**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**





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


**Securities
      Exchange Act of 1934**





For
      the
      quarterly period ended June 30, 2007





Commission
      File Number: 001-32503




**TELESTONE
      TECHNOLOGIES CORPORATION**


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




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





Floor
      6,
      Saiou Plaza


No.
      5
      Haiying Road


Fengtai
      Technology Park


Beijing,
      People’s Republic of China 100070


(Address
      of Principal Executive Offices)




(86
      10)
      8367-0505


(Issuer’s
      Telephone Number, Including Area Code)





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




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


Yes  ̈ No þ




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




Transitional
      Small Business Disclosure Format : Yes  ̈ No þ









**TELESTONE
      TECHNOLOGIES CORPORATION**





**INDEX**





**PART
      I. FINANCIAL INFORMATION**





Page**Item
                1. Condensed Financial Statements.**Condensed
                Consolidated Statements of Operations, for the three and six months
                ended
                June 30, 2007 and 2006
            2Condensed
                Consolidated Balance Sheets, as of June 30, 2007 (unaudited)and December
                31, 2006 (audited)
            3Condensed
                Consolidated Statement of Stockholders’ Equity for the period from January
                1, 2007 to June 30, 2007 (unaudited)
            4Condensed
                Consolidated Statements of Cash Flows, for the six months ended June
                30,
                2007 and 2006
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            6-15**Item
                2. Management’s Discussion and Analysis or Plan of
                Operation.**
            16**Item
                3. Controls and Procedures.**
            30**PART
                II. OTHER INFORMATION****Item
                1. Legal Proceedings.**
            31**Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds.**
            31**Item
                3. Defaults Upon Senior Securities.**
            32**Item
                4. Submission of Matters to a Vote of Security
                Holders.**
            32**Item
                5. Other Information.**
            32**Item
                6.  Exhibits.**
            32










**Telestone
        Technologies Corporation**
 
 **Condensed
        Consolidated Statements of Operations**


**Three
                months ended June 30,**
            
            **Six
                months ended June 30,*****Note***
            
            **2007**
            
            2006
            
            **2007**
            
            2006***US$’000***
            
            *US$’000*
            
            ***US$’000***
            
            *US$’000***(Unaudited)**
            
            **(Unaudited)****Operating
                revenues**Net
                sales of equipment
            
            
            
            
            
            **4,760**
            
            
            3,571
            
            
            **7,711**
            
            
            6,826Service
                income
            
            
            
            
            
            **2,096**
            
            
            1,648
            
            
            **3,941**
            
            
            2,168**6,856**
            
            
            5,219
            
            
            **11,652**
            
            
            8,994**Operating
                expenses**Equipment
                and services
            
            
            
            
            
            **3,114**
            
            
            2,637
            
            
            **5,515**
            
            
            4,445Sales
                and marketing
            
            
            
            
            
            **1,065**
            
            
            576
            
            
            **1,985**
            
            
            1,230General
                and administrative
            
            
            
            
            
            **593**
            
            
            205
            
            
            **1,213**
            
            
            508Research
                and development
            
            
            
            
            
            **325**
            
            
            167
            
            
            **497**
            
            
            280Depreciation
                and amortization
            
            
            
            
            
            **64**
            
            
            42
            
            
            **123**
            
            
            98Total
                operating expenses
            
            
            
            
            
            **5,161**
            
            
            3,627
            
            
            **9,333**
            
            
            6,561**Operating
                income**
            
            
            
            
            
            **1,695**
            
            
            1,592
            
            
            **2,319**
            
            
            2,433Interest
                expense
            
            
            
            
            
            **(26**
            **)**
            
            -
            
            
            **(51**
            **)**
            
            -Other
                income, net
            
            
            
            
            
            **11**
            
            
            141
            
            
            **11**
            
            
            145**Income
                before income taxes**
            
            
            
            
            
            **1,680**
            
            
            1,733
            
            
            **2,279**
            
            
            2,578Income
                taxes
            
            
            *8*
            
            
            **(279**
            **)**
            
            (214
            )
            
            **(430**
            **)**
            
            (342
            )**Net
                income**
            
            
            
            
            
            **1,401**
            
            
            1,519
            
            
            **1,849**
            
            
            2,236Other
                comprehensive income
            
            
            
            
            
            **31**
            
            
            -
            
            
            **42**
            
            
            -**1,432**
            
            
            1,519
            
            
            **1,891**
            
            
            2,236**Earnings
                per share:**
            
            
            *4***Weighted
                average number of shares outstanding**Basic
            
            
            
            
            
            **9,604,550**
            
            
            8,602,106
            
            
            **9,415,919**
            
            
            8,592,824Dilutive
                effect of warrants
            
            
            
            
            
            **123,606**
            
            
            121,043
            
            
            **91,833**
            
            
            104,738Diluted
            
            
            
            
            
            **9,728,156**
            
            
            8,723,149
            
            
            **9,507,752**
            
            
            8,697,562**Net
                income per share of common stock****Basic:**Net
                income
            
            
            
            
            
            **0.15**
            
            
            0.18
            
            
            **0.20**
            
            
            0.26**Diluted:**Net
                income
            
            
            
            
            
            **0.14**
            
            
            0.17
            
            
            **0.19**
            
            
            0.26




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




Page
          2 of
          15


**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Balance Sheets**




*Note*
            
            **As
                of**
              **June
                30,**
              **2007**
            
            As
                of
              December
                31,
              2006***US$’000***
            
            *US$’000***(Unaudited)****ASSETS****Current
                assets**Cash
                and cash equivalents
            
            
            
            
            
            **4,861**
            
            
            3,380Accounts
                receivable
            
            
            *6*
            
            
            **31,872**
            
            
            29,777Due
                from related parties
            
            
            *11*
            
            
            **1,644**
            
            
            1,409Inventories
                - Finished goods
            
            
            
            
            
            **5,854**
            
            
            5,048Prepayment
            
            
            
            
            
            **101**
            
            
            315Other
                current assets
            
            
            
            
            
            **566**
            
            
            373Total
                current assets
            
            
            
            
            
            **44,898**
            
            
            40,302Property,
                plant and equipment, net
            
            
            *7*
            
            
            **811**
            
            
            821**Total
                assets**
            
            
            
            
            
            **45,709**
            
            
            41,123**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities**Short-term
                bank loan
            
            
            
            
            
            **-**
            
            
            1,279Accounts
                payable - Trade
            
            
            
            
            
            **5,263**
            
            
            6,314Customer
                depositsfor sales of equipment
            
            
            
            
            
            **211**
            
            
            20Due
                to related parties
            
            
            *11*
            
            
            **2,004**
            
            
            2,001Taxes
                payable
            
            
            
            
            
            **5,231**
            
            
            2,571Accrued
                expenses and other accrued liabilities
            
            
            
            
            
            **1,379**
            
            
            4,668Total
                current liabilities
            
            
            
            
            
            **14,088**
            
            
            16,853**Commitments
                and contingencies**
            
            
            *12***Minority
                interests****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, 2007 and December 31, 2006
            
            
            *10*
            
            
            **-**
            
            
            -Issued
                and outstanding - 9,604,550 shares as of June 30, 2007 and 8,935,106
                shares as of December 31, 2006
            
