================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 --------------

                                   FORM 10-QSB

                                 --------------


|X|      QUARTERLY  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934

         For the Quarterly Period Ended September 30, 2004

                                       OR

|_|      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
         OF 1934

         For the transition period from _____________  to _____________

                        Commission file number 033-15096

                          Telestone Technologies Corp.
             (Exact name of registrant as specified in its charter)

              Delaware                                          84-1111224
   (State or other jurisdiction of                           (I.R.S. Employer
   incorporation or organization)                         Identification Number)

Floor 6, Saiou Plaza, No. 5 Haiying Road                          100070
         Fengtai Technology Park
   Beijing, People's Republic of China
(Address of principal executive offices)                         (Zip Code)

                  Registrant's telephone number, including area
                              code: 86-10-83670505

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

         Indicate by check mark whether the registrant is an  accelerated  filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

                                                       Outstanding at
                                                      November 12, 2004
        Common Stock, $.001 par value                    [8,060,106]


<PAGE>

                          TELESTONE TECHNOLOGIES CORP.

                                      Index

                                                                        Page No.
                                                                        --------


PART I  ....................................................................2

FINANCIAL INFORMATION.......................................................2

        Item 1.  Financial Statements.......................................2

CONDENSED CONSOLIDATED BALANCE SHEETS.......................................2

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED).................3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED).................4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS........................5

        Item 2.  Management's Discussion and Analysis of Financial
                 Condition and Results of Operations........................9

        Item 3.  Quantitative and Qualitative Disclosures About Market Risk.17

        Item 4.  Controls and Procedures....................................17

PART II ....................................................................18

OTHER INFORMATION 18

        Item 1.  Legal Proceedings..........................................18

        Item 2.  Unregistered Sales of Equity Securitiesand Use of Proceeds.18

        Item 3.  Defaults Upon Senior Securities............................18

        Item 4.  Submission of Matters to a Vote of Security Holders........18

        Item 5.  Other Information..........................................18

        Item 6.  Exhibits...................................................19

SIGNATURES        ..........................................................20






                                       1
<PAGE>
<TABLE>
<CAPTION>

                                     PART I
                              FINANCIAL INFORMATION

Item 1.  Financial Statements

                          TELESTONE TECHNOLOGIES CORP.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                                                                (Unaudited)
                                                                                      As of           As of
                                                                              September 30,    December 31,
                                                                                       2004            2003
                                                                      Note          US$,000         US$,000
<S>                                                                   <C>     <C>              <C>
ASSETS
Current assets
   Cash and bank balances                                               6               793           1,226
   Accounts receivable                                                  8            15,818           7,236
   Due from a director and employees                                                    233           1,905
   Inventories - Finished goods                                                       3,447           4,556
   Prepayment                                                                           761             476
   Other current assets                                                                 742             715
                                                                              -------------   -------------

   Total current assets                                                               21,794          16,114

Property, plant and equipment, net                                                      367             790
                                                                              -------------   -------------

Total assets                                                                         22,161          16,904
                                                                              =============   =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Debts maturing within one year                                                       605             484
   Accounts payable - Trade                                                           2,006           1,115
   Customer deposits for sales of equipment                                             267             152
   Due to directors and employees                                                       755           2,084
   Tax payable                                                          8             6,617           4,936
   Accrued expenses and other accrued liabilities                                       786             350
                                                                              -------------   -------------

         Total current liabilities                                                   11,036           9,121
                                                                              -------------   -------------
Commitments and Contingencies                                                          --              --
Minority interests                                                      9              --             4,123
Stockholders' equity
Preferred stock, US$0.001 par value, 10,000,000 shares authorized,
   no shares issued                                                                    --              --
Common stock and paid-in capital, US$0.001 par value:
   Authorized - 100,000,000 shares as of September 30, 2004
   and December 31, 2003
Issued and outstanding - 8,000,106 shares as of September 30, 2004
   and 1,708 shares as of December 31, 2003                                               8            --
Additional paid-in capital                                                            5,670               1
Retained earnings                                                                     5,447           3,659
                                                                              -------------   -------------

Total stockholders' equity                                                           11,125           3,660
                                                                              -------------   -------------

Total liabilities and stockholders' equity                                           22,161          16,904
                                                                              =============   =============
</TABLE>


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

                                       2
<PAGE>
<TABLE>
<CAPTION>

                          TELESTONE TECHNOLOGIES CORP.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                   (Unaudited)                (Unaudited)
                                                                Three months ended         Nine months ended
                                                                  September 30,               September 30,
                                                            ------------------------    -----------------------
                                                                 2004          2003          2004          2003
                                                      Note    US$,000       US$,000       US$,000       US$,000
<S>                                                   <C>   <C>           <C>           <C>           <C>

Operating revenues                                               5,208         4,040        12,719        10,225
                                                            ----------    ----------    ----------    ----------
Operating expenses
   Equipment and services                                        2,491         1,697         5,938         4,959
   Sales and marketing                                             742           357         1,456           954
   General and administrative                                      224           253           669           617
   Research and development                                         82            69           162           181
   Depreciation and amortization                                    18            51            20           100
                                                            ----------    ----------    ----------    ----------

   Total operating expenses                                      3,557         2,427         8,245         6,811
                                                            ----------    ----------    ----------    ----------

         Operating income                                        1,651         1,613         4,474         3,414
Interest expense                                                   (24)          (16)          (42)          (29)
Other income, net                                                    5            17             5           271
                                                            ----------    ----------    ----------    ----------

Income before income taxes and minority interest                 1,632         1,614         4,437         3,656
Income taxes expenses                                  7          --            (659)         (433)       (1,288)
                                                            ----------    ----------    ----------    ----------

Income before minority interest                                  1,632           955         4,004         2,368
Minority interest                                                 --            (411)         (368)       (1,018)
                                                            ----------    ----------    ----------    ----------

Income before extraordinary item                                 1,632           544         3,636         1,350
Extraordinary gain                                                --            --           2,302          --
                                                            ----------    ----------    ----------    ----------

Net income                                                       1,632           544         5,938         1,350
                                                            ==========    ==========    ==========    ==========

Earnings per share:                                    5

Weighted average number of shares outstanding
Basic                                                        5,753,306         1,708     2,082,474         1,708
Dilutive Effect of Warrants                                     88,699          --          29,782          --
                                                            ==========    ==========    ==========    ==========
Diluted                                                      5,842,005         1,708     2,112,256         1,708
                                                            ==========    ==========    ==========    ==========

Net income per share of common stock                               US$           US$           US$           US$
Basic:
   Income before extraordinary gain                               0.28           319          1.75           790
                                                            ==========    ==========    ==========    ==========
   Net income                                                     0.28           319          2.85           790
                                                            ==========    ==========    ==========    ==========
Diluted:
   Income before extraordinary gain                               0.28           319          1.72           790
                                                            ==========    ==========    ==========    ==========
   Net income                                                     0.28           319          2.81           790
                                                            ==========    ==========    ==========    ==========
</TABLE>

