**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 March 31, 2006








Commission
      File Number: 033-15096





**TELESTONE
      TECHNOLOGIES CORPORATION**


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




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





Floor
      6,
      Saiou Plaza


No.
      5
      Haiying Road


Fengtai
      Technology Park


Beijing,
      People's Republic of China 100070





(Address
      of Principal Executive Offices)





(86
      10)
      8367-0505





(Issuer’s
      Telephone Number, Including Area Code)








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


Yes x No  ̈




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


Yes  ̈ No x




As
      of May
      13, 2006, 8,602,106 shares of the Issuer's $.001 par value common stock were
      outstanding.




Transitional Small Business Disclosure
                Format:
              Yes
 ̈No
                  x












**TABLE
      OF CONTENT**









**Page****PART
                  I**FINANCIAL
                  INFORMATION
              2Item
                  .Financial
                  Statements
              2Condensed
                  Consolidated Statements Operations
              2Condensed
                  Consolidated Balance Sheet
              3Condensed
                  Consolidated Statements of Changes in Stockholders’ Equity
              4Condensed
                  Consolidated Statements of Cash Flow
              5Notes
                  to Condensed Consolidated Financial Statements
              6Item
                  2.Management’s
                  Discussion and Analysis or Plan of Operations
              10Item
                  3.Controls
                  and Procedures
              19**PART
                  II**OTHER INFORMATION
              20Item
                  1.Legal
                  Proceedings
              20Item
                  2.Unregistered
                  Sales of Equity Securities and Use of Proceeds
              20Item
                  3.Defaults
                  Upon Senior Securities
              20.Item
                  4.Submissions
                  of Matters to a Vote of Security Holders
              20Item
                  5.Other
                  Information
              20Item
                  6.Exhibits
              20SIGNATURES
              21


1


**PART
      I**




**FINANCIAL
      INFORMATION**




**Item
      1.** **Financial
      Statements**




**Telestone
      Technologies Corporation**




**Condensed
      Consolidated Statements of Operations**







(Unaudited)
              **Three****months
                ended**
              March
                31,2006
            
            2005*Note*
            
            *$*
            *US
                ’000*
            
            *$*
            *US
                ’000***Operating****revenues**Net
                sales of equipment
            
            
            
            
            
            3,255
            
            
            2,852Service
                income
            
            
            
            
            
            520
            
            
            6813,775
            
            
            3,533**Operating****expenses**
              Equipment
                and services
            
            
            
            
            
            1,808
            
            
            1,546Sales
                and marketing
            
            
            
            
            
            654
            
            
            590General
                and administrative
            
            
            
            
            
            304
            
            
            471Research
                and development
            
            
            
            
            
            113
            
            
            8Depreciation
                and amortization
            
            
            
            
            
            56
            
            
            43Total
                operating expenses
            
            
            
            
            
            2,935
            
            
            2,658**Operating
                income**
            
            
            
            
            
            840
            
            
            875Interest
                expense
            
            
            
            
            
            -
            
            
            (20
            )Other
                income, net
            
            
            
            
            
            5
            
            
            4**Income
                before income taxes**
            
            
            
            
            
            845
            
            
            859Income
                taxes
            
            
            5
            
            
            (128
            )
            
            -**Net
                income**
            
            
            
            
            
            717
            
            
            859Earnings
                per share
            
            
            3**Weighted
                average number of shares outstanding**
              Basic
            
            
            
            
            
            8,583,439
            
            
            8,310,995Dilutive
                effect of warrants
            
            
            
            
            
            95,987
            
            
            281,475Diluted
            
            
            
            
            
            8,679,426
            
            
            8,592,470**Net
              income** **per share of common stock****Basic:**
              Net
                income
            
            
            
            
            
            0.08
            
            
            0.10Diluted:
              Net
                income
            
            
            
            
            
            0.08
            
            
            0.10




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




2




**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Balance Sheets**










**(Unaudited)
                As of March 31, 2006**
            
            **As
                of December 31, 2005***Note*
            
            *$*
            *US
                ’000*
            
            *$*
            *US
                ’000***ASSETS****Current
                assets**
            
            
            
            
            
            2,134
            
            
            3,605Cash
                and cash equivalents
            
            
            4
            
            
            25,277
            
            
            22,530Accounts
                receivable
            
            
            6
            
            
            1,417
            
            
            1,322Due
                from related parties
            
            
            
            
            
            2,316
            
            
            2,287Inventories
                - Finished goods
            
            
            
            
            
            958
            
            
            535PrepaymentOther
                current assets
            
            
            
            
            
            273
            
            
            240Total
                current assets
            
            
            
            
            
            32,375
            
            
            30,519Property,
                plant and equipment, net
            
            
            
            
            
            981
            
            
            1,031Total
                assets
            
            
            
            
            
            33,356
            
            
            31,550LIABILITIES
                AND STOCKHOLDERS' EQUITY
              Current
                liabilitiesAccounts
                payable - Trade
            