            
            
            
            
            **10**
            
            
            9Dedicated
                reserves
            
            
            
            
            
            **2,619**
            
            
            2,619Additional
                paid-in capital
            
            
            
            
            
            **13,934**
            
            
            8,475Other
                comprehensive income
            
            
            
            
            
            **1,057**
            
            
            1,015Retained
                earnings
            
            
            
            
            
            **14,001**
            
            
            12,152Total
                stockholders’ equity
            
            
            
            
            
            **31,621**
            
            
            24,270**Total
                liabilities and stockholders’ equity**
            
            
            
            
            
            **45,709**
            
            
            41,123


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




Page
          3 of
          15


**Telestone
        Technologies Corporation**
 
 **Condensed
        Consolidated Statement of Changes in Stockholders’ Equity**


**Common
                stock****Number**
              **of
                shares**
            
            **Amount**
            
            **Additional**
              **paid-in**
              **capital**
            
            **Dedicated**
              **reserves**
            
            **Cumulative**
              **translation**
              **adjustment**
            
            **Retained**
              **earnings**
            
            TotalUS$’000
            
            US$’000
            
            *US$’000*
            
            *US$’000*
            
            *US$’000*
            
            *US$’000***Balance
                at January 1, 2007**
            
            
            8,935,106
            
            
            9
            
            
            8,475
            
            
            2,619
            
            
            1,015
            
            
            12,152
            
            
            24,270Issuance
                of stock (net of expenses)
            
            
            669,444
            
            
            1
            
            
            5,459
            
            
            -
            
            
            -
            
            
            -
            
            
            5,460Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,849
            
            
            1,849Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            42
            
            
            -
            
            
            42**Balance
                at June 30, 2007 (unaudited)**
            
            
            **9,604,550**
            
            
            **10**
            
            
            **13,934**
            
            
            **2,619**
            
            
            **1,057**
            
            
            **14,001**
            
            
            **31,621**




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




Page
          4 of
          15




**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Statement of Cash Flows**




**Six
                months ended June 30,****2007**
            
            2006***US$’000***
            
            *US$’000***(Unaudited)****Cash
                flows from operating activities****Net
                income**
            
            
            **1,849**
            
            
            2,236Adjustments
                to reconcile net income to net cash used in operating
                activities:Loss
                (Gain) on disposal of property, plant and equipment
            
            
            **3**
            
            
            (138
            )Depreciation
                and amortization
            
            
            **123**
            
            
            98Provision
                for doubtful accounts
            
            
            **402**
            
            
            -Exchange
                difference
            
            
            **42**
            
            
            -Changes
                in assets and liabilities:Accounts
                receivable
            
            
            **(2,497**
            **)**
            
            (277
            )Inventories,
                net
            
            
            **(806**
            **)**
            
            (2,117
            )Due
                from related parties
            
            
            **(235**
            **)**
            
            (140
            )Prepayment
            
            
            **214**
            
            
            313Other
                current assets
            
            
            **(193**
            **)**
            
            (34
            )Accounts
                payable
            
            
            **(1,051**
            **)**
            
            588Due
                to related parties
            
            
            **3**
            
            
            (144
            )Customer
                deposits for sales of equipment
            
            
            **191**
            
            
            (2
            )Taxes
                payable
            
            
            **2,660**
            
            
            (993
            )Accrued
                expenses and other accrued liabilities
            
            
            **(3,289**
            **)**
            
            (690
            )**Net
                cash used in operating activities**
            
            
            **(2,584**
            **)**
            
            (1,300
            )**Cash
                flows from investing activities**Purchase
                of property, plant and equipment
            
            
            **(146**
            **)**
            
            (27
            )Proceeds
                from disposal of property, plant and equipment
            
            
            **30**
            
            
            232**Net
                cash (used in) provided by investing activities**
            
            
            **(116**
            **)**
            
            205**Cash
                flows from financing activities**Proceeds
                from (Repayment of) short-term bank loan
            
            
            **(1,279**
            **)**
            
            1,239Proceeds
                from issuance of shares
            
            
            **5,460**
            
            
            75**Net
                cash provided by financing**
            
            
            **4,181**
            
            
            1,314**Net
                increase in cash and cash equivalents**
            
            
            **1,481**
            
            
            219**Cash
                and cash equivalents, beginning of the period**
            
            
            **3,380**
            
            
            3,605**Cash
                and cash equivalents, end of the period**
            
            
            **4,861**
            
            
            3,824**Supplemental
                disclosure of cash flow information**Interest
                income
            
            
            **14**
            
            
            9Interest
                expenses
            
            
            **(51**
            **)**
            
            -





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





Page
          5 of
          15


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




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




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




Success
      Million International Limited (“SMI”), a company established in the Hong Kong
      Special Administrative Region of the People’s Republic of China (the “PRC”) on
      August 23, 2004, is a wholly owned subsidiary of TTC and had no business
      operations since incorporation. Beijing Telestone Technology Company Limited
      (“Beijing Telestone”), a wholly-owned subsidiary of SMI, established in Beijing,
      the People’s Republic of China (the “PRC”) with an operating period for an
      initial term of 20 years until April 12, 2024, it is engaged in the business
      of
      design, development, installation and trading of wireless telecommunication
      coverage system equipment.




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




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




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




The
      accompanying unaudited condensed consolidated financial statements as of June
      30, 2007, have been prepared based upon Securities and Exchange Commission
      ("SEC") rules that permit reduced disclosure for interim periods and include,
      in
      the opinion of management, all adjustments (consisting of normal recurring
      adjustments and reclassifications) necessary to present fairly the financial
      position, results of operations and cash flows as of June 30, 2007 and for
      all
      periods presented.




Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with accounting principles generally accepted in the
      United States of America ("USA") have been condensed or omitted. These condensed
      consolidated financial statements should be read in conjunction with the audited
      financial statements and notes thereto incorporated by reference in the
      Company's Form-10KSB/A for the year ended December 31, 2006 filed on March
      31,
      2007. The results of operations for the six-month periods ended June 30, 2007
      and 2006 are not necessarily indicative of the operating results to be expected
      for the full year.




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




Page
          6 of
          15




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


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




**Accounting
                principles**




The
                condensed consolidated financial statements and accompanying notes
                are
                prepared in accordance with USGAAP.




**Basis
                of consolidation**




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




**Revenue
      recognition**




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




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


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


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




**Research
      and development**




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




**Income
      taxes**




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




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




Page
          7 of
          15





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




**Inventories**




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




**Property,
      plant and equipment**




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




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




When
      assets are sold or retired, their costs and accumulated depreciation are
      eliminated from the consolidated financial statements and any gain or loss
      resulting from their disposal is recognized in the year of disposition as an
      element of other income, net.




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




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




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




**Operating
      leases**




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




Page
          8 of
          15
 
  **Telestone
        Technologies Corporation**
  **Notes
        to Condensed Consolidated Financial Statements**




**Foreign
      currency translation**




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




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




For
      translation of financial statements into the reporting currency, assets and
      liabilities are translated at the exchange rate at the balance sheet date,
      equity accounts are translated at historical exchange rates, and revenues,
      expenses, gains and losses are translated at the weighted average rates of
      exchange prevailing during the period.