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

                                       3
<PAGE>
<TABLE>
<CAPTION>


                          TELESTONE TECHNOLOGIES CORP.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                               (Unaudited)
                                                     Nine months ended September 30,
                                                     --------------------------------
                                                          2004               2003
                                                        US$,000            US$,000
<S>                                                  <C>               <C>
Cash flows from operating activities
Net income                                                   5,938             1,350
Adjustments to reconcile net income to net cash
 provided by (used in) operating activities:
   Depreciation and amortization                                20               100
   Extraordinary gain                                       (2,302)             --
   Minority interests                                          368             1,018
Changes in assets and liabilities:
   Accounts receivable                                      (8,582)           (3,327)
   Inventories, net                                          1,109             2,138
   Due from a director and employees                           309              (233)
   Prepayment                                                 (285)              672
   Tax receivables                                            --                 615
   Other current assets                                        (27)              808
   Accounts payable                                            891            (1,760)
   Due to directors and employees                              398                79
   Customer deposits for sales of equipment                    115             (3,543)
   Tax payable                                               1,681             1,762
   Accrued expenses and other accrued liabilities              236                27
                                                     -------------     -------------

   Net cash used in operating activities                      (131)             (294)
                                                     -------------     -------------

         Cash flows from investing activities
   Purchase of property, plant and equipment                  (423)             (293)
                                                     -------------     -------------

   Net cash used in investing activities                      (423)             (293)
                                                     -------------     -------------

         Cash flows from financing activities
   Borrowings of short-term debts                              605               484
   Repayment of short-term debts                              (484)             --
                                                     -------------     -------------

   Net cash provided by financing                              121               484
                                                     -------------     -------------

Net decrease in cash and cash equivalents                     (433)             (103)
Cash and cash equivalents, beginning of the period           1,226               706
                                                     -------------     -------------

Cash and cash equivalents, end of the period                   793               603
                                                     =============     =============
</TABLE>


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

                                       4
<PAGE>

                          TELESTONE TECHNOLOGIES CORP.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.       ORGANIZATION AND PRINCIPAL ACTIVITIES

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

         On  September  26,  2003,  the Company  filed a voluntary  petition for
         reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
         Bankruptcy Court for the District of New Jersey, in Newark. Immediately
         prior to the reorganization (as described in Note 2 below) with Success
         Million  International  Limited ("SMI") on August 23, 2004, the Company
         had no significant business operations.

         Upon the  completion  of the  reorganization,  the Company  assumed the
         business  operations of SMI as primarily  undertaken by its subsidiary,
         Beijing  Telestone   Technology  Company  Limited   ("Telestone"),   an
         enterprise  established  in  Beijing,  People's  Republic of China (the
         "PRC")  that  is  engaged  in  the  business  of  design,  development,
         installation and trading of wireless  telecommunication coverage system
         equipment.

2.       REORGANIZATION

         On  September  26,  2003,  the Company  filed a voluntary  petition for
         reorganization under Chapter 11 of the U.S. Bankruptcy Code. On July 9,
         2004,  the  First  Amended   Disclosure   Statement  (the   "Disclosure
         Statement")  and First Amended Joint Plan of  Liquidation  (the "Plan")
         were filed by the  Company  and the  Official  Committee  of  Unsecured
         Creditors.

         On August 10,  2004,  the  Bankruptcy  Court  approved  the  Disclosure
         Statement and Plan,  and entered the order  entitled  "Order  Approving
         Disclosure  Statement and Confirming  First Amended Plan of Liquidation
         and Authorizing and Directing Certain Actions In Connection  Therewith"
         ("Order")  on August 12,  2004.  The Order  provided  that the property
         dealt with by the Plan  shall be free and clear of all  liens,  claims,
         encumbrances and interests, with valid liens, claims,  encumbrances and
         interests to attach to the proceeds of sale as set forth in the Plan.

         Pursuant to the Plan, as confirmed by the Bankruptcy  Court,  all prior
         operational  assets were to be liquidated and the proceeds paid per the
         approved Claim Schedule, to creditors and for the administration of the
         estate.  Pursuant to the Order,  all of the  property of the  Company's
         estate vested in the Plan Trustee,  free and clear of all claims, liens
         encumbrances,  charges or other interests,  and all executory contracts
         and unexpired leases were rejected. The Bankruptcy Court also placed an
         injunction against all entities that may have held,  currently hold, or
         may hold a debt,  claim or other  liability  or  interest  against  the
         Company  dischargeable  upon  confirmation  of the Plan and permanently
         enjoined any action on account of such debt, claim, liability, interest
         or right. The Bankruptcy Court further terminated all claims arising or
         related to stock,  stock options,  stock plans for employees,  officers
         and  directors,  warrants and  convertible  provisions  within the debt
         instruments by creditors.  The Bankruptcy  Court also ordered that each
         common  stock  share of the  Company be subject to a reverse  split and
         changed  into  822nd of 1 share of common  stock at a $0.001 par value.
         This became effective on August 17, 2004.

         Pursuant  to the  Order,  the  Company  reincorporated  in the State of
         Delaware  under the name Telestone  Technologies  Corporation on August
         13, 2004, by filing a Certificate of Incorporation filed with the State
         of  Delaware.  The  Company  is now  authorized  to  issue a  total  of
         110,000,000 shares with 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.



                                       5
<PAGE>

         On August 23, 2004, the Company completed a stock exchange  transaction
         with the stockholders of SMI, a company  incorporated under the laws of
         Hong Kong  Special  Administrative  Region of the PRC.  Pursuant to the
         Exchange  Agreement,  the Company issued 4,100,000 shares of its common
         stock  to  the   stockholders   of  SMI,  in  exchange  for  24,010,000
         outstanding  shares of SMI.  Immediately,  after  giving  effect to the
         exchange,  the  Company  had  4,200,106  shares  of  its  common  stock
         outstanding.  As a result of the  exchange,  SMI became a  wholly-owned
         subsidiary of the Company.

         As part of this  reorganization,  the Company was obligated to issue an
         aggregate  of  4,000,000  common  shares and  1,000,00  warrants,  upon
         conversion of indebtedness in the principal amount of $50,000 which was
         originally  due and payable on or before January 1, 2005 for the rights
         attributable  to the March  24,  2004  advance  by 14  creditors.  Each
         warrant  entitles the holders to purchase one share at a price of $3.00
         per share for a period  from  August  20,  2004 to March 24,  2009.  In
         consideration  of  the  cancellation  by  one  of  the  afore-mentioned
         creditors of her right to receive  200,000 shares and 50,000  warrants,
         the Company  issued a note payable in the  principal  amount of $50,000
         due and payable on or before  January 1, 2005 and accruing  interest at
         the rate of 10% per annum. In addition,  Focus Tech  Investments  Inc.,
         was issued a note for  $150,000  which is due and  payable on or before
         January 1, 2005 at the interest rate of 10% per annum in  consideration
         for  relinquishing its right to receive 24 million shares of stock as a
         result  of  its  $65,000  investment  in the  Company  as  part  of the
         bankruptcy   proceeding..   The   warrants   were   valued   using  the
         Black-Scholes  option  valuation  model and were  determined to have no
         value. Thus no value has been assigned on them.

