**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**


**______________**




**FORM
      10-K**




x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**For
      the fiscal year ended December 31, 2006**





o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**For
      the transition period from ______ to ______.**




**Commission
      file number:** **000-117718**




**ORSUS
      XELENT TECHNOLOGIES, INC.** ****


(Exact
      name of registrant as specified in its charter)




**Delaware**
              (State
                of incorporation)
            
            **20-11998142******
              (I.R.S.
                Employer Identification No.)


**12** **th** **Floor, Tower B, Chaowai MEN Office Building**


**26
      Chaowai Street, Chaoyang Disc.**


**Beijing,
      People’s Republic Of China 100020**


(Address
      of principal executive offices, including zip code)




**86-10-85653777**


(Registrant’s
      telephone number, including area code)




**Securities
      registered pursuant to Section 12(b) of the Act:**




**None**




**Securities
      registered pursuant to Section 12(g) of the Act:**




**Common
      Stock, par value $0.001 per share**





**Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.** **Yes
      o**  **No
      x**





**Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Securities Exchange Act of
      1934.**  **Yes
      o**  **No
      x**





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





**Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o**









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





**Large
      accelerated filer o**   **Accelerated
      filer o**   **Non-accelerated
      filer x**





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





**As
      of June 30, 2006, the aggregate market value of the registrant’s common stock
      held by non-affiliates of the registrant was $30,692,480 based on the closing
      price as reported on the OTC Bulletin Board.** ****





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





**Class**
            
            **Outstanding
                at March 17, 2007****Common
                Stock, $.001 par value per share**
            
            **29,756,000****shares**





**PART
      I**





**Item
      1.** **Business.**




Except
      as
      otherwise indicated by the context, references in this Annual Report to “we,”
“us,” “our,” or the “Company” are to the combined business of Orsus Xelent
      Technologies, Inc. and its indirect wholly-owned subsidiary, **** Beijing
      Orsus Xelent Technology & Trading Company Limited (“ *Xelent* ”).





**Introduction**





On
      March
      31, 2005, we completed a stock exchange transaction (the “ *Exchange
      Transaction* ”)
      with
      the stockholders of United First International Limited, a company incorporated
      under the laws of Hong Kong (“ *UFIL* ”).
      The
      Exchange Transaction was consummated under Delaware law and pursuant to the
      terms of that certain Securities Exchange Agreement dated effective as of March
      31, 2005 (the “ *Exchange
      Agreement* ”).




Pursuant
      to the Exchange Agreement, we issued shares of our common stock to the
      stockholders of **** UFIL,
      in
      exchange for 100% of the outstanding capital stock of UFIL. Pursuant to the
      Exchange Transaction, UFIL became our wholly owned subsidiary. We carry on
      our
      business through UFIL’s wholly owned subsidiary, Xelent.




**Description
      of Business**





We,
      through the operations of Xelent, have been engaged since May 2003 in the
      business of designing for retail and wholesale distribution economically priced
      cellular phones. In February of 2004, Xelent registered "ORSUS" with the State
      Administration for Industry and Commerce in the People’s Republic of China (the
“ *PRC* ”)
      as its
      product trademark, also known as “Orsus Cellular” within the industry. Xelent
      has sold approximately 500,000 cellular phones in the PRC in 2006.





The
      market in the PRC for cellular phones has continued to expand and we have taken
      advantage of that expansion by gradually introducing more mature 2.5G wireless
      products to the public in the PRC. As the 3G standards become more mature,
      we
      anticipate that we will seek to produce our own 3G products based on both our
      own research and development efforts and cooperation with our strategic partners
      in the industry.





*Organizational
      Structure*





The
      organizational structure of the company is linear in nature and is comprised
      of
      ten separate departments developed to ensure proper project management and
      control. These departments are as follows:




·
            Project
                Management Department, which is responsible for coordinating the
                management of cellular
                phone projects,exchanging
                concepts and ideas with our research and development team, providing
                weekly project reports and supervising the project
                schedules.




1




·
            Technology
                Support and Quality ControlDepartment,which
                is responsible fortechnical
                support for software and hardware design and testing and industrial
                design
                and mechanical design (“*ID/IM*”)
                checking and auditing, as well as tooling engineering and quality
                control
                during mass production;




·
            Business
                ManagementDepartment,which
                is responsible for materialspurchase,
                supply chain management, businesscoordination
                and to sign the business agreements, contracts and other kinds of
                documents for the business
                partners;




·
            Planning
                and FinanceDepartment,which
                is responsible foroverall accounting matters, including accounting methods and processes,
                auditing, compiling financial plans and monthly/quarterly/yearly
                financial
                statements and financial budgets, and control of
                expenses;




·
            Human
                ResourcesDepartment,which
                is responsible for our employment issues, including hiring and termination
                of staff;




·
            Financing
                and InvestmentDepartment,which
                is responsible for overall accounting matters,financing
                and investment research andanalysis.




·
            Customer
                ServiceDepartment,which
                is responsible formaintenance,
                spare partsordering,
                authorized network management, refurbishing, after-saledata
                analysis and service charge fees return,,
                as well as a hotline service center and customer service trainingcenter,technical
                support and after-sale service quality assurance systems of the
                Company;
                and




·
            R&DDepartmentthat
                is responsible for researching new models of mobile phones and developing
                new technologies;




·
            Marketing
                Development Department, which is responsible for help the Company
                to find
                new business partners, which will act as the countryside distributors,
                provincial dealers and some overseas wholesalers. The department
                also
                helps the long-term partners and new incomers to set up the marketing
                concepts and business models of Orsus
                Cellular.




·
            Logistics
                Department, collect phones from each maintenance station nationwide
                and
                send the repaired phones to
                customers




Our
      headquarters in Beijing have seven regional
      management centers and a technical support center. **** We
      also
      have an unaffiliated network of service providers, including 179 cellular phone
      service centers located throughout
      the PRC .
      Of
      these providers, 42 are provincial
      replacement and refurbishment centers and 137 are maintenance and repair
      centers.


2


**Market
      Overview and Strategic Partners**




According
      to a research conducted by the PRC Ministry of Information Industry, new
      cellular phone users in the PRC increased by 68 million in 2006, with total
      consumers reaching 460 million during that year. Currently, the PRC has the
      largest number of cellular phone users in the world. The penetration rate for
      cellular phones in the PRC was approximately 35% in 2006. The number of cellular
      phone users is expected to reach 500 million by the year-end 2007. The cellular
      phone market in the PRC is expected to reach $120 billion by the year end of
      2006 according to the PRC Ministry of Information Industry.





On
      February 26, 2006, the TD-SCDMA technology standard was officially announced
      as
      the 3G (Third Generation) technology standard in the PRC. However, sales of
      products incorporating the 3G has not developed as rapidly as generally
      anticipated (it was that 3G network construction and issuance of 3G licenses
      would be approved by the end of 2006). Although the granting of 3G licenses
      has
      been delayed until the middle of 2007, once introduction to the market of
      products utilizing the 3G technology is commenced, Xelent should be in a good
      position to take advantage of this business opportunity. We have commenced
      the
      development of our owned 3G cellular phone products, including 3G PCBA (3G
      technologies platform) and cellular phones with 3G PCBA, based on our existing
      2G and 2.5G cellular technologies and cooperation with our 3G solution and
      chips
      providers. Additionally, we are planning to join into the TD-SCDMA Industry
      League, and we are working toward the granting of 3G cellular phones
      manufacturing licenses from the PRC government in 2007.





Our
      cellular products are
      customarily equipped with leading features including 1.8-inch
      to 2.2-inch CSTN or TFT dual-color displays, one to 120 minutes video recording,
      300K to 3 million pixels photography, MP3, MPEG4 and U disk support, dual stereo
      speakers, e-mail messaging multimedia messaging, 40 to 64 polyphonic ring tones,
      slim bar-phone and flip-phone technology, ultra thin innovative lightweight
      design with handwriting and PDA functions, all at low to
      moderate price points.





Our
      relationships with our strategic partners, CEC
      Cellular Limited (“ *CECM* ”), Beijing
      Xingwang Shidai Tech & Trading Co., Ltd. (“ *XWSD* ”) and
      CECT-Chinacomm Communications Co., Ltd. (“ *ZDHT* ”)
      have
      help us to increase our market penetration. CECM, which is controlled by China
      Electronics Corporation Group, is a manufacturer
      of cellular phones with annual
      production of approximately one million units. CECM serves as a manufacturer
      for
      our cellular phone products. In addition, CECM has its own sales network, and
      we
      sell some of our products to CECM, who in turn sells those products to its
      own
      provincial and national sales distributors and dealers, thus increasing the
      distribution capabilities for our products. XWSD is also one of our major
      agents, selling our cellular phones to provincial distributors, city
      distributors and dealers. XWSD employ several market promotion services
      companies to enhance the sales networks of our products throughout the PRC.
      ZDHT
      is a new customer which began to cooperate with us from the fourth quarter
      of
      2006 and is a provider and operator of telecommunication devices and
      services.


3


**Description
      of Products & Services**





Since
      inception, Xelent
      has developed, and where indicated launched, the following cellular phone
      products:


***Project****Initiation
                  Date***
              
              ***Launch
                  Date***
              
              **Model/Project
                  Code**
              
              ***Network***January,
                  2006
              
              March,
                  2006
              
              C
                  109
              
              CDMAJanuary,
                  2006
              
              March,
                  2006
              
              D9000
              
              GSM/GPRSJanuary,
                  2006
              
              March,
                  2006
              
              D8600
              
              GSM/GPRSJanuary,
                  2006
              
              March,
                  2006
              
              X718
              
              GSM/GPRSJanuary,
                  2006
              
              March,
                  2006
              
              TDA
                  6028
              
              CDMAJanuary,
                  2006
              
              April,
                  2006
              
              X188
              
              GSMJanuary,
                  2006
              
              June,
                  2006
              
              X5
              
              GSM/GPRSMarch,
                  2006
              
              September,
                  2006
              
              C300
              
              CDMAJune,
                  2006
              
              September,
                  2006
              
              D8120
              
              GSM/GPRSMarch,
                  2006
              
              September,
                  2006
              
              C200
              
              CDMAJune,
                  2006
              
              September,
                  2006
              
              C8000
              
              CDMA/GSMJune,
                  2006
              
              September,
                  2006
              
              D8110
              
              GSM/GPRS





We
      outsource the manufacturer of our products to unaffiliated third parties. Once
      our products have been manufactured, they are delivered to a network of
      unaffiliated national sales distributors (see “ *Description
      of Current Business - Market Overview and Strategic Partners* ”)
      and
      dealers that, in turn, distribute the products to provincial sale s distributors and dealers and these provincial sale s distributors and dealers distribute our products to retailers throughout the
      PRC.


4


**Research
      & Development**





We
      do
      business with many kinds of research and development enterprises. We cooperate
      with professional design houses such as  Shanghai Huntel
      Technology Limited  (“ *Huntel* ”)
      and
      Tranzda wireless(“ *Tranzda* ”) ,
      who are
      mainly involved with us in MMI (U2) (“ *Man
      Machine Interface* ”) **** designing,
      software and hardware testing, CTA (“ *China
      Type Approval* ”)
      certification, acquisition **** and
      phone
      main board **** updating
      and software adaptability testing. In addition, we work with cooperative
      partners, such as Dalian
      Daxian Telecom Co., Ltd. (“ *Daxian* ”)
      and
      some companies in
      developing ID/MD and the layout of cellular phone main boards. Based on this
      research and development, our strategic business partners and we are then able
      to design and develop new products.




We
      mainly
      cooperate with other professional design houses and work together on research
      and development project s .
      Whenever possible, we use and lease their instrument s and
      equipment, rather than purchasing it ourselves. In the area of software
      compiling, testing & updating, we utilize data cables and computers
      installed with professional software in a testing environment. All the computers
      and data cables are owned by Xelent.