Translation
      adjustments, when material, resulting from this process are recorded in
      accumulated other comprehensive income within stockholders’ equity. Other
      comprehensive income for foreign currency translation was recorded for the
      period ended June 30, 2007 after the Renminbi ceased to be pegged to the United
      States Dollars during last year.




**Use
      of estimates**




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




**Allowance
      for doubtful accounts**




Accounts
      receivable are stated at the amount billed to customers. The
      Company recognizes an allowance for doubtful accounts to ensure trade and other
      receivables are not overstated due to uncollectibility. The Company’s estimate
      is based on a variety of factors, including historical collection experience,
      existing economic conditions and a review of the current status of the
      receivable. Accounts receivable are presented net of an allowance for doubtful
      accounts of US$3,325,000 and US$2,923,000 as of June 30, 2007 and December
      31,
      2006 respectively.




**Related
      parties**




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




Page
          9 of
          15


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


**Recently
      issued accounting standards**




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




**4.**  **EARNINGS
      PER SHARE**




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




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




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





(a)  Concentration
      of major customers and suppliers


**(Unaudited)**
                **Six
                  months ended**
                **June
                  30,****2007**
              
              2006***US$’000***
              
              *US$’000**Major
                  customers with revenues of more than 10% of the Company’s
                  sales**Sales
                  to major customers*
              
              
              **10,633**
              
              
              8,321*Percentage
                  of sales*
              
              
              **91**
              **%**
              
              93
              %*Number*
              
              
              **3**
              
              
              3*Major
                  suppliers with purchases of more than 10% of the Company’s
                  purchases**Purchases
                  from major suppliers*
              
              
              **1,077**
              
              
              2,065*Percentage
                  of purchases*
              
              
              **21**
              **%**
              
              39
              %*Number*
              
              
              **1**
              
              
              2




Accounts
      receivable related to the Company’s major customers comprised 92% and 93% of all
      accounts receivables as of June 30, 2007 and December 31, 2006
      respectively.




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




Page
          10
          of 15




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




(b)
            Country
                risks





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




(c)
            Cash
                and time deposits




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




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





**As
                of**
              **June
                30,**
              **2007**
            
            As
                of
              December
                31,
              2006***US$’000***
            
            *US$’000***(Unaudited)**Completed
                contracts
            
            
            **34,634**
            
            
            31,568Retentions
            
            
            **563**
            
            
            1,132**35,197**
            
            
            32,700Allowance
                for doubtful accounts
            
            
            **(3,325**
            **)**
            
            (2,923
            )**31,872**
            
            
            29,777




Of
      the
      retentions balance as of June 30, 2007 and December 31, 2006, approximately
      US$532,000 and US$350,000 respectively are expected to be collected within
      one
      year.




Page
          11
          of 15


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





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





Property,
      plant and equipment are summarized as follows:





Estimated
              useful
                life
            
            **(Unaudited)**
              **As
                of**
              **June
                30,**
              **2007**
            
            As
                of
              December
                31,
              2006(in
                years)
            
            ***US$’000***
            
            *US$’000*Leasehold
                improvement
            
            
            5
            
            
            **106**
            
            
            100Plant
                and machinery
            
            
            5
            
            
            **424**
            
            
            409Office
                equipment
            
            
            5
            
            
            **672**
            
            
            602Motor
                vehicles
            
            
            5
            
            
            **446**
            
            
            438**1,648**
            
            
            1,549Accumulated
                depreciation
            
            
            
            
            
            **(837**
            **)**
            
            (728
            )**811**
            
            
            821




**8.**  **TAXATION**




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




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




No
      provision for withholding 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.




All
      of
      the Company’s income is generated in the PRC by Beijing Telestone and BTWTC,
      which are subject to PRC income taxes at a rate of 24% and 33% respectively.
      Since Beijing Telestone is registered as a wholly-owned foreign investment
      enterprise (“WOFIE”), it is subject to tax laws applicable to WOFIE in the PRC
      and is fully exempt from the PRC enterprise income tax of 24% for two years
      commencing in fiscal year 2004, followed by a 50% reduction for the next three
      years.





Income
      tax expenses has been provided at the rate of 24% *(2006:
      24%)* on
      Beijing Telestone’s and 33% *(2006:
      33%)* on
      BTWTC’s estimated assessable incomes arising from PRC during the period are
      comprised of the following:





**(Unaudited)**
              **Six
                months ended June 30,****2007**
            
            2006***US$’000***
            
            *US$’000**Current
                tax**Hong
                Kong*
            
            
            **-**
            
            
            -*PRC*
            
            
            **430**
            
            
            342**430**
            
            
            342




Page
          12
          of 15


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


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




As
      of
      January 1, 2007, the Company is subject to the provisions of FIN 48, and has
      analyzed its filing positions in all of the federal, state and foreign
      jurisdictions where it is required to file income tax returns. As of December
      31, 2006, and June 30, 2007, the Company has identified the following
      jurisdictions as “major” tax jurisdictions, as defined, in which it is required
      to file income tax returns: United States; Hong Kong and PRC. Based on the
      evaluations noted above, the Company has concluded that there are no significant
      uncertain tax positions requiring recognition in its consolidated financial
      statements. Based on a review of tax positions for all open years, no reserves
      for uncertain income tax positions have been recorded pursuant to FIN 48 during
      the six months ended June 30, 2007, and the Company does not anticipate that
      it
      is reasonably possible that any material increase or decrease in its
      unrecognized tax benefits will occur within twelve months.




Upon
      adoption of FIN 48 on January 1, 2007, and as of June 30, 2007, the Company
      had
      no unrecognized tax benefits or accruals for the potential payment or interest
      and penalties. The Company’s policy is to record interest and penalties in this
      connection as a component of the provision for income tax expense. For the
      six
      months ended June 30, 2007, no interest or penalties were recorded.




Page
          13
          of 15


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


**9.**  **SEGMENT
      INFORMATION**





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





The
      Company continued to deepen their penetration in the domestic markets where
      they
      have already established a strong presence and are continuing to penetrate
      new
      overseas markets in South-East Asia, specifically; Vietnam, Indonesia and India,
      through their established business relationships with local telecommunication
      carries in the region. However, the Company operates mainly in the PRC and
      over
      90% of its revenue and operating profit are from the PRC. Accordingly no
      geographical analysis is presented.





**10.** **COMMON
          STOCK**





As
      of
      June 30, 2007, the authorized capital of TTC 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.





TTC
      had
      9,604,550 and 8,935,106, shares of common stock outstanding as of June 30,
      2007
      and December 31, 2006 respectively and 192,403 and 15,000 warrants outstanding
      as of June 30, 2007 and December 31, 2006 respectively.