         On October 29, 2004, warrants to purchase 60,000 shares of common stock
         were exercised for total proceeds of $180,000.

         For  accounting  purposes,  the  transaction  has  been  treated  as  a
         recapitalization of SMI with TTC being the legal survivor and SMI being
         the  accounting  survivor  and  the  operating  entity.  That  is,  the
         historical  financial  statements prior to August 23, 2004 are those of
         SMI, even though they are labeled as those of TTC. Retained earnings of
         the   accounting   survivor,   SMI,  is  carried   forward   after  the
         recapitalization. Operations prior to the recapitalization are those of
         the accounting  survivor,  SMI. Earnings per share for periods prior to
         the  recapitalization  are restated to reflect the equivalent number of
         shares.  Upon completion of the transaction,  the financial  statements
         become those of the operating company,  with adjustments to reflect the
         changes in equity  structure and receipt of the  assets/liabilities  of
         the public shell, TTC. Accordingly,  the Company's stockholders' equity
         as of December 31, 2003 has been recapitalized and restated.

         Following  the  recapitalization,  TTC  held  100%  of the  issued  and
         outstanding  shares of SMI and SMI became a wholly-owned  subsidiary of
         TTC.

3.       PREPARATION OF INTERIM FINANCIAL STATEMENTS

         The accompanying  unaudited condensed consolidated financial statements
         as of September 30, 2004 and for the three-month and nine-month periods
         ended  September  30,  2004 and 2003,  have been  prepared  based  upon
         Securities  and Exchange  Commission  ("SEC") rules that permit reduced
         disclosure  for  interim  periods  and  include,   in  the  opinion  of
         management, all adjustments (consisting of normal recurring adjustments
         and  reclassifications)  necessary  to  present  fairly  the  financial
         position, results of operations and cash flows as of September 30, 2004
         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.  These condensed consolidated financial statements should be
         read in  conjunction  with the audited  financial  statements and notes
         thereto  incorporated  by reference in the Company's  Form 10-KSB/A for
         the year ended  December 31, 2003 and Form  10-QSB/A for the six months
         ended June 30,  2004 filed on  September  23, 2004 and the Form 8-K for
         the  information  of SMI filed on  August  26,  2004.  The  results  of
         operations for the three-month  and nine-month  periods ended September
         30,  2004 and  2003 are not  necessarily  indicative  of the  operating
         results to be expected for the full year.



                                       6
<PAGE>

         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.

4.       COMPREHENSIVE INCOME

         For the three-month and nine-month periods ended September 30, 2004 and
         2003, the total comprehensive  income represents the net income for the
         periods.

5.       EARNINGS PER SHARE

         Basic  earnings per share is computed  based upon the weighted  average
         number of shares of common  stock  outstanding  during  each  period as
         restated  as a result of the  recapitalization  and reverse  split,  as
         described in Note 2.

         The  1,708  and  4,098,292   shares  issued  in  connection   with  the
         recapitalization were included in the computation of earnings per share
         as if outstanding at the beginning of each period  presented and at the
         date of issue of 24,000,000  shares of SMI  respectively.  In addition,
         100,106  shares,  being the  outstanding  stock of TTC as of August 23,
         2004, were treated as issued on August 23, 2004.

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

6.       ACCOUNT RECEIVABLE

                                                     (Unaudited)
                                                           As of           As of
                                                   September 30,    December 31,
                                                            2004            2003
                                                         US$,000         US$,000

         Completed contracts                              14,885           6,837
         Retentions                                          933             399
                                                   -------------   -------------

                                                          15,818           7,236
                                                   =============   =============

         Of the  retentions  balance as of  September  30, 2004 and December 31,
         2003, approximately $20,000 and $51,000 respectively are expected to be
         collected after one year.

7.       TAXATION

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

         As of December 31, 2003 TTC had a net operating loss  carry-forward for
         income tax reporting  purposes of approximately  $12,100,000 that might
         be offset  against  future  taxable  income.  These net operating  loss
         carryforwards  are expected to become severely  limited in future years



                                       7
<PAGE>

         if the Company  experiences a change in control.  Therefore,  following
         the  recapitalization  as  mentioned  before,  the amount  available to
         offset future taxable income might be limited.  No tax benefit has been
         reported in the financial statements, because the Company believes that
         it is more  likely  than not that the  carry-forwards  will be limited.
         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.  Determination  of the  amount of  unrecognized  deferred
         taxes on these earnings is not practical, however, unrecognized foreign
         tax  credits  would  be  available  to  reduce  a  portion  of the  tax
         liability.

         All of the  Company's  income is generated  in PRC by Telestone  and is
         subject  to PRC  income  taxes at a rate of 33%.  Since  Telestone  has
         registered as wholly-owned foreign investment enterprise ("WOFIE"),  it
         is  subject  to tax  laws  applicable  to WOFIE in the PRC and is fully
         exempt from PRC enterprise  income tax of 33% for two years followed by
         a 50%  reduction  for the next three years,  commencing  from the first
         profit-making  year after  offsetting  all unexpired tax losses carried
         forward from the previous years.


8.       RELATED PARTY TRANSACTION

         Summary of related party transactions
         <TABLE>
         <CAPTION>

                                                          (Unaudited)
                                                                As of           As of
                                                        September 30,    December 31,
                                                                 2004            2003
                                                              US$,000         US$,000
         <S>                                            <C>             <C>
         Due from a director and employees (Note (i))
         A director                                              --             1,714
         Other employees                                          233             191
                                                        -------------   -------------

                                                                  233           1,905
                                                        =============   =============
         Due to directors and employees (Note (i))
         Directors                                                755           2,068
         Other employees                                         --                16
                                                        -------------   -------------

                                                                  755           2,084
                                                        =============   =============
         Guarantors of short term loans
           A director                                             605             484
                                                        =============   =============
         </TABLE>

         <TABLE>
         <CAPTION>
                                                    (Unaudited)           (Unaudited)
                                                Three months ended      Nine months ended
                                                  September  30,          September 30,
                                              ---------------------   ---------------------
                                                 2004        2003        2004        2003
                                               US$,000     US$,000     US$,000     US$,000
         <S>                                  <C>         <C>         <C>         <C>
         A company controlled by a director
         - Purchase of finished goods               754         564       2,360       1,504
                                              =========   =========   =========   =========
         </TABLE>

         Note:

         (i)      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.


                                       8
<PAGE>

9.       COMMITMENTS AND CONTINGENCIES

         Telestone  has made full tax  provision  in  accordance  with  relevant
         national  and  local  laws  and  regulations  of the  PRC.  For PRC tax
         reporting purpose,  Telestone  recognized revenue on an "invoice basis"
         instead of when goods are delivered  and service are rendered.  This is
         not in  strict  compliance  with the  relevant  laws  and  regulations.
         Accordingly,  despite  the  fact  that  Telestone  has  made  full  tax
         provision in the  financial  statements,  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 unlikely  that the tax penalty
         will be imposed.


Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

         This  management's  discussion  and analysis  includes  forward-looking
statements  within the meaning of Section 27A of the  Securities Act of 1933 and
Section  21E  of  the   Securities   Exchange   Act  of  1934.   We  intend  our
forward-looking  statements  to be covered  by the safe  harbor  provisions  for
forward-looking  statements  in these  sections.  When used in this report,  the
words "anticipate,  " "believe, " "estimate, " "expect, " "intend, " "plan " and
similar  expressions  as they  relate to  Telestone  Technologies  Corp.  or our
management  are  intended  to identify  these  forward-looking  statements.  All
statements by us regarding our expected future financial  position and operating
results, our business strategy, our financing plans,  forecasted trends relating
to the  markets in which we operate  and  similar  matters  are  forward-looking
statements.  We cannot assure you that our expectations  expressed or implied in
these forward-looking statements will turn out to be correct. Our actual results
could be materially  different from our expectations because of various factors,
including those discussed below and under the caption  "Cautionary  Statements "
in our Form 8-K, filed with the SEC on August 26, 2004.

         Unless we indicate otherwise,  references below to "we, " "us, " "our "
and "Telestone " mean Telestone Technologies Corp. and its subsidiaries.

Overview

We are a wireless  communications  coverage  solutions  provider in the People's
Republic of China, or PRC. Our all-around  wireless coverage  solutions business
is comprised of research, development and application of wireless communications
technology,  as well as performance of system  integration,  technical  support,
wireless network optimization and network maintenance.  We strive to provide our
customers with quality solutions  utilizing advanced technology and supported by
consummate customer service.

Business Range

Net revenue  during the nine month period ended  September  30, 2004 was derived
from domestic telecom carriers and system integration providers. Major customers
include China Mobile, China Unicom, China Telecom and China Netcom. The majority
of our revenue for the period was generated from mobile operators, while revenue
from system integration providers was comparatively small.

Net revenue for the three month and nine month periods ended  September 30, 2004
was $5,208,000 and $12,719,000, respectively, representing an increase of 28.91%
and  24.39%,  respectively.  Income  before  income  tax  and  interest  for the
respective  periods  was  $  1,632,000  and  $  4,437,000,  respectively,  which
represents  an  approximately   1.12%  and  21.36%  increase   compared  to  the
corresponding  period in 2003.  Net  income  for the three  month and nine month



                                       9
<PAGE>
<TABLE>
<CAPTION>

periods ended  September 30, 2004 was $1,632,000  and  $5,938,000  respectively,
gross profit  margin for the same  periods was 52.17% and 53.31%,  respectively,
which represents a decrease of 5.83% and an increase of 1.81%, respectively. Our
gross  profit  margin  for the three  month  period  ended  September  30,  2004
decreased  slightly  compared  to the  first  half of the  year  due to  pricing
pressures from competition.  For the nine month period ended September 30, 2004,
our overall gross profit  margin  increased  when compared to the  corresponding
period in 2003.

Our growth is primarily  due to  increased  investments  by telecom  carriers in
equipment  purchases  to enhance  and  upgrade  their  networks so as to provide
better service to more than 300 million mobile  subscribers in the PRC We intend
to  maintain  our  wireless  communication  network  infrastructure  as our core
business.

With the expansion of our  relationship  with China Unicom and China Mobile,  we
were able to  increase  our total  revenues.  We were also able to develop a new
revenue stream from China Telecom and China Netcom during the reporting  period.
In April 2004, Telestone  registered as a foreign-invested  company and obtained
income tax  exemptions,  which  resulted in the sharp  increase in income before
extraordinary  items to $1,632,000  and  $3,636,000 for the three and nine month
periods ended September 30, 2004. In addition, the extraordinary gain during the
nine month period ended  September  30, 2004 was the negative  goodwill  arising
from our reorganization.

         Accounting Regulations and Assumptions

We prepare our financial  statements according to US GAAP. We utilize accounting
estimations  and accounting  assumptions  that could affect the amount of assets
and liabilities,  as of the report date, as well as income and expenses reported
during the similar  period.  All estimations and assumptions are on a historical
basis and actual  events or results may differ  materially.  Although we believe
the estimates,  assumptions,  and expectations  reflected in the forward-looking
statements  are  reasonable,  we  cannot  guarantee  future  results,  levels of
activity, performance or achievements.

Results of Operations

Three Months Ended September 30, 2004
(In thousands, in dollars, except percentages)

------------------------------------ ------------------------- ------------------------- ---------
                                              2004                     2003               growth
------------------------------------ ------------------------- ------------------------- ---------
                                       amount    % of revenue    amount     % of revenue     %
------------------------------------ ---------- -------------- ---------- -------------- ---------
<S>                                  <C>        <C>            <C>        <C>            <C>
Revenues                                 5,208                     4,040                    28.91
------------------------------------ ---------- -------------- ---------- -------------- ---------
Cost of equipments and services          2,491          47.83      1,697          42.00     46.79
------------------------------------ ---------- -------------- ---------- -------------- ---------
Sales and marketing expenses               742          14.25        357           8.84    107.84
------------------------------------ ---------- -------------- ---------- -------------- ---------
General and administrative expenses        224            4.3        253           6.26    -11.46
------------------------------------ ---------- -------------- ---------- -------------- ---------
Research and development expenses           82            1.6         69           1.71     11.84
------------------------------------ ---------- -------------- ---------- -------------- ---------
Depreciation and Amortization               18           0.35         51           1.26    -64.71
------------------------------------ ---------- -------------- ---------- -------------- ---------
Interest expenses                           24           0.46         16           0.40     50.00
------------------------------------ ---------- -------------- ---------- -------------- ---------
Other income                                 5            0.1         17           0.42    -70.59
------------------------------------ ---------- -------------- ---------- -------------- ---------
Income before tax                        1,632          31.34      1,614          39.95      1.12
------------------------------------ ---------- -------------- ---------- -------------- ---------
Income tax                                   0              0        659          16.31   -100.00
------------------------------------ ---------- -------------- ---------- -------------- ---------
Minority Interest                            0              0        411          10.17   -100.00
------------------------------------ ---------- -------------- ---------- -------------- ---------
Net income                               1,632          31.34        544          13.46    200.00
------------------------------------ ---------- -------------- ---------- -------------- ---------








                                       10
<PAGE>

Nine Months Ended September 30, 2004
(In thousands, in dollars, except percentages)