As
      3G
      continues to develop in the PRC in 2006, we anticipate that we will be able
      to
      develop our own 3G mobile phones based
      on
      both our own research and development efforts and cooperation with the strategic
      industry partners. We are now being negotiated with several parties including
      foreign 3G
      technology providers such as Spreadtrum Communication (Shanghai) Inc.
      (“ *SCI* ”),
      several 3G chipset and solution providers in order to get us well prepare the
      launch of 3 G services in coming future. We will put our efforts to focus on
      the
      development of the products in TD-SCDMA and WCDMA standard. Our strategic
      partners, such as SCI developed 2.5 G and 3G integrated circuit and provides
      2.5G GPRS and 3G TD-SCDMA chipset and software development platforms and
      solutions, are the successful corporations in the PRC telecommunication
      industry. We believe the cooperation with 3G technology providers in working
      on
      future research and development projects will help facilitate our entry into
      the
      3G wireless market.




We
      have
      established a team for technology development. The members of our team are
      our
      product planning division, project management division and industrial design
      center. Our p roduct
      planning division is responsible for constructing the
      medium term strategic plans and
      research and development scheduling. Our p roject
      management division administers
      our research and development efforts, overseas manufacturing and quality control
      of our products  and
      monitors costs, including human resource costs. Our i ndustrial
      design center is
      responsible for evaluating design plans provided by third party industrial
      design companies and confirming model structural design and tracing the issues on module
      production and quality.





**·**
            Introduced
                the first watch-style cellular based on CDMA2000IX with joint efforts
                ofTelson
                Electronics Co., Ltd,
                aSouth
                Korea company, in May of 2003.





·
            Based
                on GPRS CLASS 10 module, developed
                the first GPRS cellular collaborating system, with South Korea's
                TELSON,
                which is based onWISMO
                PAC P5186D, the GPRS module of WAVECOM company, in May of 2003, which
                wasintroduced
                on October of 2003.




5




·
            Formed
                a production line of 1 to 3-millionCharge
                Coupled Device(“*CCD*”)pixel camera by configuring high-resolution CMOS(“*Complementary
                Metal Oxide Semiconductor*”)





**Competition** ****




The
      Company faces substantial competition from other wireless phone manufacturers
      such as: Nokia, Motorola, which controlled above 50% totally, of the cellular
      market in the PRC in the first three quarters of 2006. In
      addition we face competition from Ningbo Bird Corporation Ltd **** and Lenovo
      Group Limited, both of which are domestic PRC producers and controlled between
      4% and 10%, respectively of the cellular market in the PRC in 2005.




**Government
      Regulation** ****





There
      is
      no government regulation banning or making material effect on Xelent, including
      but not limited, any law, rule or regulation or any order, writ, judgment,
      injunction, decree, determination or award binding on or applicable to Xelent.
      In the PRC cellular market, cellular manufacturers are responsible for repair,
      replacement and return of cellular phone to customers within the warranty period
      in accordance with certain rules and regulation in the PRC.





**Intellectual
      Property and Proprietary Rights**





Xelent
      has applied for “  ”as
      the
      registered trademark and the China Trademark Agency has distributed
“Notification of Acceptance” is serial number ZC3878232SL.





We
      utilize other intellectual property legally with partners that we cooperate
      with
      through contracts or agreements.





**Employees** ****





We
      have
      approximately 60 employees. Of the 60 employees, 7 persons serve in management
      related capacities. The remaining employees are in 10 departments, namely the Project
      Management Department which
      employs 2 persons; the Technology
      Support and Quality Control  Department which
      employs 4 persons; the Business
      Management Department which
      employs 2 persons; the Planning
      and Finance Department which
      employs 5 persons; the Human
      Resources Department which
      employs 8 persons; the Financing
      and Investment Department
      which employs 1 person, the Customer
      Service Department which
      employs 19 persons; the R&D Department which employs 6 persons; the
      Marketing Development Department which employs 3 persons and the Logistics
      Department employs 3 persons.





We
      believe that our relationship with our employees is good, and there are no
      collective bargaining arrangements in place.




6




**Item
      1A.**  **Risk
      Factors.**





*You
      should carefully consider the following risks and the other information set
      forth elsewhere in this Current Report. If any of these risks occur, our
      business, financial condition and results of operations could be adversely
      affected. As a result, the trading price of our common stock could decline,
      perhaps significantly* .




**Risks
      Related to Our Business** ****




***Loss
      of significant customers, or other major customers, could casually hurt our
      business by reducing our revenues and profitability*** *.*




Our
      success depends substantially upon retaining our significant clients. We cannot
      guarantee that we will be able to retain long-term relationships or secure
      renewals of short-term relationships with our significant clients in the
      future.




***We
      face intense competition*** *.*




The
      market we serve is intensely competitive in the PRC. There are other providers
      that we compete with for business. There are low barriers to entry for new
      competitors in this market and we may experience negative impacts as a result
      of
      increased competition. In addition, our existing or potential competitors may
      in
      the future achieve greater market acceptance and gain additional market share,
      which in turn could reduce our revenues.




***We
      depend on key personnel for the success of our business. Our business may be
      severely disrupted if we lose the services of our key executives and employees
      or fail to add new senior and middle managers to our
      management*** *.*




Our
      future success is heavily dependent upon the continued service of our key
      executives. Our future success is also dependent upon our ability to attract
      and
      retain qualified senior and middle managers to our management team. If one
      or
      more of our current or future key executives and employees are unable or
      unwilling to continue in their present positions, we may not be able to easily
      replace them, and our business may be severely disrupted. In addition, if any
      of
      these key executives or employees joins a competitor or forms a competing
      company, we could lose customers and suppliers and incur additional expenses
      to
      recruit and train personnel. Each of our executive officers has entered into
      an
      employment agreement with us.




We
      also
      rely on a number of key technology staff for the operation of our company.
      Given
      the competitive nature of our industry, the risk of key technology staff leaving
      our company is fairly high and could disrupt our operations.




***We
      rely on a third party production center*** *.*




We
      utilize a third party production center for the manufacture of the products
      we
      sell to our customers. Should we be required to utilize a different source
      for
      our manufactured products our costs could be negatively affected.




7




***Rapid
      growth and a rapidly changing operating environment strain our limited
      resources*** *.*




We
      will
      need to increase our investment in our technology infrastructure, facilities
      and
      other areas of operations, in particular our product development. If we are
      unable to manage our growth and expansion effectively, the quality of our
      products and services and in turn our customer support could deteriorate and
      our
      business may suffer. Our future success will depend on, among other things,
      our
      ability to:




·
            Continue
                to develop through our research and development facilities new
                technologies acceptable to the PRC
                market,




·
            continue
                training, motivating and retaining our existing employees and attract
                and
                integrate new employees, including our senior management, most of
                whom
                have been with our company for less than one
                year,




·
            develop
                and improve our operational, financial, accounting and other internal
                systems and controls, and




·
            maintain
                adequate controls and procedures to ensure that our periodic public
                disclosure under applicable laws, including U.S. securities laws,
                is
                complete and accurate.




***We
      may not be able to adequately protect our intellectual property, and we may
      be
      exposed to infringement claims by third parties*** *.*




We
      rely
      on contractual restrictions on disclosure to protect our intellectual property
      rights. **** Monitoring
      unauthorized use of our information services is difficult and costly, and we
      cannot be certain that the steps we take will effectively prevent
      misappropriation of our technology and content. **** Our
      management may determine in the future to make application for copyright,
      trademark or trade secret protection if management determines that such
      protection would be beneficial and cost-effective.




From
      time
      to time, we may have to resort to litigation to enforce our intellectual
      property rights, which could result in substantial costs and diversion of our
      resources. In addition, third parties may initiate litigation against us for
      alleged infringement of their proprietary rights. In the event of a successful
      claim of infringement and our failure or inability to develop non-infringing
      technology or content or license the infringed or similar technology or content
      on a timely basis, our business could suffer. Moreover, even if we are able
      to
      license the infringed or similar technology or content, license fees that we
      pay
      to licensors could be substantial or uneconomical.




***We
      have limited business insurance coverage*** *.*




The
      insurance industry in the PRC is still at an early stage of development.
      Insurance companies in the PRC offer limited business insurance products, and
      do
      not, to our knowledge, offer business liability insurance. As a result, we
      do
      not have any business liability insurance coverage for our operations. Any
      business disruption, litigation or natural disaster might result in substantial
      costs and diversion of resources.




8




***Our
      ability to generate revenues could suffer if the Chinese market for cellular
      phones does not develop as anticipated*** *.*




The
      cellular phones market in the PRC has evolved rapidly over the last four years,
      with the introduction of new products, development of consumer preferences,
      market entry by new competitors and adaptation of strategies by existing
      competitors. We expect each of these trends to continue, and we must continue
      to
      adapt our strategy to successfully compete in our market. It is extremely
      difficult to accurately predict consumer acceptance and demand for various
      existing and potential new offerings and services, and the future size,
      composition and growth of this market.




**Risks
      Related to Doing Business in** **the
      PRC**




***A
      downturn in the Chinese economy may slow down our growth and
      profitability*** *.*




The
      growth of the Chinese economy has been uneven across geographic regions and
      economic sectors. There can be no assurance that growth of the Chinese economy
      will be steady or that any downturn will not have a negative effect on our
      business. Our profitability will decrease if expenditures for wireless services
      decrease due to a downturn in the Chinese economy. More specifically, increased
      penetration of wireless services in the less economically developed central
      and
      western provinces of China will depend on those provinces achieving certain
      income levels so that cellular phones and related services become affordable
      to
      a significant portion of the population.




***Government
      regulation of the telecommunications industry may become more
      complex*** *.*




Government
      regulation of the telecommunications industry is highly complex. New regulations
      could increase our costs of doing business and prevent us from efficiently
      delivering our services. These regulations may stop or slow down the expansion
      of our user base and limit the access to our services.




***The
      uncertain legal environment in China could limit the legal protections available
      to you*** *.*




The
      Chinese legal system is a civil law system based on written statutes. Unlike
      common law systems, it is a system in which decided legal cases have little
      precedential value. In the late 1970s, the Chinese government began to
      promulgate a comprehensive system of laws and regulations governing economic
      matters. The overall effect of legislation enacted over the past 20 years has
      significantly enhanced the protections afforded to foreign invested enterprises
      in China. However, these laws, regulations and legal requirements are relatively
      recent and are evolving rapidly, and their interpretation and enforcement
      involve uncertainties. These uncertainties could limit the legal protections
      available to foreign investors, such as the right of foreign invested
      enterprises to hold licenses and permits such as requisite business
      licenses.




***Any
      recurrence of severe acute respiratory syndrome, or SARS, or another widespread
      public health problem, could adversely affect our business and results of
      operations*** *.*




A
      renewed
      outbreak of SARS or another widespread public health problem in China, where
      all
      of our revenue is derived, and in Beijing where our operations are
      headquartered, could have a negative effect on our operations. Our operations
      may be impacted by a number of health-related factors, including the
      following:




9




·
            quarantines
                or closures of some of our offices which would severely disrupt our
                operations,




·
            the
                sickness or death of our key officers and employees,
                and




·
            a
                general slowdown in the Chinese
                economy.




Any
      of
      the foregoing events or other unforeseen consequences of public health problems
      could adversely affect our business and results of operations.




***Changes
      in China’s political and economic policies could harm our
      business*** *.*




The
      economy of China has historically been a planned economy subject to governmental
      plans and quotas and has, in certain aspects, been transitioning to a more
      market-oriented economy. Although we believe that the economic reform and the
      macroeconomic measures adopted by the Chinese government have had a positive
      effect on the economic development of China, we cannot predict the future
      direction of these economic reforms or the effects these measures may have
      on
      our business, financial position or results of operations. In addition, the
      Chinese economy differs from the economies of most countries belonging to the
      Organization for Economic Cooperation and Development, or OECD. These
      differences include:




·
            economic
                structure;




·
            level
                of government involvement in the
                economy;




·
            level
                of development;




·
            level
                of capital reinvestment;




·
            control
                of foreign exchange;




·
            methods
                of allocating resources; and




·
            balance
                of payments position.