**11.**  **RELATED
      PARTY TRANSACTIONS**





**Summary
      of related party transactions**


**As
                of**
              **June
                30,**
              **2007**
            
            As
                of
              December
                31,
              2006***US$’000***
            
            *US$’000***(Unaudited)****Due
                from related parties**Other
                employees (Note (a))
            
            
            **396**
            
            
            161Ex-stockholders
                of SMI (Note (b))
            
            
            **1,248**
            
            
            1,248**1,644**
            
            
            1,409**Due
                to related parties**Directors
                (Note (a))
            
            
            **717**
            
            
            714Ex-stockholders
                of Beijing Telestone (Note (b))
            
            
            **1,287**
            
            
            1,287**2,004**
            
            
            2,001**Guarantor
                of short term loan**A
                director
            
            
            **-**
            
            
            1,279




Page
          14
          of 15


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




Note :




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





(b)
            The
                amounts due to ex-stockholders of Beijing Telestone of US$1,287,000
                represent the consideration arising from the consummation of the
                business
                combination. The ex-stockholders of SMI had represented that they
                had
                fully settled the amount with the ex-stockholders of Beijing Telestone
                and
                also undertaken to fully indemnify SMI against any claims from the
                ex-stockholders of Beijing Telestone. However, an ex-stockholder
                of
                Beijing Telestone has initiated a lawsuit against SMI alleging that
                the
                consideration amount has not been settled. The court hearing commenced
                on
                May 10, 2006 and finalized on December 19, 2006. Verdict has been
                issued
                by the Second Intermediate People’s Court of Beijing and it was announced
                that SMI and Beijing Telestone are not required to compensate the
                ex-stockholder of SMI.





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





**12.**  **COMMITMENTS
      AND CONTINGENCIES**





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





**13.**  **STOCK
      OPTION PLAN**





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





No
      options have been granted to any parties during the period ended June 30, 2007
      and as of the date of these financial statements.




Page
          15
          of 15




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




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





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





**BUSINESS
      DESCRIPTION**





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





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





Our
      wireless coverage solutions business is comprised of research, development
      and
      application of wireless communications technology. In addition to the sales
      of
      our internally designed wireless communication equipment, including repeaters,
      antennas and radio frequency accessories, we also provide project design,
      project management, installation, maintenance and other after-sales services
      in
      accordance with our customers’ requirements. Since the establishment of
      Telestone in 1997, we have gradually developed business relationships with
      China
      Mobile Group (“China Mobile”), China Unicom Group (“China Unicom”), China
      Telecom Group (“China Telecom”) and China Netcom Group (“China Netcom”), all of
      which are currently our main customers. Since our inception, we have improved
      our business relationships with wireless system equipment vendors within the
      PRC. We have been exploring the wireless system equipment industry over the
      past
      year and have continued to expand our business into overseas markets, such
      as
      Vietnam, India, Indonesia and the United States.





In
      2006,
      the Company completed its research and development into various third generation
      (“3G”) application equipment standards such as WCDMA, CDMA2000 and TD-SCDMA,
      which are the three 3G standards that are expected to be licensed and operated
      by our customers. Previously, 3G licensed Chinese domestic carriers faced the
      problems of multi-carriers and multi-mobile telecommunication systems. Our
      research and development center has developed a new 3G indoor coverage solution,
      which uses the fiber technology in the radio frequency signal distribution
      to
      transmit high speed data signals.




16





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





**BUSINESS
      REVIEW**





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




2007
            
            2006
            
            VarianceItem
            
            $'000
            
            %
                of revenue
            
            $'000
            
            %
                of revenue
            
            $'000
            
            %Revenue
            
            
            6,856
            
            
            
            
            
            5,219
            
            
            
            
            
            1,637
            
            
            31.37
            %Cost
                of equipment and services
            
            
            3,114
            
            
            45.42
            %
            
            2,637
            
            
            50.53
            %
            
            477
            
            
            18.09
            %Gross
                Profit
            
            
            3,742
            
            
            54.58
            %
            
            2,582
            
            
            49.47
            %
            
            1,160
            
            
            44.93
            %Sales
                and marketing expense
            
            
            1,065
            
            
            15.53
            %
            
            576
            
            
            11.04
            %
            
            489
            
            
            84.90
            %General
                and administrative
            
            
            593
            
            
            8.65
            %
            
            205
            
            
            3.93
            %
            
            388
            
            
            189.27
            %Research
                and development
            
            
            325
            
            
            4.74
            %
            
            167
            
            
            3.20
            %
            
            158
            
            
            94.61
            %Depreciation
                and Amortization
            
            
            64
            
            
            0.93
            %
            
            42
            
            
            0.80
            %
            
            22
            
            
            52.38
            %Interest
                expenses
            
            
            26
            
            
            0.38
            %
            
            0
            
            
            0.00
            %
            
            26Other
                Income
            
            
            11
            
            
            0.16
            %
            
            141
            
            
            2.70
            %
            
            (130
            )
            
            -92.20
            %Income
                before tax
            
            
            1,680
            
            
            24.50
            %
            
            1,733
            
            
            33.21
            %
            
            (53
            )
            
            -3.06
            %Income
                tax
            
            
            279
            
            
            4.07
            %
            
            214
            
            
            4.10
            %
            
            65
            
            
            30.37
            %Net
                income
            
            
            1,401
            
            
            20.43
            %
            
            1,519
            
            
            29.11
            %
            
            (118
            )
            
            -7.77
            %




17




Our
      revenues during the three month period ended June 30, 2007 were derived from
      our
      system integration services to domestic telecom carriers, direct product sales
      to system integration providers and direct product sales to overseas markets.
      Our major customers include China Mobile, China Unicom, China Telecom and China
      Netcom. The majority of our revenues for this period were generated from mobile
      operators, while revenues from system integration providers were comparatively
      small.





Our
      revenues for this reporting period increased as compared to the same period
      in
      2006. Our revenues for the three month period ended June 30, 2007 were
      $6,856,000, as compared to $5,219,000 from the corresponding period of the
      previous year **.**





For
      the
      reporting period, the Company provided new products and innovative solutions
      and
      also developed new leads into other mobile telecommunication markets. We
      continued to deepen our penetration in the domestic markets where we have
      already established a strong presence and are continuing to penetrate new
      overseas markets in South-East Asia, specifically; Vietnam, Indonesia and India,
      through our established business relationships with local telecommunication
      carriers in the region. We expect these new products, solutions and markets
      to
      enhance our business prospects in the medium to long-term.





The
      Company is promoting Wireless Fiber Distribution System (“WFDS”), a leading
      wireless indoor coverage solution, applied to all the modes of the wireless
      network, such as 2G and 3G, to the major wireless carriers in the PRC. The
      trials of WFDS on TD-SCDMA networks received an extremely positive response
      from
      Beijing and Xiamen. The Company also signed an agreement to supply WFDS to
      Fujian mobile’s GSM networks. The trial of WFDS in WCDMA standard was also
      successful in Kunming, Shanxi and Beijing. 3D is
      our new technology, while WFDS is a solution based on this technology.





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.





18





**CRITICAL
      ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES**





The
      discussion and analysis of our financial situation and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with generally accepted accounting principles in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates based on historical experience and
      on
      various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. We believe critical accounting policies as disclosed
      in our Annual Report on Form 10-KSB for the year ended December 31, 2006 reflect
      the more significant judgments and estimates used in preparation of our
      financial statements. We believe there have been no material changes to our
      critical accounting policies and estimates during the three months ended June
      30, 2007, compared to those discussed in our Annual Report on Form 10-KSB for
      the year ended December 31, 2006.





