              $'000
              
              % of revenue
              
              $'000
              
              %products
                  sales cost
              
              
              3530
              
              
              28.13
              %
              
              4155
              
              
              60.60
              %
              
              -625
              
              
              -15.04
              %service
                  cost
              
              
              2402
              
              
              19.18
              %
              
              1360
              
              
              19.84
              %
              
              1042
              
              
              76.62
              %Total
              
              
              5932
              
              
              47.32
              %
              
              5515
              
              
              80.44
              %
              
              417
              
              
              7.56
              %





For
      the
      three months and six months ended June 30, 2008, our total costs were $2,597,000
      and $5,932,000, which represented a decrease of 16.60% and an increase of 7.56%,
      respectively, as compared to the corresponding periods of 2007.




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




For
      the
      three months and six months ended June 30, 2008, our costs of product sales
      were
      $1,427,000 and $3,530,000, which represented a decrease of 44.19% and 15.04%,
      respectively, as compared to the same periods of 2007. The decrease of costs
      of
      product sales is mainly due to the promotion of our new products which are
      of
      the higher prices and gross margins.





For
      the
      three months and six months ended June 30, 2008, our costs of service sales
      were
      $1,170,000 and $2,402,000, representing an increase of 110.05% and an increase
      of 76.62%, respectively, as compared to the same periods of 2007. The increased
      costs of service sales were primarily attributable to the rising cost of human
      resources in light of increased consumer prices in China.





**Gross
      Profit and Gross Margin**




For
      the
      three months and six months ended June 30, 2008, our gross profit was $3,451,000
      and $6,605,000, which represented a decrease of 7.78% and an increase of 7.63%
      respectively, as compared to the same periods of 2008. Our gross margin for
      the
      aforementioned periods was 57.06% and 52.69%, respectively, compared to 54.58%
      and 52.67% for the same periods of last year.


26


Our
      gross
      profit decrease during the reporting period is attributable to the same factors
      as the decreased in revenue.





Our
      increased gross margin during the reporting period was primarily due to the
      reduced cost of equipment and services.





**Operating
      Expenses**




Three
      months ended June 30, 2008 and 2007


2008
              
              2007
              
              ComparisonsItem
              
              $’000
              
              % of
                revenue
              
              $'000
              
              % of
                revenue
              
              $'000
              
              %Sales
                  and marketing expenses
              
              
              1083
              
              
              17.91
              %
              
              1065
              
              
              15.53
              %
              
              18
              
              
              1.69
              %General
                  and administrative
              
              
              580
              
              
              9.59
              %
              
              593
              
              
              8.65
              %
              
              -13
              
              
              -2.19
              %Research
                  and development
              
              
              123
              
              
              2.03
              %
              
              325
              
              
              4.74
              %
              
              -202
              
              
              -62.15
              %Total
              
              
              1786
              
              
              
              
              
              1983
              
              
              
              
              
              -197
              
              
              -9.93
              %





Six
      months ended June 30, 2008 and
      2007


2008
              
              2007
              
              ComparisonsItem
              
              $’000
              
              % of revenue
              
              $'000
              
              % of revenue
              
              $'000
              
              %Sales
                  and marketing expenses
              
              
              2598
              
              
              20.72
              %
              
              1985
              
              
              17.04
              %
              
              613
              
              
              30.88
              %General
                  and administrative
              
              
              1253
              
              
              9.99
              %
              
              1213
              
              
              10.41
              %
              
              40
              
              
              3.30
              %Research
                  and development
              
              
              253
              
              
              2.02
              %
              
              497
              
              
              4.27
              %
              
              -244
              
              
              -49.09
              %Total
              
              
              4104
              
              
              
              
              
              3695
              
              
              
              
              
              409
              
              
              11.07
              %





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


27


**Sales
      and Marketing Expenses**





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





For
      the
      three months and six months ended June 30, 2008, sales and marketing expenses
      were $1,083,000 and $2,598,000, accounting for 17.91% and 20.72% of total
      revenues, as compared to $1,065,000 and $1,985,000, or 15.53% and 17.04% of
      total revenues, respectively, for the corresponding periods of 2007. Sales
      and
      marketing expenses for the aforementioned periods increased 1.69% and 30.88%,
      respectively, as compared to the same periods of last year.