As
      a
      result of these differences, our business may not develop in the same way or
      at
      the same rate as might be expected if the Chinese economy were similar to those
      of the OECD member countries.




***Restrictions
      on currency exchange may limit our ability to receive and use our revenues
      effectively*** *.*




Because
      almost all of our future revenues may be in the form of Renminbi, any future
      restrictions on currency exchanges may limit our ability to use revenue
      generated in Renminbi to fund any future business activities outside China
      or to
      make dividend or other payments in U.S. dollars. Although the Chinese government
      introduced regulations in 1996 to allow greater convertibility of the Renminbi
      for current account transactions, significant restrictions still remain,
      including primarily the restriction that foreign invested enterprises may only
      buy, sell or remit foreign currencies, after providing valid commercial
      documents, at those banks authorized to conduct foreign exchange business.
      In
      addition, conversion of Renminbi for capital account items, including direct
      investment and loans, is subject to governmental approval in China, and
      companies are required to open and maintain separate foreign exchange accounts
      for capital account items. We cannot be certain that the Chinese regulatory
      authorities will not impose more stringent restrictions on the convertibility
      of
      the Renminbi, especially with respect to foreign exchange
      transactions.




10




***The
      value of our securities will be affected by the foreign exchange rate between
      U.S. dollars and Renminbi*** *.*




The
      value
      of our common stock will be affected by the foreign exchange rate between U.S.
      dollars and Renminbi. For example, to the extent that we need to convert U.S.
      dollars into Renminbi for our operational needs and should the Renminbi
      appreciate against the U.S. dollar at that time, our financial position and
      the
      price of our common stock may be adversely affected. Conversely, if we decide
      to
      convert our Renminbi into U.S. dollars for the purpose of declaring dividends
      on
      our ordinary shares or for other business purposes and the U.S. dollar
      appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
      from our subsidiaries in China would be reduced.




**Risks
      Related to** **our
      Common Stock**




***The
      market price for our common stock may be volatile*** *.*




The
      market price for our common stock is likely to be highly volatile and subject
      to
      wide fluctuations in response to factors including the following:




·
            actual
                or anticipated fluctuations in our quarterly operating
                results,




·
            announcements
                of new products and services by us or our
                competitors,




·
            changes
                in financial estimates by securities
                analysts,




·
            changes
                in the economic performance or market valuations of other companies
                providing similar products and
                services,




·
            announcements
                by our competitors of significant acquisitions, strategic partnerships,
                joint ventures or capital
                commitments,




·
            additions
                or departures of key personnel,




·
            potential
                litigation, or




·
            conditions
                in the cellular phone market.




In
      addition, the securities markets have from time to time experienced significant
      price and volume fluctuations that are not related to the operating performance
      of particular companies. These market fluctuations may also materially and
      adversely affect the market price of our common stock.




***Stockholders
      could experience substantial dilution*** *.*




We
      may
      issue additional shares of our capital stock to raise additional cash for
      working capital. If we issue additional shares of our capital stock, our
      stockholders will experience dilution in their respective percentage ownership
      in the company.




11




***We
      have no present intention to pay dividends*** *.*




We
      have
      never paid dividends or made other cash distributions on our common stock,
      and
      do not expect to declare or pay any dividends in the foreseeable future. We
      intend to retain future earnings, if any, for working capital and to finance
      current operations and expansion of our business.




***A
      large portion of our common stock is controlled by a small number of
      stockholders*** *.*




A
      large
      portion of our common stock is held by a small number of stockholders. As a
      result, these stockholders are able to influence the outcome of stockholder
      votes on various matters, including the election of directors and extraordinary
      corporate transactions including business combinations. In addition, the
      occurrence of sales of a large number of shares of our common stock, or the
      perception that these sales could occur, may affect our stock price and could
      impair our ability to obtain capital through an offering of equity securities.
      Furthermore, the current ratios of ownership of our common stock reduce the
      public float and liquidity of our common stock which can in turn affect the
      market price of our common stock.




***We
      may be subject to “penny stock” regulations*** *.*




The
      U. S.
      Securities and Exchange Commission has adopted rules that regulate broker-dealer
      practices in connection with transactions in “penny stocks.” Penny stocks
      generally are equity securities with a price of less than $5.00 (other than
      securities registered on certain national securities exchanges or quoted on
      the
      NASDAQ system, provided that current price and volume information with respect
      to transactions in such securities is provided by the exchange or system).
      Penny
      stock rules require a broker-dealer, prior to a transaction in a penny stock
      not
      otherwise exempt from those rules, to deliver a standardized risk disclosure
      document prepared by the SEC, which specifies information about penny stocks
      and
      the nature and significance of risks of the penny stock market. A broker-dealer
      must also provide the customer with bid and offer quotations for the penny
      stock, the compensation of the broker-dealer, and our sales person in the
      transaction, and monthly account statements indicating the market value of
      each
      penny stock held in the customer’s account. In addition, the penny stock rules
      require that, prior to a transaction in a penny stock not otherwise exempt
      from
      those rules, the broker-dealer must make a special written determination that
      the penny stock is a suitable investment for the purchaser and receive the
      purchaser’s written agreement to the transaction. These disclosure requirements
      may have the effect of reducing the trading activity in the secondary market
      for
      stock that becomes subject to those penny stock rules. Whenever any of our
      securities become subject to the penny stock rules, holders of those securities
      may have difficulty in selling those securities.




**Our
      securities are quoted on the OTC Bulletin Board, which limits the liquidity
      and price of our securities more than if our securities were quoted or listed
      on
      The Nasdaq Stock Market or a national exchange** .




Our
      securities are traded in the over-the-counter market and quoted on the OTC
      Bulletin Board, an inter-dealer automated quotation system for equity
      securities sponsored and operated by the National Association of Securities
      Dealers, Inc., or NASD, but not included in The Nasdaq Stock Market. Quotation
      of our securities on the OTC Bulletin Board limits the liquidity and price
      of our securities more than if our securities were quoted or listed on The
      Nasdaq Stock Market or a national exchange. Lack of liquidity will limit the
      price at which you may be able to sell our securities or your ability to sell
      our securities at all.




12





**Item
      1B.**  **Unresolved
      Staff Comments.**





Not
      applicable.





**Item
      2.**  **Properties.**





We
      have
      offices in Beijing, Shenzhen, Shanghai, Tianjin and Hong Kong .
      Our
      Beijing office serves as our corporate headquarters. Our Shenzhen
      Office serves
      as the base for cellular component sourcing and coordination with suppliers
      and
      manufacturers .
      Our Shanghai
      Office is mainly responsible for sourcing and
      coordination with cellular component suppliers, coordination with our research
      and development partners and following
      up the hardware and software testing aspects before the mass
      production .
      Our Tianjin
      Office is mainly responsible for the production management. Its functions
      include coordination with our principal manufacturer to adjust the produciton
      plan in
      accordance with our sales plan, raw material supply and cellular phone delivery
      management and supervision of the production processing of our principal
      manufacturer, as well as the quality control. The
      office in Hong Kong is a representive office for coordination with
      customers.





The
      following is relevant information on our offices:





**Address**
            
            **Office
                / Production**
            
            **Process
                / Lease**
            
            **Monthly
                Rental (rmb)**
            
            **Monthly
                Rental (usd)**
            
            **Lease
                period**26T,
                Xinbaohui Plaza, Nanyou Avunue, Nanshan Dist., Shenzhen
            
            Office
            
            Lease
            
            5,000.0
            
            640
            
            08/06
                to 08/0712thFloor, Tower B, Chaowai MEN Office Building, 26 Chaowai Street, Chaoyang
                Disc., Beijing
            
            Office
            
            —(1)
            
            —
            
            —
            
            05/06
                to 12/06No.
                3, Lane 600, Tianshan Rd., Changning Dist., Shanghai
            
            Office
            
            Lease
            
            9,960
            
            1,274
            
            05/06
                to 04/07No.185,
                Xinda Road, Hebei District, Tianjin
            
            Office
            
            —
                (2)
            
            —
            
            —
            
            —No.
                1, Fuyou Street, Airport Huoyun Road, Shunyi Dist.,
                Beijing
            
            Office
            
            —(3)
            
            —
            
            —
            
            —Room
                1502, Jubilee Centre, 18 Fenwick Street, 46 Gloucester Road, Wanchai,
                Hong
                Kong
            
            Office
            
            Lease
            
            16,300(HKD)
            
            2,095
            
            9/5/05
                to 9/4/07







(1)
            From
                May 1, 2006 to December 31, 2006, there is a rent-free period for
                our
                headquarter in Beijing, the rental charge is still under the negotiation
                with landlord.




(2)
            Our
                Tianjin office is located in the CECM factory. The office is provided
                by
                CECM and is cost-free to us.


(3)
              These
                  two offices are provided by Beijing Xin Ganxian Logistic Company
                  and is
                  cost-free to us.


13





**Item
      3.** **Legal
      Proceedings**




We
      are
      not party to any litigation, and we are not aware of any threatened litigation
      that would have a material adverse effect on us or our business.




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




No
      matters were submitted to a vote of securityholders during the fourth quarter
      of
      the fiscal period ended December 31, 2006.





**PART
      II**




**Item
      5.** **Market
      For Registrant’s Common Equity, Related Stockholder Matters
      and**  **Issuer
      Purchases of Equity Securities.**




Shares
      of
      our common stock are traded on the OTC Bulletin Board under the symbol “ORXT.OB”
Our common stock has been traded on the OTC Bulletin Board since March
      2005.





**Holders** .





As
      of
      March 17, 2006, we had approximately 24 stockholders of our common stock of
      record, and our common stock had a closing bid price of $2.05 per share and
      a
      closing ask price of $1.85 per share.





The
      following table sets forth the quarterly average high and low bid prices per
      share for our common stock for the period commencing with the Exchange
      Transaction and ending on December 31, 2006:


**Fiscal
                  Year Ended**
              
              **Common
                  Stock****December
                  31, 2005**
              
              **High**
              
              **Low**First
                  Quarter
              
              
              NA
              
              
              NASecond
                  Quarter
              
              $
              3.10
              
              $
              1.90Third
                  Quarter
              
              $
              2.00
              
              $
              1.10Fourth
                  Quarter
              
              $
              2.25
              
              $
              1.29**December
                  31, 2006**First
                  Quarter
              
              $
              2.40
              
              $
              1.85Second
                  Quarter
              
              $
              2.60
              
              $
              1.90Third
                  Quarter
              
              $
              2.06
              
              $
              1.10Fourth
                  Quarter
              
              $
              3.00
              
              $
              1.60




The
      source for the high and low closing bids quotations is the Yahoo Finance website
      and does not reflect inter-dealer prices. Such quotations are without retail
      mark-ups, mark-downs or commissions, and may not represent actual transactions
      and have not been adjusted for stock dividends or splits.




14





**Outstanding
      Options, Conversions, and Planned Issuance of Common Stock** .





There
      are
      no warrants or options outstanding to acquire any shares of our common
      stock





**Preferred
      Stock** .





Our
      corporate charter permits us to issue up to 100 million shares of preferred
      stock from time to time, as are determined by resolution of our Board of
      Directors. The issuance of preferred stock may have the effect of delaying,
      deferring or preventing a change in control of our Company without further
      action by stockholders and could adversely affect the rights and powers,
      including voting rights, of holders of common stock, with us acting in
      accordance with our corporate charter and bylaws. In certain circumstances,
      the
      issuance of preferred stock could depress the market price of the common
      stock.