**RESULTS
      OF OPERATIONS**





**REVENUES**





For
      the
      three months and six months ended June 30, 2007, net revenues were $6,856,000
      and $11,652,000, representing an increase of 31.37% and 29.55%, respectively,
      when compared to the corresponding periods of 2006. The increase in net revenues
      was due to a mixed effect of: China Mobile and China Unicom increasing their
      capital investment in the Company and China Telecom temporarily lowering its
      capital expenditure in the Company in anticipation of the 3G developments.





For
      the
      second quarter 2007 reporting period, we expanded our revenue stream from the
      sales of indoor coverage solutions (including products and system integration
      services) to China Mobile and China Unicom. This revenue stream offset some
      of
      the negative effects on our revenues caused by China Telecom's drop in capital
      expenditure, which resulted in an increase in total revenues for the second
      quarter of 2007.





**BREAKDOWN
      BY NATURE**




Three
      months ended June 30, 2007




2007
            
            
            2006
            
            
            Growth$'000
            
            
            %
                of revenue
            
            
            $'000
            
            
            %
                of revenue
            
            
            $'000
            
            
            %product
                sales
            
            
            4,760
            
            
            69.43
            %
            
            3,571
            
            
            68.42
            %
            
            1,189
            
            
            33.30
            %service
                sales
            
            
            2,096
            
            
            30.57
            %
            
            1,648
            
            
            31.58
            %
            
            448
            
            
            27.18
            %total
            
            
            6,856
            
            
            
            
            
            5,219
            
            
            
            
            
            1,637
            
            
            31.37
            %




19




Six
        months ended June 30, 2007




2007
            
            
            2006
            
            
            Growth$'000
            
            
            %
                of revenue
            
            
            $'000
            
            
            %
                of revenue
            
            
            $'000
            
            
            %product
                sales
            
            
            7,711
            
            
            66.18
            %
            
            6,826
            
            
            75.90
            %
            
            885
            
            
            12.97
            %service
                sales
            
            
            3,941
            
            
            33.82
            %
            
            2,168
            
            
            24.10
            %
            
            1,773
            
            
            81.78
            %total
            
            
            11,652
            
            
            
            
            
            8,994
            
            
            
            
            
            2,658
            
            
            29.55
            %




For
      the
      three months and six months ended June 30, 2007, revenues generated from product
      sales were $4,760,000 and $7,711,000, which represented an increase of 33.30%
      and 12.97%, respectively, compared to the corresponding periods of 2006. For
      the
      aforementioned periods, revenues generated from system integration service
      sales
      were $2,096,000 and $3,941,000, which represented an increase of 27.18% and
      81.78% respectively, compared to the same periods of 2006.





For
      the
      three months and six months ended June 30, 2007, revenues generated from product
      sales accounted for 69.43% and 66.18% of total revenues, respectively, compared
      to 68.42% and 75.90% for the corresponding periods of 2006. For the
      aforementioned periods, revenues generated from system integration service
      sales
      accounted for 30.57% and 33.82% of total revenues, respectively, compared to
      31.58% and 24.10% for the same periods of 2006.





**BREAKDOWN
      BY CUSTOMERS**





Three
      months ended June 30, 2007




2007
            
            
            2006
            
            
            IncreaseUSD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %China
                Mobile Group
            
            
            2,367
            
            
            34.52
            %
            
            1,034
            
            
            19.81
            %
            
            1,333
            
            
            128.92
            %China
                Unicom Group
            
            
            2,898
            
            
            42.27
            %
            
            2,058
            
            
            39.43
            %
            
            840
            
            
            40.82
            %China
                Netcom Group
            
            
            186
            
            
            2.71
            %
            
            229
            
            
            4.39
            %
            
            (43
            )
            
            -18.78
            %China
                Telecom Group
            
            
            1,298
            
            
            18.93
            %
            
            1,889
            
            
            36.19
            %
            
            (591
            )
            
            -31.29
            %Others
            
            
            107
            
            
            1.56
            %
            
            9
            
            
            0.17
            %
            
            98
            
            
            1088.89
            %Total
            
            
            6,856
            
            
            
            
            
            5,219
            
            
            
            
            
            1,637
            
            
            31.37
            %




Six
      months ended June 30, 2007




2007
            
            
            2006
            
            
            IncreaseUSD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %China
                Mobile Group
            
            
            4,208
            
            
            36.11
            %
            
            2,166
            
            
            24.08
            %
            
            2,042
            
            
            94.28
            %China
                Unicom Group
            
            
            4,455
            
            
            38.23
            %
            
            3,726
            
            
            41.43
            %
            
            729
            
            
            19.57
            %China
                Netcom Group
            
            
            705
            
            
            6.05
            %
            
            662
            
            
            7.36
            %
            
            43
            
            
            6.50
            %China
                Telecom Group
            
            
            1,970
            
            
            16.91
            %
            
            2,429
            
            
            27.01
            %
            
            (459
            )
            
            -18.90
            %Others
            
            
            314
            
            
            2.69
            %
            
            11
            
            
            0.12
            %
            
            303
            
            
            2754.55
            %Total
            
            
            11,652
            
            
            
            
            
            8,994
            
            
            
            
            
            2,658
            
            
            29.55
            %




20




For
      the
      three months and six months ended June 30, 2007, revenues generated from China
      Mobile were $2,367,000 and $4,208,000, which represented an increase of 128.92%
      and 94.28%, respectively, compared to the corresponding periods of 2006. For
      the
      aforementioned periods, revenues generated from China Unicom were $2,898,000
      and
      $4,455,000, which represented an increase of 40.82% and 19.57% respectively,
      compared to the same periods of 2006. The increase in revenues from China Mobile
      was due to our increased business with Beijing Mobile, Guizhou Mobile, and
      Guangxi Mobile. Due to China Unicom’s infrastructure investments, we received
      more business from Xinjiang Unicom, Guizhong Unicom and Hebei Unicom.in the
      second quarter of 2007.





For
      the
      three months and six months ended June 30, 2007, revenues generated from China
      Netcom were $186,000 and $705,000, which represented a decrease of 18.78% and
      an
      increase of 6.50% respectively, compared to the corresponding periods of 2006.
      For the aforementioned periods, revenues generated from China Telecom were
      1,298,000 and 1,970,000, which represented a decrease of 31.29% and 18.90%
      respectively, compared to the corresponding periods of 2006.





Revenues
      from telecom carriers were our major revenue source for the six months ended
      June 30, 2007, with China Mobile and China Unicom accounting for this majority.
      Compared to the corresponding period in 2006, the change in the composition
      ratio of revenues was primarily driven by the following factors: (1) an increase
      in revenues received from China Mobile and China Unicom; and (2) a decrease
      of
      revenues of PHS ( Personal Handy-phone System ) coverage solutions derived
      from
      China Netcom and China Telecom.