------------------------------------ ------------------------- ------------------------- ---------
                                              2004                     2003               growth
------------------------------------ ------------------------- ------------------------- ---------
                                       amount    % of revenue    amount     % of revenue     %
------------------------------------ ---------- -------------- ---------- -------------- ---------
Revenues                                12,719                    10,225                    24.39
------------------------------------ ---------- -------------- ---------- -------------- ---------
Cost of equipments and services          5,938          46.69      4,959          48.50     19.74
------------------------------------ ---------- -------------- ---------- -------------- ---------
Sales and marketing expenses             1,456          11.45        954           9.33     52.62
------------------------------------ ---------- -------------- ---------- -------------- ---------
General and administrative expenses        669           5.26        617           6.03      8.43
------------------------------------ ---------- -------------- ---------- -------------- ---------
Research and development expenses          162           1.27        181           1.77    -10.50
------------------------------------ ---------- -------------- ---------- -------------- ---------
Depreciation and Amortization               20           0.16        100           0.98    -80.00
------------------------------------ ---------- -------------- ---------- -------------- ---------
Interest expenses                           42           0.33         29           0.28     44.83
------------------------------------ ---------- -------------- ---------- -------------- ---------
Other income                                 5           0.04        271           2.65    -98.15
------------------------------------ ---------- -------------- ---------- -------------- ---------
Income before tax                        4,437          34.88      3,656          35.76     21.36
------------------------------------ ---------- -------------- ---------- -------------- ---------
Income tax                                 433           3.40      1,288          12.60    -66.38
------------------------------------ ---------- -------------- ---------- -------------- ---------
Minority Interest                          368           2.89      1,018           9.96    -63.85
------------------------------------ ---------- -------------- ---------- -------------- ---------
Extraordinary gain                       2,302          18.10          0              0
------------------------------------ ---------- -------------- ---------- -------------- ---------
Net income                               5,938          46.69      1,350          13.20    339.85
------------------------------------ ---------- -------------- ---------- -------------- ---------
</TABLE>


Revenues

For the three months and nine months ended September 30, 2004,  consolidated net
revenues were $5,208,000 and $12,719,000, respectively, representing an increase
of 28.91% and 24.39%,  respectively,  when compared to the corresponding periods
in 2003.  The increase is  primarily  due to  increased  investments  by telecom
carriers such as China Unicom and China Mobile in equipment purchases to enhance
and  upgrade  their  networks.  Revenues  from  China  Unicom  and China  Mobile
represented  87.05% and 91.44% of total  revenues  for the three months and nine
months ended September 30, 2004, respectively.

Revenues  generated  by China  Unicom for the three months and nine months ended
September 2004 increased 19.95% and 12.73%, respectively, from the corresponding
periods in fiscal 2003.  Revenues from China Mobile increased 36.87% and 58.58%,
respectively,  during the three months and nine months ended  September 2004, as
compared  to the  corresponding  periods in 2003.  Revenues  generated  by other
clients  for the three month and nine month  periods  ended  September  30, 2004
represented a 135.54% and 93.77%  increase,  respectively,  when compared to the
corresponding periods in 2003.

We exercise great efforts in developing  new clients as well as maintaining  our
existing  clients such as China Unicom and China  Mobile.  We have  obtained PHS
network infrastructure contracts from China Telecom and China Netcom.



                                       11
<PAGE>

Revenues  are  primarily   derived  from  products   sales  (sales  of  wireless
communication  products) and service income (which consists system  integration,
technical support, wireless network optimum and network maintenance ).

Three months ended September 30, 2004                        Comparisons
--------- --------------------- ---------------------- -------------------------
                 2004                         2003              Increase
--------- --------------------- ---------------------- -------------------------
           $ ,000         %        $ ,000     % of       ,000            %
                     of Revenue             of Revenue
--------- ---------- ---------- ----------- ---------- --------------- ---------
Products      4,584     88.02%       3,484     86.24%           1,100    31.57%
--------- ---------- ---------- ----------- ---------- --------------- ---------
Service         624     11.98%         556     13.76%              68    12.23%
--------- ---------- ---------- ----------- ---------- --------------- ---------
Total         5,208       100%       4,040       100%           1,168    28.91%
--------- ---------- ---------- ----------- ---------- --------------- ---------


Nine months ended September 30, 2004                         Comparisons

--------- --------------------- ---------------------- -------------------------
                 2004                   2003                   Increase
--------- --------------------- ---------------------- -------------------------
           $ ,000         %        $ ,000     % of       ,000            %
                     of Revenue             of Revenue
--------- ---------- ---------- ----------- ---------- --------------- ---------
Products     11,113     87.38%       8,997     87.99%           2,116    23.52%
--------- ---------- ---------- ----------- ---------- --------------- ---------
Service       1,606     12.62%       1,228     12.01%             378    30.78%
--------- ---------- ---------- ----------- ---------- --------------- ---------
Total        12,719       100%      10,225       100%           2,494    24.39%
--------- ---------- ---------- ----------- ---------- --------------- ---------

For  the  three  months  ended  September  30,  2004,  product  sales  generated
$4,584,000  and service  sales  accounted  for  $624,000,  which  represents  an
increase of 31.57% and 12.23%,  respectively,  from  $3,484,000 and $556,000 for
the  corresponding  periods in 2003,  respectively.  For the nine  months  ended
September 30, 2004,  products sales were $11,113,000 and service sales accounted
for $1,606,000, which represents an increase of 23.52% and 30.78%, respectively,
from  $8,997,000  and $1,228,000  for the  corresponding  period in fiscal 2003,
respectively.

Products sales were  responsible  for 88.02% of the total revenues for the three
months ended  September  30, 2004 and 87.37% of the total  revenues for the nine
months ended September 30, 2004.
<TABLE>
<CAPTION>

Three months ended September 30, 2004      Comparisons
---------- -------------------------- -------------------------- -------------------
<S>        <C>          <C>           <C>         <C>            <C>
                    2004                       2003               Increase/Decrease
---------- -------------------------- -------------------------- -------------------
             $ ,000     % of revenue   $ ,000      % of revenue
---------- ----------- -------------- ----------- -------------- -------------------
Indoor          5,172         99.31%       3,228         79.90%              60.22%
---------- ----------- -------------- ----------- -------------- -------------------
Outdoor          --             --           299          7.39%               -100%
---------- ----------- -------------- ----------- -------------- -------------------
Others             36          0.69%         514         12.71%              92.68%
---------- ----------- -------------- ----------- -------------- -------------------
Total           5,208           100%       4,040           100%              28.91%
---------- ----------- -------------- ----------- -------------- -------------------


Nine months ended September 30, 2004       Comparisons
---------- -------------------------- -------------------------- -------------------
                    2004                       2003               Increase/Decrease
---------- -------------------------- -------------------------- -------------------
             $ ,000     % of revenue    $ ,000     % of revenue
---------- ----------- -------------- ----------- -------------- -------------------
Indoor         10,532         82.81%       6,552         64.08%              60.74%
---------- ----------- -------------- ----------- -------------- -------------------
Outdoor           892          7.01%       1,544         15.10%             -42.23%
---------- ----------- -------------- ----------- -------------- -------------------
Others          1,295         10.18%       2,129         20.82%             -39.17%
---------- ----------- -------------- ----------- -------------- -------------------
Total          12,719           100%      10,225           100%              24.39%
---------- ----------- -------------- ----------- -------------- -------------------
</TABLE>

For the three months and nine months ended  September 30, 2004,  indoor coverage
solutions generated $5,172,000 and $10,532,000,  which represents an increase of
60.22% and 60.74%, respectively, compared to the corresponding periods in fiscal
2003.  Revenues  generated by outdoor  coverage  solutions  accounted for $0 and
$892,000 for the afore-referenced  periods,  which represents a decrease of 100%
and 42.23%, respectively, when compared to the identical periods in 2003.