There
      are
      no shares of preferred stock outstanding.





**Dividends** .





We
      have
      never declared or paid any cash dividends or distributions on our common stock.
      We currently intend to retain our future earnings to support operations and
      to
      finance future growth and expansion and, therefore, do not anticipate paying
      any
      cash dividends on our common stock in the foreseeable future.





**Transfer
      Agent and Registra** r.





Our
      transfer agent is Corporate Stock Transfer, located at 3200 Cherry Creek Drive
      South, Suite 430, Denver, Colorado 80209. Their telephone number is (303)
      282-4800.





**Securities
      Authorized for Issuance Under Equity Compensation Plans** .





As
      of the
      fiscal year ended December 31, 2006, we have no shares of our common stock
      or
      preferred stock that are issuable under compensation plans approved by our
      security holders.





**Recent
      Sales of Unregistered Securities** .





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.




15





Each
      of
      the following individuals received their shares pursuant to the Exchange
      Agreement on March 31, 2005:


**Name**
              
              **Shares**Wang
                  Xin
              
              
              3,000,000Liu
                  Yu
              
              
              6,000,000Wang
                  Zhibin
              
              
              6,000,000




**Item
      6.** **Selected
      Financial Data.**





The
      following selected financial data has been extracted from our financial
      statements for the year ended December 31, 2006. This selected financial data
      should be read in conjunction with our financial statements and the related
      notes included in Item 8 of this Annual Report.


**Statement
                  of Operations Data**
              
              **For
                  year ended December 31, 2006**
              
              **For
                  year ended December 31, 2005**Operating
                  Expenses
              
              $
              60,102,000
              
              
              25,711,000Other
                  Income - Interest, net
              
              $
              75,000
              
              
              544,000Net
                  Income
              
              $
              6,718,000
              
              
              3,492,000Weighted
                  Average Common Shares Outstanding
              
              
              29,756,000
              
              
              29,756,000Net
                  Income Per Common Share - Basic and Diluted
              
              $
              0.23
              
              
              0.12
  **Balance
                  Sheet Data**
              
              **As
                  of December 31, 2006**
              
              **As
                  of December 31, 2005**Working
                  Capital
              
              $
              21,963,000
              
              
              14,158,000Total
                  Assets
              
              $
              45,887,000
              
              
              31,011,000Stockholders’
                  Equity
              
              $
              22,283,000
              
              
              14,939,000


16


**Item
      7.** **Management’s
      Discussion and Analysis of Financial Condition and Results
      of**  **Operations.**




The
      following discussion should be read in conjunction with our financial statements
      and footnotes thereto contained in this report.





**Overview**





The
      Company was organized under the laws of State of Delaware in May 2004, under
      the
      name “Universal Flirts Corp”. On June 1, 2004, the Company acquired all the
      issued and outstanding shares of Universal Flirts Inc., a New York corporation,
      from Darrel Lerner, the sole shareholder, in consideration for the issuance
      of
      8,500,000 shares of the Company’s common stock to Mr. Lerner pursuant to a stock
      exchange agreement between Universal Flirts Inc. and the Company. Pursuant
      to
      the purchase and share exchange transaction, Universal Flirts Inc. became the
      wholly-owned subsidiary of the Company.





Pursuant
      to Stock Transfer Agreement dated March 29, 2005, the Company transferred all
      of
      the common stock of Universal Flirts Inc. to Mr. Darrell Lerner in exchange
      for
      the cancellation of 28,200,000 shares of the Company’s common stock. The Company
      then had 14,756,000 shares of its common stock outstanding.





On
      March
      31, 2005, Universal Flirts Corp. completed a stock exchange transaction with
      the
      stockholders of United First International Limited, a company incorporated
      under
      the laws of Hong Kong (“ *UFIL* ”).
      The
      exchange was consummated under the laws of State of Delaware and pursuant to
      the
      terms of the Exchange Agreement. In connection with its acquisition of UFIL,
      the
      Company also authorized a 4-1 forward split of its common stock.





Pursuant
      to the Exchange Agreement, Universal Flirts Corp. issued 15,000,000 shares
      of
      its common stock, $0.001 par value, to the stockholders of UFIL, representing
      approximately 50.41% of the Company’s issued and outstanding common stock, in
      exchange for 20,000,000 outstanding shares of UFIL and cash payment of $50,000
      from UFIL. Immediately after giving effect to the exchange, the Company had
      29,756,000 shares of its common stock outstanding. Pursuant to the exchange,
      UFIL became a wholly-owned subsidiary of the Company and most of the Company’s
      business operations are now conducted through UFIL’s wholly-owned subsidiary,
      Beijing Orsus Xelent Technology & Trading Company Limited (“ *Xelent* ”).





On
      April
      19, 2005, the Company, formerly known as Universal Flirts Corp., changed its
      list name to Orsus Xelent Technologies, Inc. The Company's OTC Bulletin Board
      symbol is ORXT and its CUSIP Number is 68749U106.





In
      July,
      2005 a wholly owned subsidiary, Orsus Xelent Trading (HK) Company Limited,
      was
      incorporated in Hong Kong. Orsus Xelent Trading (HK) Company Limited is engaged
      in the trading of cellular phones and accessories with overseas
      customers.





**Business
      Review**





The
      respective market shares of domestic PRC cellular phone manufacturers decreased
      in the first quarter of 2006. The primary cause of this decrease was increased
      competition among domestic and overseas manufacturers. Advancements in
      technology prompted foreign cellular phone manufacturers to speed up the rollout
      of new products. Also, foreign cellular phone manufacturers offered price
      reductions to promote and clear their inventories of older products. This
      increase in competition was compounded by the continuing proliferation of
      counterfeit and “black market” cell phones in the PRC, which impacted sales of
      cellular phone products by legitimate manufacturers such as Xelent.




17





By
      the
      second quarter of 2006, most of the domestic PRC cellular phone manufacturers
      had adjusted their strategy to increase the competitiveness by price cutting,
      improving the quality of the products and accelerating the pace of new product
      rollouts. These manufacturers are creating better efficiency by introducing
      products designed for the local market and better using their supply chain.
      As a
      result, they have adapted to the rapidly changing market in the PRC and regained
      in the second quarter of 2006 some of the market share they lost in the first
      quarter. Additionally, they are beginning to make a stronger move into the
      overseas market to broaden their sales and increase their revenues.





According
      to our market research, the market of cellular phones equipped with specialized
      applications for specific industry users has been developed rapidly in the
      PRC.
      These products are custom designed and equipped with specialized applications
      and software to meet the special requirements of users in various specialized
      industries (such as bank, State Administration for Industry & Commerce
      (“ *SAIC* ”),
      logistic and securities companies). In the fourth quarter of this year, we
      entered into an Intent of Cooperation Agreement with a software development
      provider, Hua Yuan Run Tong (Beijing) Technology CO., Ltd. (“ *HYRT* ”),
      to
      assist us in meeting the need for these customized cellular phones. HYRT
      developed specialized software to support an application platform called the
      Industry & Commerce Law-Enforcement Platform (“ *ICEP* ”).
      The
      ICEP platform uses the CDMA 1X wireless data networks of the PRC to integrate
      commercial and government information resources. This includes a customized
      digital administration system for SAIC of the PRC in the Hebei Province that
      provides easy access by SAIC's professional law-enforcement teams. It provides
      technical support for SAIC officials to conduct mobile law-enforcement and
      food-safety monitoring. The public can also access business information through
      the ICEP. We anticipate that 20,000 specialized application devices will be
      provided to SAIC of Hebei Province in 2007. The business relating to our
      specialized application cellular phone devices will grow rapidly as a
      consequence of our cooperation with the software development company, HYRT
      and
      SAIC, and this could provide us a considerable advantage as we look to broaden
      our presence in the larger commercial markets.





In
      the
      fourth quarter of 2006, the device, model X180, which is provided by Xelent,
      has
      passed the test by HYRT, and got the NO. 001 qualified test report. We become
      the first terminal product provider of HYRT. Our product X180 becomes the only
      one model for the exhibition and illustration during the business promotion
      by
      HYRT to SAIC and China Unicom. Through the promotion conducting by HYRT, our
      product X180 is widely affirmed and recognized by SAIC and China Unicom. The
      recognition by China Unicom could help us to further develop our specialized
      application device in other industries. We believe the product line of
      specialized application device could have a significant growth in the year
      of
      2007.





Demand
      for our cellular phone products has increased as a result of the correct
      positioning of our products to meet the needs of the mid-level and low-end
      markets in the PRC. Our mid-level and low-end products are all equipped with
      a
      number of attractive features, such as MP3, MEPG4, camera and support outer
      card
      storage card. Also, the overall reduction in the GSM charges of PRC
      telecommunication providers, which caused an increase in the number of new
      cellular phone subscribers, also enhanced the demand of new cellular phones.
      After reduction of inventories by price cutting from domestic manufacturers
      in
      the second quarter, the profit margin of domestic cellular phones manufacturers,
      including Xelent, in the third quarter was comparable to profit margins in
      the
      first quarter of 2006. We expect this trend to continue and we are, therefore,
      optimistic with respect to our profits for the fourth quarter.




18





The
      following table summarizes our operation result for the year 2006 and
      2005:


**Year
                  ended**
                **December
                  31, 2006**
              
              **Year
                  ended**
                **December
                  31, 2005**
              
              **Comparison****$’000**
              
              **%
                  of revenue**
              
              **$’000**
              
              **%
                  of revenue**
              
              **$’000**
              
              **%**Revenues
              
              
              68,108
              
              
              
              
              
              28,705
              
              
              
              
              
              39,403
              
              
              137.27
              %Cost
                  of sales
              
              
              55,226
              
              
              81.09
              %
              
              22,272
              
              
              77.59
              %
              
              32,954
              
              
              147.96
              %Sales
                  & Marketing expenses
              
              
              1,045
              
              
              1.53
              %
              
              1,554
              
              
              5.41
              %
              
              (509
              )
              
              -
                  32.75
              %General
                  & Admin expenses
              
              
              1,560
              
              
              2.29
              %
              
              1,064
              
              
              3.71
              %
              
              496
              
              
              46.62
              %R&D
                  expenses
              
              
              255
              
              
              0.37
              %
              
              413
              
              
              1.44
              %
              
              (158
              )
              
              -
                  38.26
              %Depreciation
                  & Amortization
              
              
              175
              
              
              0.26
              %
              
              310
              
              
              1.08
              %
              
              (135
              )
              
              -
                  43.55
              %Allowance
                  for Obsolete Inventory
              
              
              1,387
              
              
              2.04
              %
              
              98
              
              
              0.34
              %
              
              1,289
              
              
              1,315.31
              %Loss
                  on Disposal of property, Plant and Equipment
              
              
              454
              
              
              0.67
              %
              
              0
              
              
              0.00
              %
              
              454
              
              
              0.00
              %Interest
                  expenses
              
              
              116
              
              
              0.17
              %
              
              25
              
              
              0.09
              %
              
              91
              
              
              364.00
              %Other
                  income, net
              
              
              75
              
              
              0.11
              %
              
              544
              
              
              1.90
              %
              
              (469
              )
              
              -
                  86.21
              %Income
                  before tax
              
              
              7,965
              
              
              11.69
              %
              
              3,513
              
              
              12.24
              %
              
              4,452
              
              
              126.73
              %Income
                  taxes
              
              
              1,247
              
              
              1.83
              %
              
              21
              
              
              0.07
              %
              
              1,226
              
              
              5,838.10
              %Net
                  income
              
              
              6,718
              
              
              9.86
              %
              
              3,492
              
              
              12.17
              %
              
              3,226
              
              
              92.38
              %




19


The
      following table summarizes our operating result for the three months ended
      December 31, 2006 and 2005, respectively:


**Three
                  months ended December 31, 2006**
              
              **Three
                  months ended December 31, 2005**
              
              **Comparison****$’000**
              
              **%
                  of revenue**
              
              **$’000**
              
              **%
                  of revenue**
              
              **$’000**
              
              **%**Revenues
              
              
              22,207
              
              
              100.00
              %
              
              12,101
              
              
              100.00
              %
              
              10,106
              
              
              83.51
              %Cost
                  of sales
              
              
              17,973
              
              
              80.93
              %
              
              8,891
              
              
              73.47
              %
              
              9,082
              
              
              102.15
              %Sales
                  & Marketing expenses
              
              
              119
              
              
              0.54
              %
              
              423
              
              
              3.50
              %
              
              -304
              
              
              -71.87
              %General
                  & Admin expenses
              
              
              -323
              
              
              -1.45
              %
              
              295
              
              
              2.44
              %
              
              -618
              
              
              -209.49
              %R&D
                  expenses
              
              
              68
              
              
              0.31
              %
              
              76
              
              
              0.63
              %
              
              -8
              
              
              -10.53
              %Depreciation
                  & Amortization
              
              
              26
              
              
              0.12
              %
              
              146
              
              
              1.21
              %
              
              -120
              
              
              -82.19
              %Allowance
                  for Obsolete Inventory
              
              
              761
              
              
              3.43
              %
              
              222
              
              
              1.83
              %
              
              539
              
              
              242.79
              %Loss
                  on Disposal of property, Plant and Equipment
              
              
              454
              
              
              2.04
              %
              
              0
              
              
              0.00
              %
              
              454
              
              
              0.00
              %Interest
                  expenses
              
              
              46
              
              
              0.21
              %
              
              0
              
              
              0.00
              %
              
              46
              
              
              0.00
              %Other
                  income, net
              
              
              74
              
              
              0.33
              %
              
              3
              
              
              0.02
              %
              
              71
              
              
              2,366.67
              %Income
                  before tax
              
              
              3,157
              
              
              14.22
              %
              
              2,051
              
              
              16.95
              %
              
              1,106
              
              
              53.92
              %Income
                  taxes
              
              
              1,087
              
              
              4.89
              %
              
              -2
              
              
              -0.02
              %
              
              1,089
              
              
              54,450.00
              %Net
                  income
              
              
              2,070
              
              
              9.32
              %
              
              2,053
              
              
              16.97
              %
              
              17
              
              
              0.83
              %


**Application
      of critical accounting policies and 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, including
      those related to revenue recognition, inventories, adequacy of allowances for
      doubtful accounts, valuation of long-lived assets, income taxes, and warranties.
      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. The policies discussed below are considered by
      management to be critical to an understanding of our financial
      statements.





*Revenue
      recognition*





Net
      sales
      represent the invoiced value of goods, net of value-added tax (“ *VAT* ”)
      and
      returns. We generally recognize product revenue when persuasive evidence of
      an
      arrangement exists, delivery has occurred, the fee is fixed or determinable,
      and
      collectibility is probable. We have a policy of including handling costs
      incurred for finished goods, which are not significant, in sales and marketing
      expenses.




20





*Warranties*





We
      offer
      warranties on the products we manufacture. Terms generally are for one year
      from
      the date of sale. Provision for warranty expense is established for costs that
      are expected to be incurred after the sales and delivery of products under
      warranty. The balance of warranty provision was $53,000 by the year ended
      December 31, 2006. The warranty provision is determined based on known product
      failures, historical experience of the level of repairs and replacements, and
      other currently available evidence.





*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. Deferred income taxes are 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 of 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.





*Trade
      receivables and allowance for doubtful accounts*





Trade
      receivables are recorded at original invoice amount, less an estimated allowance
      for uncollectible accounts. Trade credit is generally extended on a short-term
      basis, thus trade receivables do not bear interest. Trade receivables are
      periodically evaluated for collectibility based on past credit history with
      customers and their current financial condition. Changes in the estimated
      collectibility of trade receivables are recorded in the results of operations
      for the year in which the estimate is revised. Trade receivables are presented
      net of an allowance for doubtful accounts of $230,000 and $149,000 as of
      December 31, 2006 and of 2005 respectively.





*Inventories*





Inventories
      are stated at the lower of cost or market. Potential losses from obsolete and
      slow-moving inventories are provided for when identified. Cost, which comprises
      all costs of purchase and, where applicable, other costs that have been incurred
      in bringing the inventories to their present location and condition, is
      calculated using the weighted average method. Market represents the estimated
      selling price in the ordinary course of business less the estimated costs of
      completion and the estimated costs necessary to make the sale.





*Impairment
      of long-lived assets*





The
      long-lived assets we hold and use 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.




21





**Results
      of operation**





**Revenues**





Our
      revenues were $68,108,000 for the twelve months ended December 31, 2006,
      representing an increase of 137.27% as compared to 28,705,000 in the Fiscal
      Year
      2005. After going through an environment of reformation in the cellular phone
      market in 2005, we adjusted our business model, our market position and our
      strategy and improved our technology and the quality of our products, in terms
      of both function and appearance. We believe that we are now in a much better
      position to deal with the rapidly changing and competitive market for cellular
      phone products in the PRC. Also, we are better prepared to take advantage of
      the
      rejuvenated cellular phone market that has resulted from the reduction in the
      monthly fee charged by telecommunication provides in the second quarter of
      2006.




We
      continue the cooperation with telecommunication operator and expanded the sales
      of our CDMA products, which accounted for 37% of our total revenues for the
      year
      ended December 31, 2006, representing an increase of 398%, compared to 2005.
      Meanwhile, the sales of GSM products have remained relatively stable. Our
      business strategy emerged in the second quarter and took effect in the third
      and
      fourth quarter.




Our
      mid-level and low-end products contain a number of attractive features, such
      as
      MP3, MPEG4, video recording and outer card storage. Our high-end products
      contain those same features as well as PDA, GPRS and office software function,
      special industry applications and other attractive features and functions.
      The
      appearance of all our products are in line with the latest trends, including
      being ultra slim and containing a wide use of metal casing, and they have been
      well received by our customers. We introduced a middle-grade dual mode cellular
      phone with both GSM & CDMA applications in the third quarter to meet the
      demand in the market for this type of product.




*Products
      Segment*





For
      the
      year ended December 31, 2006, products attributed over 3% of our revenues are
      shown as follows:


Twelve
                  months ended December 31, 2006$’000
              
              
              %
                  of revenueD8120
              
              
              10,805
              
              
              15.86
              %C8000
              
              
              10,442
              
              
              15.33
              %D8110
              
              
              10,124
              
              
              14.86
              %Daxian
                  X5
              
              
              8,395
              
              
              12.33
              %C300
              
              
              4,572
              
              
              6.71
              %C200
              
              
              3,373
              
              
              4.95
              %C109
              
              
              2,474
              
              
              3.63
              %Others
              
              
              17,923
              
              
              26.32
              %




22




In
      2006,
      we kept on our self-developed handsets business and jointly cooperation with
      our
      R&D partners, which took 53% of the total revenue, representing a decrease
      of 5%, as compared to 58% in 2005; we also developed the trade sales activities
      in order to widen our revenue streams, which took 47% of the total revenue
      in
      2006, representing an increase of 5%, as compared to 42% in 2005. The increase
      in the portion of the trading mobile phones activities subsequently provides
      a
      risk-control on R&D investments and materials-ordering in facing the
      competition from the ‘black
      market’ (counterfeit) cellular phones in the
      PRC, because the business cycle of trade sales is shorter than R&D models,
      which made us forestall the ‘black market’ cellular phones in the
      market.





The
      total
      revenue for the twelve months ended December 31,2006 amounted to $68,108,000,
      of
      which the sale of GSM products in this period accounted for $43,064,000, or
      63.23%, of our total revenue. The GSM products mainly included, D8120
      ($10,805,000), D8110 ($10,124,000), Daxian X5 ($8,395,000), and others
      ($13,740,000). The sales of CDMA was $25,044,000, representing 36.77% of our
      total revenue, which included C8000 ($10,442,000), C300 ($4,572,000), C200
      ($3,373,000),  C109
      ($2,474,000), and others ($4,183,000). The CDMA sale has sharply increased
      by
      $20,012,000, or 397.69%, as compared to $5,032,000 in fiscal year
      2005.





Our
      GSM
      products are mainly purchased from China Electronic Apparatus
      Company  and
      Beijing Dong Fang Long Yu Trading Company, which include D8120 (ultra thin,
      slide PDA with MP3, MEPG4, Camera, T-Flash Card, handwriting touch screen),
      D8110 (ultra thin, slide PDA with MP3, MEPG4, Camera, T-Flash Card), X5 (ultra
      thin with MP3, MEPG4, Camera, T-Flash Card). Our CDMA products are mainly
      purchased from Tian Feng Ju Yuan Technology Company Limited, Beijing Tian Hong
      Bo Communication Apparatus Company Limited and Dalian Daxian Telecom Co., Ltd,
      which include C8000 (a high-end PDA with MP3, MEPG4, Camera, T-Flash Card,
      GSM
& CDMA Simultaneous Standby Dual Mode handset), C300 (a high-end cell phone
      with colorful screen, MP3, Camera and IM System), C200 (a low-end shell phone
      with colorful screen, MP3, Camera), C109 (a low-end bar phone with colorful
      screen).





For
      the
      three months ended December 31, 2006, products attributed over 3% of our
      revenues are shown as follows:




**Three
                  months ended December 31, 2006****$’000**
              
              
              **%
                  of revenue**D8110
              
              
              8,698
              
              
              39.17
              %C8000
              
              
              6,737
              
              
              30.34
              %D8120
              
              
              5,893
              
              
              26.54
              %Others
              
              
              879
              
              
              3.96
              %




23




In
      the
      fourth quarter of 2006, sales reached $22,207,000, as compared with $12,101,000
      in the same period in 2005, which represents a growth in sales of 83.51%.
      Revenue derived from GSM cellular phones in the fourth quarter of 2006 was
      $15,053,000 and accounted for 67.79% of the sales in this quarter. Meanwhile,
      sales of our CDMA products in the fourth quarter of 2006 generated revenue
      of
      $7,154,000 and accounted for 32.21% of sales in this quarter, which accounts
      for
      a $5,092,000 increase as compared to the same period of 2005.





The
      revenue in the fourth quarter of 2006 had increased by 8.19%, as compared to
      $20,525,000 in the third quarter of 2006. The increase of the revenue is
      primarily attributable to the launch of our ultra-thin, slim bar modes which
      are
      currently in demand by the market; and our cooperation with telecommunication
      operators with respect to our CDMA products in various grades.





*Customers
      Segment*




**Twelve
                  months ended**
                **December
                  31, 2006****$’000**
              
              
              **%
                  of revenue**Beijing
                  Xingwang Shidai Tech & Trading Co., Ltd.
              
              
              36,406
              
              
              53.45
              %CEC
                  Cellular Limited
              
              
              12,902
              
              
              18.94
              %CECT-Chinacomm
                  Communications co.,ltd
              
              
              10,485
              
              
              15.39
              %Others
              
              
              208
              
              
              0.31
              %**Subtotal
                  (Domestic)**
              
              
              **60,001**
              
              
              **88.10**
              **%**Singapore
                  ST
              
              
              6,112
              
              
              8.97
              %Singapore
                  CEO
              
              
              1,996
              
              
              2.93
              %**Subtotal
                  (Overseas)**
              
              
              **8,107**
              
              
              **11.90**
              **%**





Our
      revenues were primarily derived from three major domestic customers. For the
      twelve months ended December 31, 2006, our revenues generated from Beijing
      Xingwang Shidai Tech & Trading Co., Ltd. (“ *XWS* D”),
      CEC
      Cellular Limited (“ *CECM* ”)
      and
      CECT-Chinacomm Communications Co.,Ltd (“ *ZDHT* ”)
      were
      $36,406,000, $12,902,000, and $10,485,000 respectively. XWSD is one of the
      most
      important customers of Xelent for a long period of time, the sales to XWSD
      was
      accounting for 53.45% of the total revenues in 2006. The other two major
      domestic customers accounted for 18.94% (CECM) and 15.39% (ZDHT) respectively.
      Both XWSD and CECM are distributors and dealers in Mainland China, and their
      sales networks cover most of the major cities in the PRC. ZDHT is a new customer
      which began to cooperate with us from the fourth quarter of 2006. ZDHT is a
      telecommunication devices and services operator. In the overseas market, we
      distribute our products to two Singapore customers, which are namely ST
      Electronics (Info-Software Systems) Pte Ltd. and Chartered Electro-Optics Pte
      Ltd. The revenues generated from these two companies were $8,107,000, or 11.90%
      of the total revenue.