**BREAKDOWN
      BY SOLUTIONS**




Three
      months ended June 30, 2007




2007
            
            
            2006
            
            IncreaseUSD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %Indoor
            
            
            6,179
            
            
            90.13
            %
            
            4,840
            
            
            92.74
            %
            
            1,339
            
            
            27.67
            %Outdoor
            
            
            499
            
            
            7.28
            %
            
            104
            
            
            1.99
            %
            
            395
            
            
            379.81
            %Others
            
            
            178
            
            
            2.60
            %
            
            275
            
            
            5.27
            %
            
            (97
            )
            
            -35.27
            %Total
            
            
            6,856
            
            
            
            
            
            5,219
            
            
            
            
            
            1,637
            
            
            31.37
            %




21




Six
      months ended June 30, 2007




2007
            
            
            2006
            
            
            IncreaseUSD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %Indoor
            
            
            9,140
            
            
            78.44
            %
            
            7,831
            
            
            87.07
            %
            
            1,309
            
            
            16.72
            %Outdoor
            
            
            1,038
            
            
            8.91
            %
            
            540
            
            
            6.00
            %
            
            498
            
            
            92.22
            %Others
            
            
            1,474
            
            
            12.65
            %
            
            623
            
            
            6.93
            %
            
            851
            
            
            136.60
            %Total
            
            
            11,652
            
            
            
            
            
            8,994
            
            
            
            
            
            2,658
            
            
            29.55
            %




For
      the
      three months and six months ended June 30, 2007, revenues generated from indoor
      wireless coverage solutions were $6,179,000 and $9,140,000, which represented
      an
      increase of 27.67% and 16.72%, respectively, compared to the corresponding
      periods of 2006. For the aforementioned periods, revenues generated from outdoor
      wireless coverage solutions were $499,000 and $1,038,000, which represented
      an
      increase of 379.81% and a decrease of 92.22% respectively, compared to the
      same
      periods of 2006.





For
      the
      three months and six months ended June 30, 2007, revenues generated from indoor
      wireless coverage solutions accounted for 90.13% and 78.44% of total revenues,
      respectively, compared to 92.74% and 87.07% for the corresponding periods of
      2006. For the aforementioned periods, revenues generated from outdoor wireless
      coverage solutions accounted for 7.28% and 8.91% of total revenues,
      respectively, compared to 1.99% and 6.00% for the same periods of 2006.





The
      significant increase in outdoor coverage revenues in the second quarter of
      2007
      was due to increased sales to Xinjiang Unicom and Hebei Unicom .





**BREAKDOWN
      BY REGIONS**




Three
      months ended June 30, 2007





2007
            
            
            2006
            
            
            IncreaseUSD'
                000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %North
            
            
            3,641
            
            
            53.11
            %
            
            1,809
            
            
            34.66
            %
            
            1,832
            
            
            101.27
            %South
            
            
            2,483
            
            
            36.22
            %
            
            2,426
            
            
            46.48
            %
            
            57
            
            
            2.35
            %East
            
            
            669
            
            
            9.76
            %
            
            984
            
            
            18.85
            %
            
            (315
            )
            
            -32.01
            %Oversea
            
            
            63
            
            
            0.92
            %
            
            -
            
            
            
            
            
            63Total
            
            
            6,856
            
            
            
            
            
            5,219
            
            
            
            
            
            1,637
            
            
            31.37
            %




Six
      months ended June 30, 2007




2007
            
            
            2006
            
            
            IncreaseUSD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %
              of
            
            
            USD
                '000
            
            
            %North
            
            
            6,511
            
            
            55.88
            %
            
            4,043
            
            
            44.95
            %
            
            2,468
            
            
            61.04
            %South
            
            
            3,326
            
            
            28.54
            %
            
            3,097
            
            
            34.43
            %
            
            229
            
            
            7.39
            %East
            
            
            1,546
            
            
            13.27
            %
            
            1,854
            
            
            20.61
            %
            
            (308
            )
            
            -16.61
            %Overseas
            
            
            269
            
            
            2.31
            %
            
            -
            
            
            
            
            
            269Total
            
            
            11,652
            
            
            
            
            
            8,994
            
            
            
            
            
            2,658
            
            
            29.55
            %





22





For
      the
      three months and six months ended June 30, 2007, revenues generated from the
      North (covering areas such as Beijing, Tianjin, Xinjiang etc.) were $3,641,000
      and $6,511,000, which represented an increase of 101.27% and 61.04%,
      respectively, compared to the corresponding periods of 2006. For the
      aforementioned periods, revenues generated from the south (covering areas such
      as Guangdong, Fujian, Sichuan etc.) were $2,483,000 and $3,326,000, which
      represented an increase of 2.35% and 7.39% respectively, compared to the same
      periods of 2006. For the identical periods, revenues generated from the east
      (covering areas such as Shanghai, Nanjing etc.) were $669,000 and $1,546,000,
      which represented a decrease of 32.01% and 16.61%, respectively, compared to
      the
      corresponding periods of 2006. Revenues from overseas were $63,000 and $269,000
      respectively.





For
      the
      three months and six months ended June 30, 2007, revenues generated from the
      north accounted for 53.11% and 55.88% of total revenues, respectively, compared
      to 34.66% and 44.95% for the corresponding periods of 2006. For the
      aforementioned periods, revenues generated from the south accounted for 36.22%
      and 28.54% of total revenues, respectively, compared to 46.48% and 34.43% for
      the same periods of 2006. For the identical periods, revenues generated from
      the
      east accounted for 9.76% and 13.27% of total revenues, respectively, compared
      to
      18.85% and 20.61% for the corresponding periods of 2006 and revenues generated
      from outside the mainland of the PRC accounted for 0.92% and 2.31%
      respectively.





For
      the
      six month 2006 reporting period, the revenue increase in the north was mainly
      due to an increase in sales made to Beijing Mobile and to Xinjiang Unicom’s
      increase in capital expenditure. The revenue decrease in the east was primarily
      due to a decrease in business with Shanghai Telecom resulting from its reduced
      capital expenditure.





**COSTS
      OF REVENUES**





Three
      months ended June 30, 2007




2007
            
            
            2006
            
            
            IncreaseUSD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %Costs
                of product sales
            
            
            2,557
            
            
            37.30
            %
            
            1,861
            
            
            35.66
            %
            
            696
            
            
            37.40
            %Costs
                of system integration service sales
            
            
            557
            
            
            8.12
            %
            
            776
            
            
            14.87
            %
            
            (219
            )
            
            -28.22
            %Total
            
            
            3,114
            
            
            
            
            
            2,637
            
            
            
            
            
            477
            
            
            18.09
            %




23




Six
      months ended June 30, 2007




2007
            
            
            2006
            
            
            IncreaseUSD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %Costs
                of product sales
            
            
            4,155
            
            
            35.66
            %
            
            3,399
            
            
            37.79
            %
            
            756
            
            
            22.24
            %Costs
                of system integration service sales
            
            
            1,360
            
            
            11.67
            %
            
            1,046
            
            
            11.63
            %
            
            314
            
            
            30.02
            %Total
            
            
            5,515
            
            
            
            
            
            4,445
            
            
            
            
            
            1,070
            
            
            24.07
            %




For
      the
      three months and six months ended June 30, 2007, our total costs were $3,114,000
      and $5,515,000, which represented an increase of 18.09% and 24.07%,
      respectively, as compared to the corresponding periods of 2006.