            
            
            
            
            4,622
            
            
            4,223Customer
                deposits for sales of equipment
            
            
            
            
            
            7
            
            
            4Due
                to related parties
            
            
            6
            
            
            2,123
            
            
            2,133Taxes
                payable
            
            
            
            
            
            6,413
            
            
            5,556Accrued
                expenses and other liabilities
            
            
            
            
            
            1,468
            
            
            1,703Total
                current liabilities
            
            
            
            
            
            14,633
            
            
            13,619Stockholders'
                equityCommitments
                and contingencies
            
            
            8**Stockholders’
                equity**Preferred
                stock, US$0 001 par value, 10,000,000 shares authorized, no shares
                issued
            
            
            
            
            
            -
            
            
            -Common
                stock and paid-in capital, US$0.001 par value:
              Authorized
                - 100,000,000 shares as of March 31, 2006 and December 31,
                2005
            
            
            
            
            
            -
            
            
            -Issued
                and outstanding- 8,602,106 shares as of March 31, 2006 and 8,577,106
                sharesas
                of December 31, 2005
            
            
            
            
            
            8
            
            
            8Dedicated
                reserves
            
            
            
            
            
            2,131
            
            
            2,131Additional
                paid-in capital
            
            
            
            
            
            7,476
            
            
            7,401Other
                comprehensive income
            
            
            
            
            
            365
            
            
            365Retained
                earnings
            
            
            
            
            
            8,743
            
            
            8,026Total
                stockholders' equity
            
            
            
            
            
            18,723
            
            
            17,931**Total
                liabilities and stockholders' equity**
            
            
            
            
            
            33,356
            
            
            31,550




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




3




**Telestone
      Technologies Corporation**





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









**Common
                stock****Additional**
            
            
            
            **Other****Number**
            
            
            
            **paid**-**in**
            
            **Dedicated**
            
            **comprehensive**
            
            **Retained****of
                shares**
            
            **Amount**
              *US$
                ‘000*
            
            **capital**
              *US$
                ‘000*
            
            **reserves**
              *US$
                ‘000*
            
            **income**
              *US$'000*
            
            **earnings**
              *US$
                ‘000*
            
            **Total**
              *US$
                000***Balance
                  at January**1, 2006
            
            
            8,577,106
            
            
            8
            
            
            7,401
            
            
            2,131
            
            
            365
            
            
            8,026
            
            
            17,931**Issuance
                of stock for**
              **warrant
                exercised**
            
            
            25,000
            
            
            -
            
            
            75
            
            
            -
            
            
            -
            
            
            -
            
            
            75**Net
                income**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            717
            
            
            717**Balance
                at March 31,****2006**
            
            
            8,602,106
            
            
            8
            
            
            7,476
            
            
            2,131
            
            
            365
            
            
            8,743
            
            
            18,723








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





4





**Telestone
      Technologies Corporation**





**Condensed
      Consolidated Statements of Cash Flows**










(Unaudited)
              **Three****months
                ended**
              **March 31,**2006
            
            2005*US$
                ’000*
            
            *US$
                ’000***Cash
                flows fromoperating
                activities****Net
                income**Adjustments
                to reconcile net income to net cash used in operating
            
            
            717
            
            
            859activities:Depreciation
                and amortization
            
            
            56
            
            
            43Provision
                for doubtful accounts
            
            
            103
            
            
            249Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (2,850
            )
            
            (1,423
            )Inventories,
                net
            
            
            (29
            )
            
            1,682Due
                from related parties
            
            
            (95
            )
            
            (35
            )Prepayment
            
            
            (423
            )
            
            (82
            )Other
                current assets
            
            
            (33
            )
            
            83Accounts
                payable
            
            
            399
            
            
            1,850Due
                to related parties
            
            
            (10
            )
            
            (83
            )Customer
                deposits for sales of equipment
            
            
            3
            
            
            16Taxes
                payable
            
            
            857
            
            
            (184
            )Accrued
                expenses and other liabilities
            
            
            (235
            )
            
            (293
            )**Net
                cash used in operating activities**
            
            
            (1,540
            )
            
            (682
            )**Cash
                flows from investing activities**Purchase
                of property, plant and equipment
            
            
            (6
            )
            
            (314
            )**Net
                cash used in investing activities**
            
            
            (6
            )
            
            (314
            )**Cash
                flows from financing activities**
            
            
            75
            
            
            795Proceeds
                from issuance of shares**Net
                cash provided by financing**
            
            
            75
            
            
            795**Net
                decrease in cash and cash equivalents**
            
            
            (1,471
            )
            
            (201
            )**Cash
                and cash equivalents, beginning of the period**
            
            
            3,605
            
            
            2,230**Cash
                and cash equivalents, end of the period**
            
            
            2,134
            
            
            2,029





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





5




**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, TTC 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"),
      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 the PRC with
      an
      operating period for an initial term of 20 years, until April 12, 2024, is
      engaged in the business of design, development, installation and trading of
      wireless telecommunication coverage system equipment.