24


**Three
                  months ended**
                **December
                  31, 2006****$’000**
              
              
              **%
                  of revenue**Beijing
                  Xingwang Shidai Tech & Trading Co., Ltd.
              
              
              11,590
              
              
              52.19
              %CECT-Chinacomm
                  Communications co.,ltd
              
              
              10,485
              
              
              47.21
              %Others
              
              
              132
              
              
              0.60
              %





In
      the
      fourth quarter, 52.19% of our revenue is generated from XWSD, and 47.21% from
      ZDHT. To reduce the risk of concentration, we developed a new customer of ZDHT
      in the fourth quarter, which could enlarge our customer base.





**Other
      income, net**





For
      the
      twelve months ended December 31, 2006, other net income was $75,000, or 0.11%
      of
      the total revenues. There was a significant decrease as compared with $544,000
      of other net income in the same period of 2005. The decrease in other income,
      net in 2006 was primarily due to the once-off royalty fee rebate amounting
      to
      $309,000 in the second quarter of 2005.





**Operating
      expenses**





For
      the
      twelve months ended December 31, 2006, our operating expenses amounted to
      $60,102,000. The operating expenses mainly includes sales and marketing, general
      and administrative and R & D expenses and depreciation were shown and
      compared with the same period in 2005 as follows:




**Twelve
                  months ended December 31, 2006**
              
              **Twelve
                  months ended December 31, 2005**
              
              **Comparison****$’000**
              
              **%
                  of revenue**
              
              **$’000**
              
              **%
                  of revenue**
              
              **$’000**
              
              **%**Cost
                  of sales
              
              
              55,226
              
              
              81.09
              %
              
              22,272
              
              
              77.59
              %
              
              32,954
              
              
              147.96
              %Sales
                  & marketing exp.
              
              
              1,045
              
              
              1.53
              %
              
              1,554
              
              
              5.41
              %
              
              (509
              )
              
              -32.75
              %General
                  & admin. exp.
              
              
              1,560
              
              
              2.29
              %
              
              1,064
              
              
              3.71
              %
              
              496
              
              
              46.62
              %R&D
              
              
              255
              
              
              0.37
              %
              
              413
              
              
              1.44
              %
              
              (158
              )
              
              -38.26
              %Depreciation
              
              
              175
              
              
              0.26
              %
              
              310
              
              
              1.08
              %
              
              (135
              )
              
              -43.55
              %Allowance
                  for Obsolete Inventory
              
              
              1,387
              
              
              2.04
              %
              
              98
              
              
              0.34
              %
              
              1,289
              
              
              1315.31
              %Loss
                  on Disposal of Property, Plant and Equipment
              
              
              454
              
              
              0.67
              %
              
              0
              
              
              0.00
              %
              
              454
              
              
              0.00
              %Total
              
              
              60,102
              
              
              88.25
              %
              
              25,711
              
              
              89.57
              %
              
              34,391
              
              
              133.76
              %




25


For
      the
      three months ended December 31, 2006, our operating expenses was
      $19,078,000.


**Three
                  months ended December 31, 2006**
              
              **Three
                  months ended December 31, 2005**
              
              **Comparison****$’000**
              
              **%
                  of revenue**
              
              **$’000**
              
              **%
                  of revenue**
              
              **$’000**
              ****
              **%**Cost
                  of sales
              
              
              17,973
              
              
              80.93
              %
              
              8,891
              
              
              73.47
              %
              
              9,082
              
              
              102.15
              %Sales
                  & marketing. exp.
              
              
              119
              
              
              0.54
              %
              
              423
              
              
              3.50
              %
              
              (304
              )
              
              -71.87
              %General
                  & admin. exp.
              
              
              (323
              )
              
              -1.45
              %
              
              295
              
              
              2.44
              %
              
              (618
              )
              
              -209.49
              %R&D
              
              
              68
              
              
              0.31
              %
              
              76
              
              
              0.63
              %
              
              (8
              )
              
              -10.53
              %Depreciation
              
              
              26
              
              
              0.12
              %
              
              146
              
              
              1.21
              %
              
              (120
              )
              
              -82.19
              %Allowance
                  for Obsolete Inventory
              
              
              761
              
              
              3.43
              %
              
              222
              
              
              1.83
              %
              
              539
              
              
              242.79
              %Loss
                  on Disposal of Property, Plant and Equipment
              
              
              454
              
              
              2.04
              %
              
              0
              
              
              0.00
              %
              
              454
              
              
              0.00
              %Total
              
              
              19,078
              
              
              85.92
              %
              
              10,053
              
              
              83.08
              %
              
              9,025
              
              
              89.77
              %





*Cost
      of Sales*




For
      the
      twelve months ended December 31, 2006, our cost of sales was $55,226,000, or
      81.09% of revenue. The cost of sales to revenues was 77.59% for the
      corresponding period in 2005, resulting in an increase of 3.50%. The principal
      reasons for this increase was the keen competition in the cellular phone
      industry in the PRC, the pressure on price cutting in our selling price was
      greater than the reduction in our purchase cost. Additioanlly $8,107,000 of
      the
      sales in the second quarter of 2006 were overseas trading, which have generally
      lower margins as compared to our domestic sales.




*Sales
      and marketing expenses*





Sales
      and
      marketing expenses mainly represent payments made to sales personnel, cost
      of
      provision for after-sales services, and marketing and transportation
      costs.





For
      the
      twelve months ended December 31, 2006, sales and marketing expenses were
      $1,045,000, or 1.53% of total revenue, as compared to $1,554,000, or 5.41%
      of
      total revenue for the corresponding period in 2005. This constituted a decrease
      of 32.75% as compared to the corresponding period in 2005. This decrease was
      due
      to the reduction in the number of personnel. In addition, the after-sales
      service expense was reduced resulting from the increase of the portion of
      trading of cellular phones, where no after-sales service is provided for the
      trading activities.




Because
      of the reasons above, for the three months ended December 31, 2006, sales and
      marketing expenses were $119,000, or 0.54% of total revenue, representing a
      71.87% decrease, as compared to the same period of last year. It represents
      a
      decrease of 15%, as compared with $140,000 in the third quarter of
      2005.


26




*R&D
      expenses*





Our
      R&D expenses were $255,000 or 0.37% of total revenue for the twelve months
      ended December 31, 2006, which represents 38.26% decrease, as compared with
      $413,000 or 1.44% of total revenues in the same period of 2005. This decrease
      R&D expenses was attributed to increase in our trading activities and the
      change of the business model to purchase mature projects instead of R&D
      independently. Moreover, the reduction of staff is another reason that decreased
      R&D expense.





*General
      and administrative expenses*





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





For
      the
      twelve months ended December 31, 2006, general and administrative expenses
      were
      $1,560,000, which represents 2.29% of total revenue. Included in general and
      administrative expenses was a allowance for doubtful accounts amounting to
      $767,000, due primarily to the uncertainty of long outstanding account
      receivables and trade deposits,. Except for the allowance factor, the general
      and administrative expenses were $793,000 or 1.16% of the total revenue and
      represented a decrease of $122,000 or 13.22%, as compared to $915,000 in 2005.
      The decrease in the expenses was mainly due to the fact that we laid off
      redundant personnel. Since the second half year of 2005, we have adjusted our
      business strategy, and this resulted in the redundant personnel, which made
      the
      ordinary staff costs, including the wages and insurance for personnel, decrease
      in relation to the decrease in the numbers of staff.





For
      the
      three months ended December 31, 2006, general and administrative expenses were
      $-323,000. The negative balance is due to that $605,000 bad debts which has
      been
      provided in third quarter was recovered in the fourth quarter. Except for this
      effect, the expenses were only $282,000 or 1.27% of the total revenue, which
      increased 46.23%, as compared to $146,000, for the corresponding period in
      2005.
      General and administrative expenses increased $140,000 in the fourth quarter
      of
      2006, as compared to 142,000 in the third quarter (expect for the provision
      of
      accounts receivables). The increases were mainly due to the seasonal
      fluctuation.





*Allowance
      for obsolete inventories*





For
      the
      twelve months ended December 31, 2006, allowance for obsolete inventories were
      $1,387,000, which was due to the provision on certain age materials for some
      products which have stopped.





**Gross
      profit and gross profit margin**





For
      the
      twelve months ended December 31, 2006, our gross profit was $12,882,000. Our
      gross profit margin for the reporting period was 18.91%, which represents 3.5%
      decrease, as compared to 22.41% of 2005. The gross profit margin in the fourth
      quarter had a slight increase, which reached 19.07%.





The
      changes in our gross profit margin are attributable to:





1.
            The
                keen competition from the domestic cellular manufactures and the
                overseas
                cellular providers by the strategy of
                price-cutting.





2.
            The
                gross profit of overseas trade being relatively low. We have continued
                to
                develop our overseas customers since the second quarter of 2006.
                At the
                beginning stage of the development of overseas customers, the price
                of our
                products was designed to be favorable and attractive to our customers,
                and
                the gross profit of overseas is approximately
                15%





3.
            Increase
                in the sales of low-ended products, the demand of the low ended products
                was stimulated by the reduction of monthly charges by the
                telecommunication operators.





27





**Net
      income**





For
      the
      twelve months ended December 31, 2006, our net income was $6,718,000, or net
      profit margin 9.86%, representing an increase of 3,226,000 or 92.38%, as
      compared to $3,492,000, or net profit margin 12.17% in 2005. The improvement
      in
      our net profit is due primarily to the fact that we have been successful in
      changing the new business strategy, and positioning in the domestic market
      played an important part in the increase in our net income. Furthermore, the
      sharp decline of 30% in the labor costs resulting from our cost control efforts
      is another reason for the improvement in net income.





However,
      our net profit margin decreased by 2.30%, as compared to last year, which is
      mainly because:





1.
            In
                2006, the allowance for obsolete inventories and doubtful accounts
                were
                amounted to $1,387,000 and $767,000 respectively and the loss on
                the
                disposal of old moulds amounted to
                $454,000.





2.
            The
                income tax of $1,247,000, which was provided in
                2006.





Other
      than the two factors above, our net profit became $10,573, 000 and the net
      profit margin reached 15.52%, representing an increase of $6,833,000, as
      compared to the net income $3,740,000 of 2005(other than the provision). So
      our
      profitability has substantially increased in 2006.





**Liquidity
      and Capital Resources**





We
      generally finance our operations from cash flow generated
      internally.





As
      of
      December 31, 2006, we had current assets of $45,567,000. Current assets are
      mainly comprised of accounts receivable of $31,425,000, trade deposits of
      $8,989,000, restricted cash, cash and cash equivalents of $2,421,000, inventory
      of $1,230,000 and other accounts receivable of $1,502,000. Current liabilities
      of $23,604,000, included accounts payable of $10,964,000, short-term bank loan
      of $6,268,000, other accrued expenses and accrued liabilities of $4,444,000,
      tax
      payable of $1,294,000, amounts due to directors of $330,000 and other creditors
      of 304,000.