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




For
      the
      three months and six months ended June 30, 2007, our costs of product sales
      were
      $2,557,000 and $4,155,000, which represented an increase of 37.40% and 22.24%,
      respectively, as compared to the same periods of 2006. The percentage increase
      in costs of product sales was mainly due to increased revenue growth and the
      cost of original materials. We are continuously working to lower our costs
      of
      product sales through a series of effective cost control measures which include;
      reducing purchasing costs through large scale procurement, decreasing the use
      of
      raw materials through system design optimization, regularly improving our system
      integration technologies, and optimizing our supply chain to in turn receive
      better terms from suppliers.





For
      the
      three months and six months ended June 30, 2007, our costs of service sales
      were
      $557,000 and $1,360,000, representing a decrease of 28.22% and an increase
      of
      30.02%, respectively, as compared to the same periods of 2006. For the
      aforementioned periods, the decrease in costs of service sales was mainly due
      to
      a change in our service model whereby system integration services are now
      carried out by local technicians instead of technicians sent from our
      headquarters in Beijing. The new service model will reduce service costs and
      increase the gross margin on services provided.





**GROSS
      PROFIT AND GROSS MARGIN**





For
      the
      three months and six months ended June 30, 2007, our gross profit was $3,742,000
      and $6,137,000, which represented an increase of 44.93% and 34.91%,
      respectively, as compared to the same periods of 2006. Our gross margin for
      the
      aforementioned periods was 54.58% and 52.66%, respectively, compared to 49.47%
      and 50.58% for the same periods of last year.





Our
      gross
      profit increase during the reporting period is attributable to a growth of
      revenue and the gross margin of service sales increasing. We will take the
      necessary effective measures to control product costs,
      and will
      utilize our research and development capabilities to develop high margin
      products.




24





**OPERATING
      EXPENSES**





Three
      months ended June 30, 2006




2007
            
            
            2006
            
            
            IncreaseUSD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %Sales
                and marketing expenses
            
            
            1065
            
            
            15.53
            %
            
            576
            
            
            11.04
            %
            
            489
            
            
            84.90
            %General
                and administrative expenses
            
            
            593
            
            
            8.65
            %
            
            205
            
            
            3.93
            %
            
            388
            
            
            189.27
            %Research
                and development expenses
            
            
            325
            
            
            4.74
            %
            
            167
            
            
            3.20
            %
            
            158
            
            
            94.61
            %total
            
            
            1983
            
            
            
            
            
            948
            
            
            
            
            
            1035
            
            
            109.18
            %




Six
      months ended June 30, 2007




2007
            
            
            2006
            
            
            IncreaseUSD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %
                of revenue
            
            
            USD
                '000
            
            
            %Sales
                and marketing expenses
            
            
            1985
            
            
            17.04
            %
            
            1230
            
            
            13.68
            %
            
            755
            
            
            61.38
            %General
                and administrative expenses
            
            
            1213
            
            
            10.41
            %
            
            508
            
            
            5.65
            %
            
            705
            
            
            138.78
            %Research
                and development expenses
            
            
            497
            
            
            4.27
            %
            
            280
            
            
            3.11
            %
            
            217
            
            
            77.50
            %total
            
            
            3695
            
            
            
            
            
            2018
            
            
            
            
            
            1677
            
            
            83.10
            %








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





**SALES
      AND MARKETING EXPENSES**





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





For
      the
      three months and six months ended June 30, 2007, sales and marketing expenses
      were $1,065,000 and $1,985,000, accounting for 15.53% and 17.04% of total
      revenues, as compared to $576,000 and $1,230,000, or 11.04% and 13.68% of total
      revenues, respectively, for the corresponding periods of 2006.




25





The
      sales
      and marketing expenses increase in the second quarter of 2007 was due to our
      efforts to promote WFDS, expand our product sales range, penetrate into new
      markets, open new branches and representative offices, as well as introduce
      investments related to business expansion in new markets.





**GENERAL
      AND ADMINISTRATIVE EXPENSES**




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





For
      the
      three months and six months ended June 30, 2007, general and administrative
      expenses were $593,000 and $1,213,000, accounting for 8.65% and 10.41% of total
      revenues, as compared to $205,000 and $508,000, or 3.93% and 5.65% of total
      revenues, respectively, for the corresponding periods of 2006. General and
      administrative expenses for the aforementioned periods increased 189.27% and
      138.78%, respectively, as compared to the same periods of last year.





The
      major
      reasons for the increase in general and administrative expenses were due to
      expenses related to the enhancement in management and control systems, the
      growth of staff levels and the increase in expenses incurred as a result of
      compliance requirements of Section 404 of the Sarbanes-Oxley Act of
      2002.





**RESEARCH
      AND DEVELOPMENT EXPENSES**




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





For
      the
      three months and six months ended June 30, 2007, research and development
      expenses were $325,000 and $497,000, accounting for 4.74% and 4.27% of total
      revenues, as compared to $167,000 and $280,000, or 3.20% and 3.11% of total
      revenues, respectively, for the corresponding periods of 2006. Research and
      development expenses for the aforementioned periods increased by 94.61% and
      77.50%, respectively, as compared to the same periods of last year.





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




**Net
      Income**




For
      the
      three and six months ended June 30, 2007, our net income was $1,401,000 and
      $1,849,000, respectively, which represented a decrease of 7.77% and
      17.31% , as
      compared to the same period in 2006. The decrease in the net income was
      primarily due to an increase in expenses such as sales and marketing costs,
      general and administrative costs and research and development that were incurred
      in order to benefit our income growth over the coming quarters.




26





**LIQUIDITY
      AND SOURCE OF CAPITAL**




We
      generally finance our operations from cash flow generated internally and through
      bank loans. As of June 30, 2007, we had current assets of $44,898,000. Current
      assets are comprised of inventories of $5,854,000, accounts receivable of
      $31,872,000, prepayments, deposits and other receivables of $2,311,000, and
      cash
      and cash equivalents of $4,861,000. Current liabilities are comprised of
      accounts payable of $5,263,000, tax payables of $5,231,000, other payables
      and
      accruals of $3,594,000.




Our
      trading terms with our customers are mainly on credit. As of June 30, 2007,
      our
      accounts receivable were $31,872,000, compared to $29,777,000 as of December
      31,
      2006. The credit period is generally less than one year. The
      gradual increase in the accounts receivables is mainly due to: 1) steady growth
      in revenues; 2) a change in the settlement pattern of the mobile operators,
      and
      3) one account receivable with China Unicom, whose payment has been
      delayed.




For
      the
      three months ended June 30, 2007, although the Company experienced long accounts
      receivable turnover periods, our ability to settle these accounts receivables
      improved when compared to the same period of last year. We believe that the
      outstanding accounts receivables can be recovered because our major customers,
      China Unicom and China Mobile, are large reputable operators in the PRC, and
      long-term clients with whom we have not experienced significant bad debts in
      the
      past. Following the principle of prudence, we believe that we have fully
      provisioned for doubtful accounts. Notwithstanding this, we have paid special
      attention to lowering the turnover period of our accounts receivable balances
      and have taken the following measures:





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





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





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





(4)
            Our
                business strategy is to encourage sales to China Mobile, China Telecom,
                China Netcom and certain provincial branches of China Unicom who
                have
                consistently demonstrated good payment track-records to us.