Beijing
      Telestone Wireless Telecommunication Company Limited ("BTWTC"), being considered
      as a variable interest entity owned by TTC's directors and stockholders, was
      established in Beijing, the PRC, with a tenure of 20 years. 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, BTWTC and Beijing Telestone are collectively referred to
      as
      the “Company”.




The
      consolidated financial statements include the financial statements of TTC,
      its
      subsidiaries and a VIE for which the TTC’s subsidiary, Beijing Telestone is the
      primary beneficiary. All transactions and balances have been eliminated upon
      consolidation.






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





The
      accompanying unaudited condensed consolidated financial statements as of March
      31, 2006, have been prepared based upon Securities and Exchange Commission
      ('"SEC") rules that permit reduced disclosure for interim periods and include,
      in the opinion of management, all adjustments (consisting of normal recurring
      adjustments and reclassifications) necessary to present fairly the financial
      position, results of operations and cash flows as of March 31, 2006 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 10-KSB/A for the year ended December 31, 2005, filed on March
      31,
      2006. The results of operations for the three-month periods ended March 31,
      2006
      and 2005 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
      the financial statements and the reported amounts of' revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.




**3.** **EARNINGS
      PER SHARE**





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




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




6




**Telestone
      Technologies Corporation**


**Notes
        to Condensed Consolidated Financial Statements**


**4.** **ACCOUNTS** **RECEIVABLE**




(**Unaudited)**
              **As
                of March**
              **31, 2006**
            
            As
                of
              December
              31,
                2005*US$ ’000*
            
            *US$
                ’000*Completed
                contracts
            
            
            27,069
            
            
            24,139Retentions
            
            
            851
            
            
            931Allowance
                for doubtful accounts
            
            
            27,920
            
            
            25,070(2,643
            )
            
            (2,540
            )25,277
            
            
            22,530





Of
      the
      retentions balance as of March 31, 2006 and December 31, 2005, approximately
      $US704,000 and $US777,000 respectively are expected to be collected after one
      year.




**5.** **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.





Determination
      of the amount of unrecognized deferred taxes on these earnings is not practical,
      however, unrecognized foreign tax credits would be available to reduce a portion
      of the tax liability.





All
      of
      the Company's income is generated in the PRC by Beijing Telestone and is subject
      to PRC income taxes at a rate of 24%. ** 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, followed by a 50% reduction for the next three years, commencing with
      fiscal year 2006.




**6.** **RELATED** **PARTY
      TRANSACTION**





**Summary
      of related party transactions**




(Unaudited)
              As
                of
              March
                31, 2006
            
            As
                of
              December
                31, 2005,*US$
                ‘000*
            
            *US$
                ‘000***Due
                from related parties**
              Other
                employees (Note (a))
            
            
            209
            
            
            114Ex--stockholders
                of SM1(Note (b))
            
            
            1,208
            
            
            1,2081,417
            
            
            1,322**Due
                to related parties**
              Directors
                (Note (a))
            
            
            827
            
            
            835Related
                company (Note (c))
            
            
            50
            
            
            52Ex-stockholders
                of Beijing Telestone (Note (b))
            
            
            1,246
            
            
            1,2462,123
            
            
            2,133




7




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


Note:


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 $US1,216,000
                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 (the “Indemnification”).
                However,
                an ex-stockholder of Beijing Telestone has initiated a lawsuit against
                SMI
                and Beijing Telestone on December 14, 2005 alleging that the consideration
                amount has not been settled. The court hearing had taken place on
                May 10,
                2006 to preliminarily collect evidence from both parties. The Company
                is
                still waiting for the court order for the next hearing as at the
                date of
                this report. According to the legal opinion issued on March 6, 2006
                from
                Beijing Telestone’s
                attorney
                (Da Du Law Firm, registered in the PRC), the lawsuit as referred
                to above
                related to the dispute between the ex-stockholders of Beijing Telestone
                and there is no legal relationship between the ex-stockholder and
                SMI/Beijing Telestone. Accordingly, the outcome of the legal case,
                in the
                opinion of the directors, will have no legal implications on the
                ownership
                structure and control of Beijing Telestone.





(c)
            The
                company is related to the extent that a director of the Company has
                a
                beneficial interest in it. The amounts due to the related company
                represent unsecured advances made to the Company. These amounts are
                interest free and repayable on
                demand.




**7.** **SEGMENT
      INFORMATION**





During
      the quarter ended March 31, 2006, all revenues of the Group are from its
      installation and trading of wireless telecommunication. Accordingly no financial
      information by business segment is presented.




The
      Group
      operates in the PRC and over 90% of its revenue and operating profit are from
      the PRC. Accordingly no geographical analysis is presented.