The
      sales
      and marketing expenses in the second quarter of 2008 was almost the same as
      those of the same period of 2007.





**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 and six months ended June 30, 2008, general and administrative
      expenses were $580,000 and $1,253,000, accounting for 9.59% and 9.99% of total
      revenues, as compared to $593,000 and $1,213,000, or 8.65% and 10.41% of total
      revenues, respectively, for the corresponding periods of 2007. General and
      administrative expenses for the three months periods ended June 30, 2008
      decreased 2.19% and for the six months periods increased 3.30%, as compared
      to
      the same periods of last year.





**Research
      & Development Expenses**





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





For
      the
      three months and six months ended June 30, 2008, research and development
      expenses were $123,000 and $253,000, accounting for 2.03% and 2.02% of total
      revenues, as compared to $325,000 and $497,000, or 4.74% and 4.27% of total
      revenues, respectively, for the corresponding periods of 2007. Research and
      development expenses for the aforementioned periods decreased by 62.15% and
      49.09% respectively, compared to the same periods of 2007.


28


The
      decreased expense in Research and Development is the result of continuous
      reduction of investment in the 2G products since the 2G technology has matured
      and the Restructuring has been announced. Now our Research and Development
      is
      focusing on WFDS (Wireless Fiber Distributed System).





We
      have
      directed some of our research and development efforts towards investing in
      wireless telecommunications research and development, primarily TD-SCDMA related
      technologies and applications. We expect these research activities will enhance
      our technologies, reduce the cost of existing products and create future revenue
      through the launch of new 3G products.





**Net
      Income**




For
      the
      three and six months ended June 30, 2008, our net income was $1,780,000 and
      $2,618,000, respectively, which represented an increase of 28.55% and 42.67%,
      as
      compared to the same period in 2007. The net
      income increase is mainly due to our
      business expansion of our new products, which are of higher prices and gross
      margins compared to the traditional products. What is more, the increase of
      net
      income is also because of decreased cost and appreciation
      of RMB .





**LIQUIDITY
      AND SOURCE OF CAPITAL**





We
      generally finance our operations from cash flow generated internally. As of
      June
      30, 2008, we had current assets of $69,244,000. Current assets are comprised
      of
      inventories of $7,759,000, accounts receivable of $51,936,000, prepayments,
      deposits and other receivables of $4,695,000, and cash and cash equivalents
      of
      $4,853,000. Current liabilities comprised accounts payable of $8,328,000, tax
      payables of $5,434,000, a short-term bank loan of $2,856,000, and other payables
      and accruals of $9,890,000.





Our
      trading terms with our customers are mainly on credit. As of June 30, 2008,
      our
      accounts receivable were $51,936,000 compared to $45,013,000 as of December
      31,
      2007. The credit period is generally less than one year. The gradual increase
      in
      the accounts receivable is mainly due to: 1) steady growth in revenues resulting
      from growth in business, and 2) change in the settlement pattern of the mobile
      operators.


29


Although
      we experience a longer accounts receivable turnover period than some, 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
      receivable will be paid as the Company’s major customers, China Mobile and China
      Unicom, are state funded and the Company has not experienced any significant
      debts in the past. This notwithstanding, we have paid special attentions to
      lowering the turnover period of our accounts receivable balances and have taken
      the following measures:





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





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





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





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





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





As
      of
      June 30, 2008, our inventories were $7,759,000, as compared to $8,023,000 as
      of
      December 31, 2007, which represented a decrease of 3.29%. The decrease in the
      inventories was mainly attributable to meeting operation requirements,
      controlling the balance of inventories, and enhancing the management and
      acceleration of inventory turnover.