For the  three  and nine  months  ended  September  30,  2004,  indoor  coverage
solutions  accounted for 99.31% and 82.81% of the total revenues,  respectively,
compared  to  79.90%  and  64.08%  for  the   corresponding   periods  in  2003,
respectively. Outdoor coverage solutions accounted for 0% and 7.01% of the total
revenues in the  afore-referenced  periods,  as compared to 7.39% and 15.10% for
the corresponding periods in 2003, respectively.




                                       12
<PAGE>
<TABLE>
<CAPTION>

Geographically,  we generate  the majority of our  revenues  from the  Northern,
Southern and Eastern regions of the PRC.

Three months ended September 30, 2004      Comparisons
---------- -------------------------- -------------------------- -------------------
<S>        <C>          <C>           <C>         <C>            <C>
                   2004                       2003               Increase/Decrease
---------- -------------------------- -------------------------- -------------------
             $ ,000     % of revenue   $ ,000      % of revenue
---------- ----------- -------------- ----------- -------------- -------------------
North           3,380         64.90%       1,165         28.84%             190.13%
---------- ----------- -------------- ----------- -------------- -------------------
South           1,060         20.35%       2,641         65.37%             -59.86%
---------- ----------- -------------- ----------- -------------- -------------------
East              768         14.75%         234          5.79%             228.21%
---------- ----------- -------------- ----------- -------------- -------------------
Total           5,208                      4,040                             28.91%
---------- ----------- -------------- ----------- -------------- -------------------

Nine months ended September 30, 2004       Comparisons
---------- -------------------------- -------------------------- -------------------
                    2004                       2003               Increase/Decrease
---------- -------------------------- -------------------------- -------------------
             $ ,000     % of revenue   $ ,000      % of revenue
---------- ----------- -------------- ----------- -------------- -------------------
North           8,396         66.01%       2,611         25.54%             221.56%
---------- ----------- -------------- ----------- -------------- -------------------
South           2,583         20.31%       6,915         67.63%             -62.65%
---------- ----------- -------------- ----------- -------------- -------------------
East            1,740         13.68%         699          6.83%             148.93%
---------- ----------- -------------- ----------- -------------- -------------------
Total          12,719                     10,225                             24.39%
---------- ----------- -------------- ----------- -------------- -------------------
</TABLE>

For the  three  months  and nine  months  ended  September  30,  2004,  revenues
generated  by  North  area  sales   amounted  to  $3,380,000   and   $8,396,000,
respectively, which represents an increase of 190.13% and 221.56%, respectively,
as compared to the corresponding  periods in 2003. Revenues generated from South
and East  amounted to $1,828,000  and  $4,323,000,  respectively,  a decrease of
36.42% and 43.22%, respectively, from the identical periods in 2003.

For the three months and nine months ended September 30, 2004, revenue generated
by North area sales  accounted  for  64.90%  and  66.01% in total  revenues,  as
compared  with  28.84%  and  25.54%  for  the  corresponding  periods  in  2003,
respectively.  Revenues  generated  by South  area and East area  accounted  for
35.10% and 33.99% of the total revenues,  as compared with 71.17% and 74.46% for
the corresponding periods in 2003, respectively.

The maturity of the  wireless  communications  market in Southeast  area and the
intense  competition  there resulted in the decrease of price and profit margin.
At the same  time,  network  coverage  solutions  demand  in the East and  North
continued  to increase  at a fast pace as a result of  economic  growth in those
areas.  We have changed our focus to inland areas and remote areas and strive to
seize new markets,  therefore revenues generated from the South decreased during
the reporting period in contrast to the sharp increase in the North and East.

Costs of Revenues

Our costs of revenues can be divided into sales and service  costs.  Sales costs
include raw materials and service costs include  infrastructure  fees, component
costs and business tax.
<TABLE>
<CAPTION>

Three months ended September 30, 2004                  Comparisons
-------------------- --------------------------- --------------------------- ----------
<S>                  <C>       <C>               <C>       <C>               <C>
                                   2004                    2003               Increase
-------------------- --------------------------- --------------------------- ----------
                      $ ,000   % of total costs    $ ,000  % of total costs
-------------------- -------- ------------------ -------- ------------------ ----------
Products sales cost    2,078             83.42%    1,621             95.52%     28.19%
-------------------- -------- ------------------ -------- ------------------ ----------
Service cost             413             16.58%       77              4.48%
-------------------- -------- ------------------ -------- ------------------ ----------
Total                  2,491              100%     1,697              100%      46.79%
-------------------- -------- ------------------ -------- ------------------ ----------

Nine months ended September 30, 2004                   Comparisons
-------------------- --------------------------- --------------------------- ----------
                               2004                        2003               Increase
-------------------- --------------------------- --------------------------- ----------
                      $ ,000   % of total costs   $ ,000   % of total costs
-------------------- -------- ------------------ -------- ------------------ ----------
Products sales cost    5,196             87.50%    4,332             87.36%     19.94%
-------------------- -------- ------------------ -------- ------------------ ----------
Service cost             742             12.50%      627             12.64%     18.34%
-------------------- -------- ------------------ -------- ------------------ ----------
Total                  5,938              100%     4,959               100%     19.74%
-------------------- -------- ------------------ -------- ------------------ ------------
</TABLE>



                                       13
<PAGE>

For the three months and nine months ended  September  30, 2004,  total costs of
revenues  amounted  $2,491,000 and $5,938,000,  which  represents an increase of
46.79% and 19.74%,  respectively when compared to the  corresponding  periods in
2003. The increase in total costs is due to the increase our total revenues.

For the three months and nine months ended  September 30, 2004,  products  sales
costs accounted for $2,078,000 and $5,196,000, respectively, which represents an
increase of 28.19% and 19.94% as compared to the corresponding  periods in 2003,
respectively.  The increase in costs is due to the  increase of products  sales.
For these periods, products sales costs accounted for 83.42% and 87.50% of total
costs,  respectively,  as compared with 95.52% and 87.36% for the  corresponding
periods in 2003, respectively. We are attempting to decrease costs by continuous
R&D efforts.

For the three months and nine months ended  September  30, 2004,  service  costs
accounted for $413,000 and $742,000,  respectively, which represents an increase
of 436.36% and 18.34% for the corresponding periods in 2003,  respectively.  The
sharp  increase  in the third  quarter  of 2004 was due to the  occurrence  of a
one-time  infrastructure  fee of  $206,000.  For these  periods,  service  costs
accounted  for 16.58%  and 12.50% of total  costs,  as  compared  with 4.48% and
12.64% for the corresponding periods in 2003, respectively.