Major
      customers and suppliers with revenues and purchases of more than 10% of the
      Company's sales and purchases are as follows:




(unaudited)
                Three months
              ended
                March 31,2006
            
            2005*US$
                ‘000*
            
            *US$
                ‘000*Major
                customers with revenues of more than 10% of the
              Company's
                sales
              Sales
                to major customers
            
            
            3,773
            
            
            2,824Percentage
                of sales
            
            
            99.9
            %
            
            80
            %Number
            
            
            4
            
            
            3Major
                suppliers with purchases of more than 10% of the
              Company's
                purchases
              Purchases
                from major suppliers
            
            
            1,279
            
            
            1,557Percentage
                of purchases
            
            
            79
            %
            
            48
            %Number
            
            
            2
            
            
            1




Accounts
      receivable related to the Company's major customers comprised 94% and 95% of
      all
      account receivables as of March 31, 2006 and December 31, 2005
      respectively.




8




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




**8.** **COMMITMENTS
      AND CONT** **INGENCIES**







The
      Company recognizes its revenue upon the completion of contract and has made
      full
      tax provision in accordance with relevant national and local laws and
      regulations of the PRC. A contract is considered completed upon completion
      of
      all essential contract work and when the installation has been accepted by
      the
      customers. It is 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 purposes, Beijing Telestone recognized revenue on an "invoice basis"
      instead of when goods are delivered and service is 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
      unlikely that the tax penalty will be imposed.




**9.** **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 year ended December 31,
      2005
      and as of the date of these financial statements.





9









**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 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 PRC. We principally
      provide mobile telecommunication coverage solutions to our customers in services
      networks to our customers in the PRC.




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




Our
      wireless coverage solutions business is comprised of research, development
      and
      application of wireless communications technology. In addition to sales of
      our
      internally designed wireless communication equipment, including repeaters,
      antennas and radio frequency accessories, we also provide project design,
      project management, installation, maintenance and other after-sales services
      in
      accordance with our customers' requirements. Since the establishment of
      Telestone in 1997, we have gradually developed business relationships with
      China
      Mobile, China Unicom, China Telecom and China Netcom, which are our main
      customers nowadays. During 2005, there was a great improvement of the revenue
      from China Telecom and China Netcom. Meanwhile we improved our business
      relationships with wireless system equipment vendors within China. After one
      year’s exploring in this field, we are starting to expand the business into
      overseas markets such as Vietnam. We also have expanded the business to India
      and Indonesia regions. Furthermore, we are ready to build new offices in Dallas,
      Texas.




In
      year
      2005, the Company completed the research & development (“R&D”) of the 3G
      application equipments, such as WCDMA, CDMA2000 and TD-SCDMA within the 3G
      system. Before 3G licensed Chinese domestic carriers will face the problems
      of
      multi-carriers and multi-mobile telecommunication systems, our research and
      development center has developed a new third generation indoor coverage
      solution, which uses the fiber technology in the radio frequency signal
      distribution.




10




**BUSINESS
      REVIEW**




Three
      months ended March 31, 2006




2006
            
            2005
            
            Growth$,000
            
            %
                of Revenue
            
            $,000
            
            %
                of Revenue
            
            $,000
            
            %Revenue
            
            
            3775
            
            
            
            
            
            3533
            
            
            
            
            
            242
            
            
            6.85
            %Cost
                of Equipment and Services
            
            
            1808
            
            
            47.89
            %
            
            1546
            
            
            43.76
            %
            
            262
            
            
            16.95
            %Sales
                and Marketing Expenses
            
            
            654
            
            
            17.32
            %
            
            590
            
            
            16.70
            %
            
            64
            
            
            10.85
            %General
                and Administrative
            
            
            304
            
            
            8.05
            %
            
            471
            
            
            13.33
            %
            
            -167
            
            
            -35.46
            %Research
                and Development
            
            
            113
            
            
            2.99
            %
            
            8
            
            
            0.23
            %
            
            105
            
            
            1312.50
            %Depreciation
                and Amortization
            
            
            56
            
            
            1.48
            %
            
            43
            
            
            1.22
            %
            
            13
            
            
            30.23
            %Interest
                Expenses
            
            
            0
            
            
            0.00
            %
            
            20
            
            
            0.57
            %
            
            -20
            
            
            -100.00
            %Other
                Income
            
            
            5
            
            
            0.13
            %
            
            4
            
            
            0.11
            %
            
            1
            
            
            25.00
            %Income
                Before Tax
            
            
            845
            
            
            22.38
            %
            
            859
            
            
            24.31
            %
            
            -14
            
            
            -1.63
            %Income
                Tax
            
            
            128
            
            
            3.39
            %
            
            0
            
            
            0.00
            %
            
            128Minority
                Interest
            
            
            0
            
            
            0.00
            %
            
            0
            
            
            0.00
            %
            
            0
            
            
            0.00
            %Extraordinary
                Gain
            
            
            0
            
            
            0.00
            %
            
            0
            
            
            0.00
            %
            
            0
            
            
            0.00
            %Net
                Income
            
            
            717
            
            
            18.99
            %
            
            859
            
            
            24.31
            %
            
            -142
            
            
            -16.53
            %







Our
      net
      revenues during the three months period ended March 31, 2006 were derived from
      installation and trading of wireless telecommunication. Our major customers
      include China Mobile, China Unicom, China Telecom and China Netcom. The majority
      of our revenues for the period were generated from mobile operators, while
      revenues from system integration providers were comparatively
      small.