We
      believe that these measures will optimize the structure of our accounts
      receivables, minimize our financial risks in the future as well as help improve
      our accounts receivable turnover period and provide a better internal control
      environment for us to cope with the fast growing telecommunication industry
      in
      the PRC




27




As
      of
      June 30, 2007, our inventories were $5,854,000, as compared to $5,048,000 as
      of
      December 31, 2006, which represented an increase of 15.96%. This increase in
      the
      inventory levels was a result of the following factors: (1) inventory
      reservations based in anticipated of growth in the third quarter; and (2) our
      ability to acquire a lower purchasing pricing through large scale procurement.




As
      of
      June 30, 2007, our cash and bank balances were mainly denominated in Renminbi
      ("RMB") and United States dollars ("US$"), while our bank borrowings were mainly
      denominated in RMB. Our revenue and expenses, assets and liabilities are mainly
      denominated in RMB and US$. Recently, the exchange
      rate fluctuations in the
      PRC have led
      to an appreciation of currency. This may be a result of certain exchange
      risks.




We
      have
      experienced negative cash flows from operating activities for the periods ended
      June 30, 2007 and 2006, which is primarily the result of extended turnover
      periods related to our accounts receivable, as mentioned above. A continuation
      of this situation could negatively impact our liquidity and in turn, our overall
      results of operations. In order to address this issue, apart from the
      implementation of the above-mentioned measures to reduce the turnover period,
      we
      are also exploring the possibility of obtaining third party financing and are
      also considering
      raising additional capital through debt or equity financing .




Our
      gearing ratio, calculated as total debts over total assets, was 30.82% as of
      June 30, 2007 and 40.98% as of December 31, 2006, respectively.




**Business
      Strategy Update**




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





1.
      The
      Company will continue to invest in research and development for our key
      technologies and our products to enhance its leading position in wireless
      coverage technology and take full advantage of the PRC’s investment in the 3G
      networks. The Company has dedicated research and development to wireless
      coverage solutions and in the next three years the main business will continue
      to be wireless coverage solutions for mobile telecommunications.





2.
      In the
      domestic market, Telestone will maintain strong relationships with Chinese
      mobile carriers and make selective acquisitions in major provincial markets
      where the Company does not have the leading market share. Our potential targets
      are companies that occupy a leading market position and have strong business
      networks in their provincial markets. The Company is confident that it will
      deepen its penetration of provincial markets and raise its overall market share
      through selective acquisitions and the promotion of new solutions.





3.
      Telestone will also focus on building up its presence in markets outside the
      PRC. Telestone has opened offices in Vietnam and the United States, and has
      sold
      products in Vietnam, Indonesia, Thailand, Philippines and the United States.
      The
      Company will continue to strengthen its presence in these exciting new markets
      by leveraging its expertise and leading wireless coverage products and
      solutions. Our strategies in the United States and the
      developing countries are slightly different. In the United States, we seek
      cooperation with peers that have strong research and development ability, and
      then develop technology and products that fit in the market of the PRC. However,
      we will also find partners within the integration business and then sell our
      products, as Telestone’s products have a significant cost advantage. In the
      developing countries, we only seek cooperation with a local integration partner
      to deliver our leading wireless coverage solution technology, whom we then
      work
      with to set up our local products distribution channels.




28





**Recent
      Developments**





Telestone
      announced the acquisition of Shandong Guolian in July. Shandong Guolian is
      a
      leading provider of wireless coverage services for carriers in the Shandong
      Province of the PRC. The principal business activities of Guolian and its
      subsidiary are design, development, production and installation and trading
      of
      wireless telecommunication coverage system equipment.





In
      July
      2007, Mr. Yu Yongjing assumed the role of Chief Operating Officer (“COO”). Mr.
      Yu was the General Manager of Shandong Guolian, which is now part of Telestone.
      Mr. Yu brings with him over 13 years of experience in selling and marketing
      wireless coverage products in the PRC. Prior to joining Shandong Guolian, Mr.
      Yu
      managed the Engineering Department of Japan Daimei Telecommunication Corporation
      for around 10 years. Due to our former COO, Mr. Zhang Yongjun's
      experience in technology and products, he is currently leading the Company’s
      efforts to further develop overseas business expansion.





The
      Company has launched new solutions based on WFDS products, including, a
      commercialized result of our 3D technology offering, which has received an
      extremely positive response from China Mobile. China Mobile is scheduled to
      conduct further trials of WFDS on the TD-SCDMA network during the third quarter
      of 2007.





**Business
      Outlook**





We
      believe that our revenues in 2007 will continue to improve and should exceed
      our
      total revenues for the fiscal year of 2006 by at least 30%. This expectation
      is
      based on anticipated sales of new products and solutions in both the PRC and
      new
      geographical markets.





**CONTINGENT
      LIABILITIES**





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




29





**EMPLOYMENT
      AND REMUNERATIONS**





We
      offer
      competitive remuneration schemes to our employees based on common industry
      practices as well as the employees and the Company’s overall performance.





**ITEM
      3A(T). CONTROLS AND PROCEDURES**





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




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





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





During
      the quarter ended June 30, 2007, there were no changes to our internal controls
      over financial reporting that have materially affected, or are reasonably likely
      to materially affect, our internal control over financial
      reporting.




30





**PART
      I** **I**




**OTHER
      INFORMATION**




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




On
      December 24, 2004, a former stockholder of Beijing Telestone initiated
      arbitration proceedings in the PRC against Success Million International Limited
      (“SMI”) **** alleging
      the failure of SMI to settle the payment of the consideration owed to said
      stockholder as a result of the transaction pursuant to which SMI acquired all
      of
      the outstanding share capital of Beijing Telestone. The value of the above
      claim
      is approximately $1.2 million. The claim was rejected based on lack of
      jurisdiction.




As
      a
      result of the rejected claim, the former shareholder initiated a new legal
      court
      proceeding in the PRC against SMI and Beijing Telestone based on the same claim.
      The value of this claim is nearly $1 million. The court hearing commenced on
      May
      10, 2006. The court of first instance, the Second Intermediate People’s Court of
      Beijing, ruled in favor of SMI and Beijing Telestone on December 19, 2006.
      The
      Company believes that the former stockholder of Beijing Telestone still has
      the
      right to appeal and/or file another lawsuit against SMI and Beijing Telestone.
      No court summons have been received by the Company as of August 6, 2007. See
      also footnote (b) of Note 11 to the Consolidated Financial Statements contained
      in this Quarterly Report.




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




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





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




31





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





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




None.




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




None.




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




None.




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




The
      following documents are filed as part of this report:




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




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




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




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




32


**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, 2007
            By:
            /s/
              Han
              DaqingHan
                Daqing, Chief Executive Officer
              (Principal
                Executive Officer)




Date:
              August 14, 2007
            By:
            /s/
              Liu
              DongpingLiu
                Dongping, Chief Financial Officer
              (Principal
                Financial Officer)


33