Gross Margin

For the three months and nine months ended  September  30, 2004,  gross  margins
were 52.17% and 53.31%,  respectively,  and 58% and 51.50% for the corresponding
periods in 2003, respectively.  Under the intense competition that exists in our
market  segment,  sales prices for both  products and  solutions  have  slightly
decreased.  We believe we are able to maintain gross margins  because of our R&D
capacity and  advanced  products  design.  As of  September  30,  2004,  we have
developed  hundreds  of  models  of  repeaters,   tower-tip  amplifiers,   power
amplifiers,  couplers,  monitor chips,  antenna,  microwave products and network
products.  With the enlarged  operation  and  extensive  client base,  we have a
strong bargaining position with suppliers.  We believe the lowered profit margin
resulting from selling price pressures will be compensated by our effective cost
control measures.

Operating Expenses

Operating  Expenses  mainly  include  sales and marketing  costs,  R&D costs and
general and administrative costs.

Three months ended September 30, 2004        Comparisons
-------------------------- ----------------------- -------- --------------
                                   2004                             2003
-------------------------- ----------------------- -------- --------------
                            $ ,000   % of revenue   $ ,000   % of revenue
-------------------------- -------- -------------- -------- --------------
Sales & marketing              742         14.25%      357          8.84%
-------------------------- -------- -------------- -------- --------------
R&D                             82          1.57%       69          1.71%
-------------------------- -------- -------------- -------- --------------
General & administrative       224          4.30%      253          6.26%
-------------------------- -------- -------------- -------- --------------
Depreciation and
amortization                    18          0.35%       51          1.26%
-------------------------- -------- -------------- -------- --------------
Total                        1,048         20.12%      679         16.81%
-------------------------- -------- -------------- -------- --------------

Nine months ended September 30, 2004         Comparisons
-------------------------- ----------------------- -----------------------
                                     2004                    2003
-------------------------- ----------------------- -----------------------
                            $ ,000   % of revenue   $ ,000   % of revenue
-------------------------- -------- -------------- -------- --------------
Sales & marketing            1,456         11.45%      954          9.33%
-------------------------- -------- -------------- -------- --------------
R&D                            162          1.27%      181          1.77%
-------------------------- -------- -------------- -------- --------------
General & administrative       669          5.26%      617          6.03%
-------------------------- -------- -------------- -------- --------------
Depreciation and
amortization                    20          0.16%      100          0.98%
-------------------------- -------- -------------- -------- --------------
Total                         1,066        20.47%       730        18.07%
-------------------------- -------- -------------- -------- --------------


Operation expenses mainly include sales & marketing costs, R&D costs and general
& administrative costs.

Sales and Marketing Expenses:

Includes all related  expenses and  remunerations  for sales  persons and travel
expenses related to sales of products and development of market.

For the three months and nine months ended September 30, 2004, sales & marketing
expenses were $742,000 and  $1,456,000,  respectively,  representing  14.25% and
11.45% of total  revenues  for said  periods,  respectively;  as  compared  with
$357,000 and $954,000, or 8.84% and 9.33% of total revenues,  respectively,  for
the  corresponding  periods in 2003.  Sales & marketing  expenses  increased  by
107.84% and 52.56%, respectively, during the afore-referenced periods.


                                       14
<PAGE>

Expense  increases  resulted  from our  efforts  to expand our  business  range,
penetrate new markets and set up branches and representative offices therein, as
well as investments  related to the launch of new markets . Additional  expenses
were also incurred in connection with the development of our relationships  with
China Telecom and China Netcom.  We expect these types of expenses will continue
to be incurred with our further development of these and similar relationships.

R&D Expenses:

R&D expenses include  remunerations  for R&D staff,  material  expenses,  travel
expenses and facilities.

For the three months and nine months ended September 30, 2004, R&D expenses were
$82,000 and $162,000,  respectively,  and accounted for 1.57% and 1.27% of total
revenues for the periods,  respectively,  as compared  with $69,000 and $181,000
during the  corresponding  periods in 2003 and accounting for 1.71% and 1.77% of
total revenues, respectively, for such periods. In the third quarter of 2004, we
established a research  center,  which focuses on R&D for network  communication
products. We expect the research activities will strengthen our technology, will
reduce the costs of  existing  products  and will also  provide  future  revenue
streams through the launching of new products.

General & Administrative Expenses:

For the three  months  and nine  months  ended  September  30,  2004,  general &
administrative expenses were $224,000 and $669,000,  respectively,  or 4.30% and
5.26% of total  revenues,  respectively,  during these  periods,  as compared to
$253,000 and $617,000, or 6.26% and 6.03%.  respectively,  of total revenues for
the corresponding periods in 2003

Depreciation and Amortization

For the three months and nine months ended September 30, 2004,  depreciation and
amortization  costs  were  $18,000  and  $20,000,  or 0.35%  and  0.16% of total
revenues, respectively, as compared to $51,000 and $100,000, or 1.26% and 0.98%,
respectively,  of total revenues for the  corresponding  periods in fiscal 2003.
The sharp decrease in depreciation and  amortization  charged for the nine month
period ended September 30, 2004 as compared to the corresponding  period in 2003
is due to the writing off fixed identifiable  assets resulting from the goodwill
arising from our reorganization.

Income/Payment for Interests and Other Income

For the three months and nine months ended September 30, 2004, interest payments
amounted  to  $24,000  and  $42,000,  as  compared  with  $16,000  and  $29,000,
respectively  for the  corresponding  periods in 2004.  The increase in interest
payments is due increased borrowings.
<TABLE>
<CAPTION>

----------------------- ------------------------------------- ------------------------------------
<S>                     <C>             <C>                   <C>             <C>
                                        2004                                  2003
----------------------- ------------------------------------- ------------------------------------
                         As of June 30   As of September 30    As of June 30   As of September 30
----------------------- --------------- --------------------- --------------- --------------------
 Balance of bank Loans      $484,000          $605,000              $0              $484,000
----------------------- --------------- --------------------- --------------- --------------------
</TABLE>

Provisions for Income Tax

As of September 30, 2004, our revenues were generated from domestic  operations.
According to PRC Taxation Regulation, foreign-invested companies enjoy first and
second  year tax  exemptions  and half tax  deduction  from for the third  year.
Therefore  we are entitled to enjoy a tax holiday from April 2004 to March 2006.
We are in good  standing  with  regard  to tax  obligations  owed  to our  local
government.




                                       15
<PAGE>

Current Assets and Source of Capital

Our major sources of capital are cash generated from  operations and bank loans.
As of September 30, 2004, current assets amounted at $21,794,000, which includes
inventories valued at $3,447,000,  accounts receivable of $15,818,000,  payments
in advance and other accounts  receivables of $761,000,  balance on cash in bank
of $793,000, due from a director and employees of $233,000, other current assets
of $742,000.  Current  liabilities  amounted  to$11,036,000,  including accounts
payable of $2,006,000, tax payables of $6,617,000,  debts maturing within 1 year
of $605,000,  advances from customers of $267,000, amounts due to a director and
employees of $755,000  and accrued  expenses and other  accrued  liabilities  of
$786,000.