Our
      revenues slightly increased for this reporting period as compared to the same
      period in 2005. Our net revenues for the three month period ended March 31,
      2006
      were $3,775,000, up from $3,533,000 for the corresponding period of the previous
      year. Nevertheless, we believe that Chinese carriers' total capital investment
      in year 2006 will not be less than 2005 and could potentially be greater with
      the expected launch of the 3G network.




For
      the
      reporting period, we endeavored to provide new products and innovative
      solutions, and we also developed new leads into other mobile telecommunication
      markets. We continue to deepen our penetration in the domestic markets where
      we
      already have a strong presence and now we are developing overseas markets in
      south-east Asia, specifically Vietnam, Indonesia and India. In these regions
      we
      have established business relationships with the local telecommunication
      carriers. We expect that new products, solutions and markets will enhance our
      business prospects.




11


Along
      with our strong R & D 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 improve our gross margin.




We
      believe that our revenues in year 2006 will improve and eventually eclipse
      fiscal 2005's revenue totals with the application of our continuously developed
      new products, solutions and the contribution of our newly developing markets,
      especially as the expected 3G network begins its construction, and the schedule
      for China Unicom reorganization becomes clear. The
      anticipated 3G rollout will have a positive impact on our company as we maintain
      our course with the 3G target directly in sight. We reiterate our earlier
      guidance for growth in 2006 of 20% to 30% in revenue and net earning after
      taxes
      compared to 2005, without the inclusion of revenue generated from the upcoming
      3G deployment in China.


**CRITICAL
      ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES**




Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates based on historical experience and
      on
      various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. We believe critical accounting policies as disclosed
      in our Annual Report on Form 10-KSB/A for the year ended December 31, 2005
      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 March
      31, 2006 compared to those discussed in our Annual Report on Form 10-KSB/A
      for
      the year ended December 31, 2005.




**RESULTS
      OF OPERATION**




**Revenues**




Our
      revenues were $ 3,775,000 for the three months ended March 31, 2006,
      representing a increase of 6.85%, as compared to the same period in 2005. The
      slight increase in our revenues was primarily due to: China Mobile and China
      Netcom increasing their capital expenditures on 2G networks, which increase
      our
      business income.




Our
      revenues were primarily derived from products sales and service
      income.




Three
      months ended March 31, 2006




2006
            
            2005
            
            Growth$,000
            
            %
                of Revenue
            
            $,000
            
            %
                of Revenue
            
            $,000%Product
                Sales
            
            
            3255
            
            
            86.23
            %
            
            2852
            
            
            80.72
            %
            
            403
            
            
            14.13
            %Service
                Income
            
            
            520
            
            
            13.77
            %
            
            681
            
            
            19.28
            %
            
            -161
            
            
            -23.64
            %Total
            
            
            3775
            
            
            100.00
            %
            
            3533
            
            
            100.00
            %
            
            242
            
            
            6.85
            %





12




For
      the
      three months ended March 31, 2006, our revenues generated from product sales
      were $3,255,000, representing an increase of 14.13%, as compared to the
      corresponding period of last year. For the three months ended March 31, 2006,
      our revenues generated from service income were $520,000, representing a
      decrease of 23.64%, as compared to the same period in 2005.




For
      the
      three months ended March 31, 2006, our products sales and service income
      increased 6.85% compared to the same period in 2005. The increase in product
      sales was caused by China Mobile and China Netcom increasing their capital
      expenditures on 2G networks. The decrease in service income resulted from
      revenue decrease in network-optimization and project maintenance in the first
      quarter of the year 2006.




**Breakdown
      by customers**




Three
      months ended March 31, 2006




2006
            
            2005
            
            Increase$,000
            
            %
                of Revenue
            
            $,000
            
            %
                of Revenue
            
            $,000%China
                Telecom
            
            
            540
            
            
            14.29
            %
            
            806
            
            
            22.81
            %
            
            -266
            
            
            -33.06
            %China
                Unicom
            
            
            1,668
            
            
            44.18
            %
            
            1,656
            
            
            46.87
            %
            
            12
            
            
            0.72
            %China
                Netcom
            
            
            433
            
            
            11.47
            %
            
            2
            
            
            0.06
            %
            
            431
            
            
            21543.99
            %China
                Mobile
            
            
            1,132
            
            
            29.98
            %
            
            251
            
            
            7.10
            %
            
            881
            
            
            350.99
            %System
                Integrators
            
            
            2
            
            
            0.08
            %
            
            818
            
            
            23.15
            %
            
            816
            
            
            -99.76
            %Total
            
            
            3,775
            
            
            
            
            
            3,533
            
            
            
            
            
            242
            
            
            6.86
            %






For
      the
      three months ended March 31, 2006, our revenues generated from China Mobile
      and
      China Netcom were $1,132,000 and $433,000 respectively, representing an
      increased of 350.99% and 21543.99%, respectively, as compared to the same period
      in 2005. The increase in our revenues from China Mobile and China Netcom was
      primarily due to the carriers' increased capital expenditure on 2G
      networks.