As
      of
      June 30, 2008, our cash and bank balances were mainly denominated in Renminbi
      (“RMB”) and United States dollars (“US$”) while our bank borrowings were mainly
      denominated in RMB. Our revenue and expenses, assets and liabilities are mainly
      denominated in RMB and US$. Recently, the exchange rate fluctuations in the
      PRC
      have led to an appreciation of RMB. This may result in certain exchange
      risks.


30


We
      have
      experienced negative cash flows from operating activities for the periods ended
      June 30, 2008 and 2007, which is primarily the result of extended turnover
      periods related to our accounts receivable, as mentioned above. A continuation
      of this situation could negatively impact our liquidity and in turn our overall
      results of operations. In order to address this issue, apart from the
      implementation of the above-mentioned measures to reduce the turnover period,
      we
      are also exploring the possibility of obtaining third party financing and
      considering raising additional capital through debt or equity
      financings.





Our
      gearing ratio, calculated as total debts over total assets, was 36.11% as of
      June 30, 2008 and 36.17% as of December 31, 2007, respectively.





**BUSINESS
      STRATEGIES**





In
      order
      to maintain our leading position in the PRC’s wireless coverage solutions
      sector, and expand and diversify our revenue streams, we will adopt a three
      pronged strategy to ensure value for its shareholders:





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 3G networks. We have
      dedicated research and development to wireless coverage solutions and in the
      next three years our main business will continue to be wireless coverage
      solutions for mobile telecommunications. Our proprietary WFDS product is one
      of
      the leading indoor wireless coverage products in China, and it is applicable
      to
      2G, 3G, Broadband access and CATV networks.





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 a leading market share. Our potential targets are companies
      that enjoy a leading market position and have strong business networks in their
      provincial markets or that have strong production capability as well as
      companies that own applicable value-added products whose customer premises
      network platform adapting to WFDS. We are confident that we will deepen our
      penetration of provincial markets and raise our overall market share through
      selective acquisitions and the promotion of new solutions.





3.
      We
      also plan to focus on building up our presence in markets outside 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 then develop technology and to whom to sell our products that
      fit
      in the market of the PRC. However, we will also find partners within the
      integration business and then sell our products, as our products have a
      significant cost advantage. In the developing countries, we only seek
      cooperation with a local integration partner to deliver our leading wireless
      coverage solution technology, with whom we will then work to set up our local
      products distribution channels.


31


**BUSINESS
      OUTLOOK**





As
      we
      mentioned in early July, despite the anticipation of Telestone's domestic
      business being impacted by the Beijing Olympic Games to be held in August,
      in
      light of the Restructuring currently under way and the promotion plan for
      Telestone's new products, the Company believes that its 2008 full year revenues
      and net income will grow by at least 20% compared with that of 2007. With the
      Restructuring expected to be completed in 2009, Chinese telecom operators are
      expected to increase their capital expenditures in indoor coverage networks
      and
      the Company therefore anticipates 2009 revenue increasing around 100% from
      that
      of 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
      common practice in the PRC that official invoices bearing the tax authority
      stamp 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 assessed at this point with any reasonable degree of
      certainty. The Board of Directors considers it is unlikely that the tax penalty
      will be imposed.





**EMPLOYMENT
      AND REMUNERATIONS**





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


32


**OFF-BALANCE
      SHEET ARRANGEMENTS**




We
      do not
      have any off-balance sheet arrangements.





**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(d) and 15d-15(d). 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 June 30, 2008, 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.


33


**PART
      II**




**OTHER
      INFORMATION**




**Item
      1.  Legal Proceedings.**




None.




**Item
      1A. Risk Factors.**





None.





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




None





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




None.




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




None.




**Item
      5.   Other Information.**




None.


34





**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





**SI** G **NATURES**





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




**TELESTONE
                TECHNOLOGIES**
              **CORPORATION**Date:
                August 14, 2008
            By:
            /s/
                Han DaqingHan
                Daqing, Chief Executive Officer(Principal
                Executive Officer)Date:
                August 14, 2008
            By:
            /s/
                Liu DongpingLiu
                Dongping, Chief Financial Officer(Principal
                Financial Officer)


35