We
      offer
      two different trading terms to our customers, i.e. cash-on-delivery and on
      credit term within 45-90 days. As of December 31, 2006, our accounts receivable
      has increased $19,391,000, as compared to $12,034,000 on December 31, 2005.
      The
      increase in our account receivables was due primarily to trading with our two
      major customers, XWSD and CECM.




28





As
      of
      December 31, 2006, our trade deposits were $8,989,000, which represented a
      decrease of $1,591,000 or 15%, as compared to $10,580,000 on December 31, 2005.
      The trade deposit comprised the deposit of the produce of Specialized
      Application Devices and good-sale cellular phones.





As
      of
      December 31, 2006, our inventories were $1,230,000, which represented a decrease
      of $3,230,000 or 72.43%, as compared to $4,460,000 on December 31, 2005. This
      decrease was due in large part to our use of old materials during the production
      of our older models. In addition, our newly developed products do not require
      us
      to carry large level of inventories because the component parts are readily
      available. We have critically and regularly evaluated our inventory and an
      allowance for obsolete inventory was made. An aggregate of $1,804,000 was taken
      as an allowance for obsolete inventories as of December 31, 2006.





As
      of
      December 31, 2006, we provided an advance to third party of $288,000 to overseas
      partners, which are Hongkong Donor Development Company Limited ($248,000) and
      Millon Leader International Limited ($40,000).





As
      of
      December 31, 2006, our pledged deposit was $1,128,000. The deposit was pledged
      to a third party guarantor for providing guarantee service to us in respect
      of a
      bank borrowing of $6,268,000.





As
      of
      December 31, 2006, our accounts payables were $10,964,000, which represented
      an
      increase of $3,025,000 or 38.1%, as compared to $7,939,000 on December 31,
      2005.
      The increase in accounts payable was attributable mainly to unpaid products
      from
      our vendor China Electronic Apparatus Company and Fusong Technology Development
      (Shenzhen) Ltd.





As
      of
      December 31, 2006, our accrued expenses and other accrued liabilities were
      $4,444,000, which represented a significant growth of $2,185,000 or 96.72%,
      as
      compared to $2,259,000 on December 31, 2005. The increase is mainly because
      of
      the aggregated VAT of $3,961,000.





As
      of
      December 31, 2006, our tax payable was $1,294,000, which was attributable mainly
      to the income tax that we mentioned in the net profit analysis.





As
      of
      December 31, 2006, our cash and bank balances were mainly denominated in
      Renminbi (“RMB”) and Hong Kong Dollar. Our revenue and expenses, assets and
      liabilities are mainly denominated in RMB. Our activities, assets and
      liabilities are mainly denominated in RMB, any further possible inflation of
      RMB
      would be beneficial to us. We consider that the exposure to exchange
      fluctuations is relatively low and therefore we have not engaged in any hedging
      activity.





*Cash
      Flows*





As
      of
      December 31, 2006, we have the cash and cash equivalents of $2,421,000, as
      compared to $2,974,000 on December 31, 2005. This represented a decrease of
      $553,000, or 18.59%. This decrease was mainly due to the increase in the
      accounts receivable, which was due to the convergent trade in the end of 2006
      As
      a result; the cash coming to us was slower. However, these trading are in the
      credit term.




29





As
      of
      December 31, 2006, our short-term loan was $6,268,000, which is composed of
      $2,558,000 from Huaxia Bank and $3,710,000 from Beijing Rural Bank.





Our
      gearing ratio, calculated as total debts over total assets, was 51.44%, as
      of
      December 31, 2006, it was basically the same as compared to 51.83% as of
      December 31, 2005.




***Contingent
      Liabilities***





As
      of
      December 31, 2006, we had not entered into any guarantee contracts nor any
      non-disclosed contracts which will affect stockholders’ equity or share
      structure.





***Off
      Balance Sheet Arrangements***





As
      of
      December 31, 2006, we had no off balance sheet arrangements.




***Contractual
      Commitments***





The
      Company is obligated to make future under various contracts, including purchase
      and operating leases. The Company does not have any long-term debt or capital
      lease obligations. The following table summarized the Company’s contractual
      obligations at December 31, 2006, reported by maturity of
      obligation.





**Payments due by period****Contractual Obligations**
            
            **Total**
            
            **Less than**
              **1 year**
            
            **1-3 years**
            
            **3-5 years**
            
            **More than**
              **5 years**$’000
            
            $’000
            
            $’000
            
            $’000
            
            $’000Long-term
                Debt Obligations
            
            
            6,268
            
            
            6,268
            
            
            -
            
            
            -
            
            
            -Capital
                Lease Obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                Lease Obligations
            
            
            27
            
            
            27
            
            
            -
            
            
            -
            
            
            -Purchase
                Obligations
            
            
            19,422
            
            
            19,422
            
            
            
            
            
            -
            
            
            -Other
                long-term liabilities reflected on the registrant’s balance sheet under
                GAAP
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            
            25,717
            
            
            25,717
            
            
            -
            
            
            -
            
            
            -





**Item 7A.**  **Quantitative
      and Qualitative Disclosures About Market Risk.**




Market
      risk is the sensitivity of income to changes in interest rates, foreign
      exchanges, commodity prices, equity prices and other market-driven rates or
      prices. The Company, in the normal course of doing business, is exposed to
      market risk through changes in interest rates with respect to bank loans. Bank
      loans at December 31, 2006 were $6,268,000. The interest rate for twelve months
      ended December 31, 2006 was charged at 6.7% to 7.956% per annum.




30





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 functional currency are translated into functional
      currency at the applicable rates of exchange in effect at the balance sheet
      date. Exchange gains and losses are recorded in the combined 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 resulting from this process are recorded, when material, in
      accumulated other comprehensive income (loss) within stockholders'
      equity.





**Item
      8.**  **Financial
      Statements and Supplementary Data.**




Reference
      is made to pages F-1 through F-16 comprising a portion of this annual
      report on Form 10-K.




**Item
      9.** **Changes
      in and Disagreements with Accountants on Accounting
      and**  **Financial
      Disclosure.**




None.




**Item 9A.**  **Controls
      and Procedures.**




The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in our reports filed pursuant to
      the
      Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
      and reported within the time periods specified in the SEC’s rules, regulations
      and related forms, and that such information is accumulated and communicated
      to
      our principal executive officer and principal financial officer, as appropriate,
      to allow timely decisions regarding required disclosure.




The
      Company, under the supervision of our chief executive officer and chief
      financial officer, carried out an evaluation of the effectiveness of the design
      and operation of its disclosure controls and procedures as of December 31,
      2005.
      Based upon that evaluation, management, including our chief executive officer
      and chief financial officer, concluded that the Company’s disclosure controls
      and procedures were effective in alerting it in a timely manner to information
      relating to the Company required to be disclosed in this report.




During
      our fiscal year 2006, there were no significant changes in our internal controls
      over financial reporting that have materially affected, or are reasonably likely
      to materially affect our internal controls over financial
      reporting.




31





**Item 9B.**  **Other
      Information.**




Not
      applicable.




**PART
      III**




**Item
      10.**  **Directors,
      Executive Officers and Corporate Governance.**





As
      of
      December 31, 2006, our current directors and executive officers were as
      follows:





**Name**
            
            **Age**
            
            **Positions
                Held and Tenure**Wang
                Xin
            
            38
            
            Chief
                Executive Officer and a DirectorZhao
                Hongwei
            
            41
            
            Chief
                Financial OfficerLiu
                Yu
            
            41
            
            DirectorWang
                Zhibin
            
            37
            
            Director





Wang
      Xin
      has served as Chief Executive Officer and a member of our Board of Directors
      since March 31, 2005. From April 2003 to present, he has also served as Director
      and General Manager of Xelent. Prior to joining Xelent, he served as the as
      the
      General Manager of the Sales and Marketing Division of Shanghai Cellstar
      International Trading Co., Ltd. from January 2003 to April 2003, Director of
      Logistics & Customer Service of Shanghai Cellstar International Trading Co.,
      Ltd. from November 1997 to January 2003, and Director and Vice President of
      Beijing VA Communication Equipment Co., Ltd. from May 1996 to October
      1997.




Zhao
      Hongwei **** has
      served as our Chief Financial Officer since October 26, 2005. Mr. Zhao has
      over
      15 years’ experience in accounting and financial management, mainly with listed
      companies in Hong Kong and Foreign Invested Enterprise in the PRC, most recently
      serving as the regional financial controller of XinAo Gas Holdings Limited,
      a
      listed company in Hong Kong.




Liu
      Yu **** has
      served as a member of our Board of Directors since March 31, 2005 and a member
      of the Board of Directors of Xelent since April 2003. From May 1998 to present
      he has also served as Chairman of the Board of Beijing Huanyitong Technology
      & Trading Co., Ltd. From May 1995 to April 1998, he served as General
      Manager of Beijing Lianwanjia Telecommunication Trading Center.




Wang
      Zhibin has served as a member of our Board of Directors since March 31, 2005,
      and a member of the Board of Directors of Xelent since August 2004. From May
      1998 to present, he has also served as General Manager of Beijing Glory Real
      Estate Development Co., Ltd., and a director of Beijing Huanyitong Technology
      & Trading Co., Ltd. From May 1995 t o April 1998, he served as a Manager of
      Beijing Lianwanjia Telecommunication Trading Center.




*Subsequent
      Events*




On
      February 7, 2007, Naizhong Che, Peng Wang, Zhixiang Zhang, Nathaniel K. Hsieh,
      and Howard S. Barth were elected to our Board of Directors by unanimous written
      consent of our Board of Directors, effective immediately.




32




Mr.
      Naizhong Che earned his B.S. from Beijing University of Posts and
      Telecommunications. Now retired, he has broad experience in the communications
      industry including R&D, production, imports and exports. He served twelve
      years with the Ministry of Information Industry of China Posts and
      Telecommunications Industry Standardization Institute in various
      capacities.




Mr.
      Peng
      Wang earned his bachelor’s degree at Central University of Finance and Economics
      and his master’s at Guanghua School of Management, Peking University. His
      expertise includes formulating, planning and implementing marketing strategies
      for technology companies. He is currently General Manager for Beijing
      Youlilianxu Technology Co., Ltd. where he is responsible for products in China,
      including ViewSonic projection, Samsung MP4 and LG projection.




Mr.
      Zhixiang Zhang earned bachelor and master’s degrees at Central University of
      Finance and Economics. He has extensive experience in corporate financial
      management, audits and financial strategy, and most recently was the Financial
      Controller for Cec-Chinacomm Communications Co., Ltd.




Mr.
      Nathaniel K. Hsieh is a member of the Illinois and Iowa Bar Associations. He
      earned his L.L.M. at Georgetown University and his J.D. at the University Of
      Iowa College Of Law. He is the Founder and President of Tritent International
      Corp. of Chicago, Illinois, which oversees tobacco import and manufacturing
      operations for one of the 60 independent tobacco manufacturers in
      U.S.




Mr.
      Howard S. Barth is a member of the Canadian Institute of Chartered Accountants
      and the Ontario Institute of Chartered Accountants. He earned his B.A. and
      M.B.A. at York University and has over 25 years of experience as a certified
      accountant. Until recently, he was chief executive officer and president with
      Yukon Gold Corporation, Inc., a public company which is dual-listed in the
      U.S.
      and Canadian markets. He is currently a director of Yukon Gold Corporation
      Inc.
      and has served on its audit committee. He is also a member of the Board of
      Directors and chairman of the audit committee for Nuinsco Resources Limited,
      a
      TSX-listed exploration company.





**Committees
      of the Board of Directors**





As
      of
      December 31, 2006, our Board of Directors did not have any standing
      committees.