For
      the
      three months ended March 31, 2006, our revenues generated from China Unicom
      and
      China Telecom were $1,668,000 and $540,000. Revenue from China Unicom was almost
      the same as in the first quarter of 2005, and revenue from China Telecom
      decreased $266,000, representing a decrease of 33.06%, as compared to the same
      period in 2005. The decrease in revenues from China Telecom was primarily due
      to
      major unfinished projects. The financial performance will be revealed in the
      following quarters.




For
      the
      three months ended March 31, 2006, our direct products sales derived from system
      integrators were $2,000, compared to $818,000 generated during the same period
      in 2005, representing a decrease of 99.76% for the corresponding period of
      the
      previous year, because we want to reduce our business risk, and limit the sales
      to System Integrators.




13




From
      the
      composition of our revenues, revenue from carriers was our major revenue source,
      of which China Mobile and China Unicom constituted the majority. Compared to
      the
      corresponding period in 2005, the change in the composition ratio of our
      revenues was primarily driven by the following factors: (1) the increase in
      revenues from China Mobile and China Netcom, and (2) the decrease in revenues
      from China Telecom and System Integrators




**Breakdown
      by solutions**




Three
      months ended March 31, 2006




2006
            
            2005
            
            Increase$,000
            
            %
                of Revenue
            
            $,000
            
            %
                of Revenue
            
            $,000
            
            %
                of RevenueIndoor
            
            
            2,991
            
            
            79.24
            %
            
            2,683
            
            
            75.94
            %
            
            308
            
            
            11.50
            %Outdoor
            
            
            436
            
            
            11.54
            %
            
            32
            
            
            0.91
            %
            
            404
            
            
            1261.77
            %Others
            
            
            348
            
            
            9.22
            %
            
            828
            
            
            23.15
            %
            
            470
            
            
            -57.45
            %Total
            
            
            3,775
            
            
            
            
            
            3,533
            %
            
            
            
            
            242
            
            
            6.86
            %






For
      the
      three months ended March 31, 2006, revenues generated from indoor wireless
      coverage solutions were $2,991,000, representing an increase of 11.50%, as
      compared to the corresponding period of last year. For the reporting period,
      our
      revenues generated from outdoor wireless coverage solutions were $436,000,
      representing an increase of 1261.77% as compared to the same period in 2005.
      Our
      indoor coverage revenues and outdoor coverage revenues accounted for 79.24%
      and
      11.54% of our total revenues for the three months ended March 31, 2006,
      respectively, compared to75.94% and 0.91% for the same period in 2005.




The
      significant increase in outdoor coverage revenues is due to improvement of
      Ganshu Unicom in outdoor coverage solution business.




**Breakdown
      by regions**




Three
      months ended March 31, 2006




2006
            
            2005
            
            Increase$,000
            
            %
                of Revenue
            
            $,000
            
            %
                of Revenue
            
            $,000
            
            %
                of RevenueNorth
            
            
            2,233
            
            
            59.15
            %
            
            1,492
            
            
            42.23
            %
            
            741
            
            
            49.66
            %South
            
            
            671
            
            
            17.77
            %
            
            1,475
            
            
            41.75
            %
            
            804
            
            
            -54.52
            %East
            
            
            871
            
            
            23.08
            %
            
            566
            
            
            16.02
            %
            
            305
            
            
            53.89
            %Total
            
            
            3,775
            
            
            
            
            
            3,533
            
            
            
            
            
            242
            
            
            6.86
            %







For
      the
      three months ended March 31, 2006, our revenues generated from the North
      (covering areas like Beijing, Tianjin, Xinjiang and etc.), South (covering
      areas
      like Guangdong, Fujian, Hubei and etc.) and East (covering areas like Shanghai,
      and etc.) were $2,233,000, $671,000 and $871,000, respectively, compared to
      $1,492,000, $1,475,000 and $566,000 for the corresponding period of last
      year.




14




Our
      revenues derived from the North, South and East accounted for 59.15%, 17.77%
      and
      23.08% of our total revenues for the three months ended March 31, 2006,
      respectively, compared to 42.23%, 41.75% and 16.02% for the same period in
      2005.