Generally  we  allow a credit  period  ranging  from 8  months  to 1 year to our
customers.  As of September  30, 2004,  accounts  receivable  were  $15,818,000,
representing an increase of 118.60% as compared to $7,236,000 as of December 31,
2003. The increase is mainly due to the increase in sales and market share.

Ninety percent (90%) of accounts  receivable are less than one year old and most
of these receivables are due from China Unicom and China Mobile.

Management  strives to keep  inventories at the most efficient  level and not to
occupy  surplus  capital.  We  manage  to sell  slow  moving  inventories  after
modification  and keep the new inventories at the most efficient level possible.
These strategies result in lower inventory turnover.

As of  September  30,  2004,  total  liabilities/total  assets ratio was 49.80%.
(Total  liabilities  include  short-term  bank loans and payables due within one
year).

We  experienced  negative cash flows from  operating  activities  for the period
ended September 30, 2004 and 2003. Although we have net current assets as of the
balance sheet date, the long turnover period of accounts receivables caused cash
flow  pressure,  particularly  as we also attempt to expand our R&D  activities.
Management is exploring other  resources for funding our current  operations and
future  development,  which include  raising capital and applying for additional
banking facilities.

Related Party Transactions

As to the  current  accounts  with  directors  and  stockholders,  prior  to the
reorganization,  Beijing  Telestone was a private company and advances were made
to and from Mr. Han, our  principal  stockholder.  Advances made to Mr. Han were
settled by the  "dividend  under  common  control"  upon the  completion  of the
reorganization with SMI.

As to the current  accounts with employees,  the amount that was advanced to the
employees for their business travel expenses,  marketing  expenditures and other
expenses will be charged to statement of  operations as operating  expenses when
actual expenses were incurred.

Prior to the  reorganization,  a company  controlled  by Mr. Han acted as one of
Beijing Telestone's  primary suppliers  accounting for 49.94% of total materials
purchases  during the period from  January 1, 2004 to  September  15,  2004.  On
September  15,  2004,  the company  controlled  by Mr. Han was disposed of to an
unaffiliated third party,  Shijiazhuang Spectrum Digital Communication Co., Ltd.
("Spectrum").  Spectrum currently acts as one of our suppliers. We have signed a
Memorandum of  Cooperation  with  Spectrum,  which was disclosed in the Form 8-K
filed with the SEC on August 26, 2004.

Contingent Liabilities

As of September 30, 2004,  we have not entered into any guarantee  contracts nor
any  non-disclosed  contracts  which will affect  stockholders'  equity or share
structure.



                                       16
<PAGE>

Employment and Remunerations

As of September 30, 2004, we had 327 employees. Total employee expenses occurred
during the reporting  period was  $599,000.  We offer  competitive  remuneration
schemes  to our  employees  based  on  industry  practices  as well as  employee
performance.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

With  respect to foreign  currency  exchange  rates,  we do not  believe  that a
devaluation  or  fluctuation of the RMB against the USD would have a detrimental
effect on our  operations,  since we conduct  virtually  all of our  business in
China,  and the sale of its  products  and the  purchase  of raw  materials  and
services are settled in RMB. The effect of a devaluation  or  fluctuation of the
RMB against the USD would affect our results of operations,  financial  position
and cash flows,  when  presented  in USD (based on a current  exchange  rate) as
compared to RMB.

As our debt obligations are primarily  short-term in nature, with fixed interest
rates,  we do not have any risk  from an  increase  in  market  interest  rates.
However, to the extent that we arrange new borrowings in the future, an increase
in market  interest  rates would cause a  commensurate  increase in the interest
expense related to such borrowings.

Item 4.  Controls and Procedures

         Our management,  with the participation of our Chief Executive Officer,
who is our principal executive officer,  and our Chief Financial Officer, who is
our  principal  financial  officer,  has  evaluated  the  effectiveness  of  our
disclosure  controls and  procedures as of September  30, 2004.  Based upon that
evaluation,  the Chief  Executive  Officer  and  Chief  Financial  Officer  have
concluded  that our  disclosure  controls and procedures are effective in timely
alerting  them to material  information  relating to  Telestone,  including  its
consolidated subsidiaries,  required to be included in this report and the other
reports that we file or submit under the Securities Exchange Act of 1934 so that
such information may be recorded, processed,  summarized and reported within the
time periods specified by the SEC.

         During  the third  fiscal  quarter,  there  have been no changes in our
internal control over financial reporting that have materially affected, or that
are reasonably likely to materially  affect, our internal control over financial
reporting.




















                                       17
<PAGE>

                                     PART II

                                OTHER INFORMATION

Item 1.  Legal Proceedings

We are not currently engaged in any legal proceedings.

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

(a)

There were no unregistered sales of securities during the last quarter.

(b)

Not Applicable

(c)

There were no issuer repurchases during the last quarter.

Item 3.  Defaults Upon Senior Securities

(a)

There has been no material default during the last quarter.

(b)

Not Applicable

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

There were no matters submitted to a vote of the shareholders during the last
quarter.

Item 5.  Other Information

(a)

Not Applicable

(b)

Not Applicable




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<PAGE>



Item 6.  Exhibits

         (a)      Exhibits

         Telestone files herewith the following exhibits:

         Exhibit No     Description
         ----------     --------------

         3.1*           Certificate of Incorporation  of Telestone  Technologies
                        Corp.

         3.2*           By-Laws of Telestone Technologies Corp.

         10.1+          Securities  Exchange  Agreement  by and among  Telestone
                        Technologies Corporation,  Success Million International
                        Limited  and  the   stockholders   of  Success   Million
                        International  Limited dated  effective as of August 23,
                        2004.

        10.2+           Memorandum of Cooperation by and among Beijing Telestone
                        Technology Co., Ltd. and  Shijiazhuang  Spectrum Digital
                        Communication Co., Ltd.

        31.1            Certification   pursuant   to   Section   302   of   the
                        Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

        31.2            Certification   pursuant   to   Section   302   of   the
                        Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

        32.1            Written Statement of Chief Executive Officer pursuant to
                        Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
                        Section 1350).

        32.2            Written Statement of Chief Financial Officer pursuant to
                        Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
                        Section 1350).

---------------------------
* Incorporated by reference to Telestone's Form 8-K filed with the SEC on August
19, 2004.

+ Incorporated by reference to Telestone's Form 8-K filed with the SEC on August
26, 2004












                                       19
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                                 Telestone Technologies Corp.
                                                 (Registrant)

Date:  November 15, 2004                         By: /s/ Han Daqing
                                                    ----------------------------
                                                    Han Daqing
                                                    Chief Executive Officer
                                                    (Duly Authorized Officer and
                                                    Principal Financial Officer)



















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