For
      the
      reporting period, most wireless coverage projects in major northern areas
      generated revenue from China Netcom. We limited the business relations with
      China Unicom, especially in the Guangzhou province, and we are still exploring
      the business potential with China Mobile and China Telecom. The above two
      factors caused the revenues not to be as good as expected in the south regions.
      Our Eastern regions’ revenue increased in the first quarter of the year, and the
      evidence is from the Fujian Telecom and JiangSu Telecom. In the meantime, the
      business deal with Telestone and Shanghai Telecom is still in the bidding stage,
      and we believe it will improve our revenue in the upcoming years.




**Costs
      of Revenues**




Three
      months ended March 31, 2006




2006
            
            2005
            
            Increase$,000
            
            %
                of Revenue
            
            $,000
            
            %
                of Revenue
            
            $,000
            
            %
                of RevenueProducts
                Sales Costs
            
            
            1538
            
            
            85.07
            %
            
            1337
            
            
            86.48
            %
            
            201
            
            
            15.03
            %Service
                Costs
            
            
            270
            
            
            14.93
            %
            
            209
            
            
            13.52
            %
            
            61
            
            
            29.19
            %Total
            
            
            1808
            
            
            
            
            
            1546
            
            
            
            
            
            262
            
            
            16.95
            %






For
      the
      three months ended March 31, 2006, our total costs of revenues were $1,808,000,
      representing an increase of 16.95% as compared to the corresponding period
      of
      last year. The increase in our total costs is attributable to increase in our
      revenues in the first quarter of 2006.




Our
      costs
      of revenues include product sales costs and service costs.




For
      the
      three months ended March 31, 2006, our product sales costs were $1,538,000,
      representing an increase of 15.03% as compared to the same period in 2005.
      Our
      product sales costs accounted for 85.07% of our total cost for the three months
      ended March 31, 2006 compared to 86.48% for the same period in 2005 which
      resulted from our following effective cost control measures: 1) Reducing
      purchasing costs through large scale procurement; 2) Decreasing the use of
      raw
      materials through system design optimization; 3) Regularly improving our SI
      technologies; and 4) Optimizing our supply chain to in turn receive better
      terms
      from suppliers.




For
      the
      three months ended March 31, 2006, our service costs were $270,000, representing
      an increase of 29.19% as compared to the same period in 2005. The main reason
      for this increase was the agreements regarding the construction and installment
      with Xi’an Telecom. These agreements were related expenses and were added to the
      service costs.




Our
      product sales costs and our service costs accounted for 85.07% and 14.93% of
      the
      total costs, respectively, for the first quarter in 2006, compared to 86.48%
      and
      13.52%, respectively, for the corresponding period in 2005.




15




**Gross
      Profit and Gross Margin**




For
      the
      three months ended March 31, 2006, our gross profit was $1,967,000, which
      represented a decrease of 1.01% as compared to the same period in 2005. Our
      gross margin for the reporting period was 52.11%, up from 56.24% for the same
      period last year.




Our
      gross
      profit decrease during the reporting period, is attributable to strong
      competition in this market, and we have met the ramp rate of the sales price,
      which is higher than the rate of cost. We will take some effective measures
      to
      control product cost, and take advantage of our R&D capability to enhance
      our marketing competence.




**Operating
      expenses**




2006
            
            2005
            
            Increase$,000
            
            %
                of Revenue
            
            $,000
            
            %
                of Revenue
            
            $,000
            
            %
                of RevenueSales
                and Marketing Expenses
            
            
            654
            
            
            17.32
            %
            
            590
            
            
            16.70
            %
            
            64
            
            
            10.85
            %General
                and Administrative Expenses
            
            
            304
            
            
            8.05
            %
            
            471
            
            
            13.33
            %
            
            -167
            
            
            -35.46
            %Research
                and Development Expenses
            
            
            113
            
            
            2.99
            %
            
            8
            
            
            0.23
            %
            
            105
            
            
            1312.50
            %Total
            
            
            1071
            
            
            28.37
            %
            
            1069
            
            
            30.26
            %
            
            2
            
            
            0.19
            %







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




Sales
      and marketing expenses




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




For
      the
      three months ended March 31, 2006, sales and marketing expenses were $654,000,
      accounting for 17.32% of the total revenues, as compared to $590,000, or 16.70%
      of total revenues for the corresponding period in 2005. Sales and marketing
      expenses had a period-to-period increase of 10.85%.




Sales
      and
      marketing expenses increased because of our efforts to expand our business
      range, penetrate into new markets and set up branches and representative offices
      therein, as well as investments related to business expansion in new markets.
      We
      expect the increase in sales and marketing expenses during the reporting period
      will benefit our income growth in the coming quarters.




16




General
      and administrative expenses




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




For
      the
      three months ended March 31, 2006, general and administrative expenses were
      $304,000, accounting for 8.05% of the total revenues, as compared to $471,000,
      or 13.33% of the total revenues for the corresponding period in 2005. General
      and administrative expenses had a period-to-period decrease of
      35.46%.




The
      major
      reasons for the decrease in general and administrative expenses were due to
      our
      efforts to optimize the structure of the organization, improved work efficiency
      and cutting the level of daily expenses.




R
      & D expenses




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




For
      the
      three months ended March 31, 2006, R & D expenses were $113,000, accounting
      for 2.99% of the total revenues, as compared to $8,000, or 0.23% of the total
      revenues for the corresponding period in 2005. R & D expenses had a
      period-to-period increase of 1312.50%.




We
      have
      directed some of our R&D efforts towards investing into wireless
      telecommunications research and development, primarily 3G 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 months ended March 31, 2006, our net income was $717,000, which
      represented a decrease of 16.53% as compared to the same period in 2005. The
      period-to-period decrease in net income was primarily due to the R&D
      center’s increased costs in term of sales and marketing expenses. Furthermore,
      the income tax is paid at 12%, whereas in previous years, there was no income
      tax payment.




**LIQUIDITY
      AND SOURCE OF CAPITAL**




We
      generally finance our operations from cash flow generated internally. As of
      March 31, 2006, we had current assets of $32,375,000. Current assets are
      comprised of inventories of $2,316,000, accounts receivable of $25,277,000,
      prepayments, deposits and other receivables of $2,648,000, and cash and cash
      equivalents of $2,134,000. Current liabilities comprised of accounts payable
      of
      $4,623,000, tax payables of $6,413,000, other payables and accruals of
      $3,598,000.




Our
      trading terms with our customers are mainly on credit. As of March 31, 2006,
      our
      accounts receivable were $25,277,000 compared to $22,530,000 as of December
      31,
      2005. The credit period is generally less than one year. The gradual increase
      in
      the accounts receivable is mainly due to 1) steady growth in revenues resulting
      from growth in business scale, 2) change in the settlement pattern of the mobile
      operators, and 3) the account receivable with China Unicom. Their payment period
      is not as quick as expected by the Company.




17




Although
      we have experienced a long accounts receivable turnover period, the evidence
      showed that in the first quarter of this year there was little improvement
      in
      collection of the accounts receivable, but we believe the accounts receivable
      could be recovered because our major customers, namely China Unicom and China
      Mobile, are reputable and sizeable mobile operators in the PRC. Additionally,
      we
      have not experienced significant bad debts historically. Notwithstanding this,
      we pay 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.




(2)  The
      Company will keep in touch with the management and the key department (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.




(3)  Our
      business strategy is to encourage sales to China Mobile, China Telecom, China
      Netcom and certain provincial branches of China Unicom who had good payment
      records. We believe these measures will optimize the structure of our account
      receivables and minimize our financial risks in the future.




We
      believe the above-mentioned measures could 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 that we are facing
      in the coming future.




As
      of
      March 31, 2006, our inventories were $2,316,000, as compared to $2,287,000
      as of
      December 31, 2005, which represented an increase of 1.27%. The increase in
      the
      inventories is due to the following factors: (1) inventory reservations based
      on
      anticipated growth in the second quarter; and (2) our ability to acquire a
      lower
      purchasing pricing through large scale procurement.




As
      of
      March 31, 2006, 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 Chinese exchange rate fluctuations
      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
      March 31, 2006 and 2005, 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 parties financing and
      considering raising additional capital through debt or equity
      financings.




18




Our
      gearing ratio, calculated as total debts over total assets, was 43.87% as of
      March 31, 2006 and 43.17% as of December 31, 2005, respectively.




**CONTINGENT
      LIABILITIES**




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




**EMPLOYMENT
      AND REMUNERATIONS**




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




**Item
      3.** **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 (“CEO”) and Chief Financial Officer
      (“CFO”), 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
      that evaluation, our CEO and CFO concluded that our disclosure controls and
      procedures are effective in timely 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
      to accomplish their objectives, we intend to continue to examine, refine and
      formulize our disclosure controls and procedures and to monitor ongoing
      developments in this area.




19




**PART
      II**




**OTHER
      INFORMATION**




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




A
      former
      stockholder of Telestone initiated arbitration proceedings in the PRC against
      SMI alleging the failure of SMI to settle the payment of the consideration
      owned
      to said stockholder as a result of the transaction pursuant to which SMI
      acquired all of the outstanding capital shares of Telestone. The value of the
      above claim is approximately $1.2 million. The claim was rejected because of
      non-jurisdiction.




As
      a
      result of the rejected claim, the former shareholder initiated a legal
      proceeding in the PRC against SMI and Beijing Telestone Technologies Corp.
      for
      the same claim in nature. The case is in the process of pretrial preparation.
      The value of this claim is nearly $1 million. Management believes that the
      claim
      is without merit and will be resoled in SMI and Beijing Telestone Technologies
      Corp.’s favor.




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




None.




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




None.




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




None.




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




None.




**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




20




**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: May
              15, 2006
            By:
            /s/ Han
              DaqingHan
              Daqing, Chief Executive Officer




Date: May
              15,
              2006
            By:
            /s/ Liu
              DongpingLiu
              Dongping, Chief Financial Officer







21