On
      February 7, 2007, our Board of Directors approved and authorized the
      establishment of three new committees to facilitate and assist the Board of
      Directors in the execution of its responsibilities: the Audit Committee, the
      Compensation Committee and the Nominations/Corporate Governance Committee.
      In
      accordance with American Stock Exchange listing standards, all the committees
      are comprised solely of non-employee, independent Directors. Charters for each
      committee are available on the Company’s website at www.orsus-xelent.com. The
      charter of each committee is also available in print to any stockholder who
      requests it. The table below shows current membership for each of the standing
      committees of our Board of Directors.




33




**Audit
                Committee**
            
            **Nominating/Corporate****Governance
                Committee**
            
            **Compensation
                Committee**Nathaniel
                K. Hsieh (Chair)
            
            Naizhong
                Che (Chair)
            
            Naizhong
                Che (Chair)Howard
                S. Barth
            
            Nathaniel
                K. Hsieh
            
            Zhixiang
                ZhangZhixiang
                Zhang
            
            Peng
                Wang
            
            Peng
                Wang





*Audit
      Committee*





The
      Audit
      Committee is comprised solely of non-employee Directors, all of whom our Board
      of Directors has determined are independent pursuant to the rules of the
      American Stock Exchange (the “ *AMEX
      Rules* ”).
      Our
      Board of Directors has determined that all the members of the Audit Committee
      are financially literate pursuant to the AMEX Rules. Our Board of Directors
      also
      has determined that Mr. Barth is an Audit Committee Financial Expert within
      the
      meaning stipulated by the Securities and Exchange Commission. As the Audit
      Committee was only recently established subsequent to the fiscal year end on
      December 31, 2006, the members of the Audit Committee were not involved in
      the
      review and approval of this annual report on Form 10-K.





*Corporate
      Governance Committee*





The
      Corporate Governance Committee is comprised solely of non-employee Directors,
      all of whom our Board of Directors has determined are independent pursuant
      to
      the AMEX Rules.





*Compensation
      Committee*





The
      Compensation Committee is comprised solely of non-employee Directors, all of
      whom our Board of Directors has determined are independent pursuant to the
      AMEX
      Rules.





*Compensation
      Committee Interlocks and Insider Participation*





The
      Compensation Committee is comprised entirely of independent
      directors.





**Section
      16(a) Beneficial Ownership Reporting Compliance**




Section
      16(a) of the Securities and Exchange Act of 1934, as amended, requires our
      directors, officers and persons owning more than 10% of our common stock to
      file
      reports of ownership and changes of ownership with the Securities and Exchange
      Commission. Based on its review of the copies of such reports furnished to
      us,
      or representations from certain reporting persons that no other reports were
      required, we believe that all applicable filing requirements were complied
      with
      during the fiscal year dated December 31, 2006.




34




**Item
      11.**  **Executive
      Compensation.**




**Compensation
      Discussion and Analysis**





*General
      Philosophy*




We
      compensate our senior management and key employees through a single way of
      base
      salary currently. However our compensation programs of a mix of base salary,
      bonus and equity compensation is under consideration and will be designed to
      impact all employees by setting general levels of compensation and helping
      to
      create an environment of goals, rewards and expectations. Because we believe
      the
      performance of every employee is important to our success, we are mindful of
      the
      effect of executive compensation and incentive programs on all of our
      employees.





At
      the
      senior-most levels, we will design the incentive compensation to reward
      company-wide performance through tying awards primarily to earnings growth
      and
      stock appreciation. At lower levels, we will design the incentive compensation
      to reward the achievement of specific operational goals within areas under
      the
      control of the relevant employees, although company-wide performance is also
      a
      factor.





*Base
      Salaries*





We
      want
      to provide our senior management with level of assured cash compensation in
      the
      form of base salary that facilitates an appropriate lifestyle given their
      professional status and accomplishments. For our chief executive officer, we
      concluded that a base salary of between $65,000 and $75,000 was appropriate
      in
      this regard for fiscal year ending December 31, 2006. Similarly, we concluded
      that a base salary of between $30,000 and $40,000 was appropriate for our chief
      financial officer for fiscal year ending December 31, 2006. These ranges were
      not objectively determined, but instead reflect levels that we concluded were
      appropriate based upon our general experience. We performed a similar analysis
      with respect to other senior management. At the senior vice president level
      we
      have a significant level of competition for them. We believe that this gives
      us
      the opportunity to attract and retain talented managerial employees both at
      the
      senior executive level and below.




35





**Summary
      Compensation Table**





SUMMARY
      COMPENSATION TABLE


Name
                  & Principal Position
              
              Year
              
              Salary
                ($)
              
              Bonus
                ($)
              
              Stock
                Awards
                ($)
              
              Option
                Awards
                ($)
              
              Non-Equity
                  Incentive Plan Compensation
                ($)
              
              Change
                  in Pension value and Nonqualified deferred compensation
                  earnings
                ($)
              
              All
                  other Compensation
                ($)
              
              Total
                ($)Wang
                  Xin, PEO
              
              
              2006
              
              
              66,309
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              66,309Zhao
                  Honwei, PFO
              
              
              2006
              
              
              30,110
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              30,110Wang
                  Xiaolong, Vice-President
              
              
              2006
              
              
              25,757
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              25,757Zhou
                  Liangyun Vice-president
              
              
              2006
              
              
              22,989
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              22,989Wan
                  Feng, CEO Assistant
              
              
              2006
              
              
              20,395
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              20,395





As
      of as
      of December 31, 2006, the Company did not have any “Grants of Plan-Based
      Awards”, “Outstanding Equity Awards at Fiscal Year-End”, “Option Exercises and
      Stock Vested”, “Pension Benefits”, or “Nonqualified Deferred Compensation”. Nor
      did the Company have any “Post-Employment Payments” to report.





There
      was
      no officer whose salary and bonus for the period exceeded $100,000. The amounts
      listed in the table above were paid by Xelent, the wholly owned subsidiary
      of
      our wholly owned subsidiary UFIL. While we do have employment agreements with
      our executive officers, the salary for our executive officers is at the
      discretion of our Board of Directors. We expect to pay substantially similar
      compensation to our executives in the future and anticipate continuing to pay
      them through Xelent.





We
      have
      no stock option, retirement, pension, or profit-sharing programs for the benefit
      of directors, officers or other employees, but our Board of Directors may
      recommend adoption of one or more such programs in the future.




**Compensation
      of Directors**




The
      Company does not has pay compensation to its directors. All directors are
      reimbursed for out-of-pocket expenses in connection with attendance at Board
      of
      Director’s and/or committee meetings. The Company may establish other
      compensation plans (e.g. options, cash for attending meetings, etc.) in the
      future.




36




**Item
      12.**  **Security
      Ownership of Certain Beneficial Owners and Management
      and** **Related
      Stockholder Matters.**





The
      following table sets forth information regarding the beneficial ownership of
      our
      common stock as of March 17, 2006 for each person known by us to be the
      beneficial owner of more than 5% of our outstanding shares of common stock.
      Unless otherwise indicated, we believe that all persons named in the table
      have
      sole voting and investment power with respect to all shares of common stock
      beneficially owned by them.





**Amount
                and Nature of Beneficial Ownership****(2)****Title
                of****Class**
            
            **Name
                and Address of Beneficial Owner****(1)**
            
            **Number**
              **of
                Shares********(3)**
            
            **Percent
                of**
              **Voting
                Stock********(4)**Common
            
            
            Wang
                Xin, Chief Executive Officer and Director
            
            
            3,000,000
            
            
            10.09
            %Common
            
            
            Liu
                Yu, Director
            
            
            6,000,000
            
            
            20.16
            %Common
            
            
            Wang
                Zhibin
            
            
            6,000,000
            
            
            20.16
            %





(1)
            Unless
                otherwise noted, the address is that of the
                Company.





(2)
            On
                March 17, 2006, there were 27,956,000 shares of our common stock
                outstanding. Each person named above has sole investment and voting
                power
                with respect to all shares of the common stock shown as beneficially
                owned
                by the person, except as otherwise indicated
                below.





(3)
            Under
                applicable rules promulgated by the U. S. Securities and Exchange
                Commission pursuant to the Securities Exchange Act of 1934, as amended
                (the “*Exchange
                Act*”),
                a person is deemed the “beneficial owner” of a security with regard to
                which the person, directly or indirectly, has or shares (a) the voting
                power, which includes the power to vote or direct the voting of the
                security, or (b) the investment power, which includes the power to
                dispose
                or direct the disposition of the security, in each case irrespective
                of
                the person’s economic interest in the security. Under these SEC rules, a
                person is deemed to beneficially own securities which the person
                has the
                right to acquire within 60 days through (x) the exercise of any option
                or
                warrant or (y) the conversion of another
                security.




(4)
            In
                determining the percent of our common stock owned by a person (a)
                the
                numerator is the number of shares of our common stock beneficially
                owned
                by the person, including shares the beneficial ownership of which
                may be
                acquired within 60 days upon the exercise of options or warrants
                or
                conversion of convertible securities, and (b) the denominator is
                the total
                of (i) the 29,756,000 shares of our common stock outstanding
                on****March
                17, 2006 and (ii) any shares of our common stock which the person
                has the
                right to acquire within 60 days upon the exercise of options or warrants
                or conversion of convertible securities. Neither the numerator nor
                the
                denominator include shares which may be issued upon the exercise
                of any
                other options or warrants or the conversion of any other convertible
                securities.




The
      following table sets forth information regarding the beneficial ownership of
      our
      common stock as of March 17, 2006 for each of our officers and directors and
      all
      our officers and directors as a group. Unless otherwise indicated, we believe
      that all persons named in the table have sole voting and investment power with
      respect to all shares of common stock beneficially owned by them.




37




**Amount
                and Nature of Beneficial Ownership****(2)****Title
                of****Class**
            
            **Name
                and Address of Beneficial Owner****(1)**
            
            **Number**
              **of
                Shares********(3)**
            
            **Percent
                of**
              **Voting
                Stock********(4)**Common
            
            
            Wang
                Xin, Chief Executive Officer and Director
            
            
            3,000,000
            
            
            10.09
            %Common
            
            
            Liu
                Yu, Director
            
            
            6,000,000
            
            
            20.16
            %Common
            
            
            Zhao
                Hongwei, Chief Financial Officer
            
            
            —
            
            
            —Common
            
            
            Naizhong
                Che, Director
            
            
            —
            
            
            —Common
            
            
            Peng
                Wang, Director
            
            
            —
            
            
            —Common
            
            
            Zhixiang
                Zhang, Director
            
            
            —
            
            
            —Common
            
            
            Nathaniel
                K. Hsieh, Director
            
            
            —
            
            
            —Common
            
            
            Howard
                S. Barth, Director
            
            
            —
            
            
            —Common
            
            
            Directors
                and executive officers as a group (4 persons)
            
            
            9,000,000
            
            
            30.25
            %


(1)
              Unless
                  otherwise noted, the address is that of the
                  Company.





(2)
            On
                March 17, 2006, there were 27,956,000 shares of our common stock
                outstanding. Each person named above has sole investment and voting
                power
                with respect to all shares of the common stock shown as beneficially
                owned
                by the person, except as otherwise indicated
                below.





(3)
            Under
                applicable rules promulgated by the U. S. Securities and Exchange
                Commission pursuant to the Securities Exchange Act of 1934, as amended
                (the “*Exchange
                Act*”),
                a person is deemed the “beneficial owner” of a security with regard to
                which the person, directly or indirectly, has or shares (a) the voting
                power, which includes the power to vote or direct the voting of the
                security, or (b) the investment power, which includes the power to
                dispose
                or direct the disposition of the security, in each case irrespective
                of
                the person’s economic interest in the security. Under these SEC rules, a
                person is deemed to beneficially own securities which the person
                has the
                right to acquire within 60 days through (x) the exercise of any option
                or
                warrant or (y) the conversion of another
                security.




(4)
            In
                determining the percent of our common stock owned by a person (a)
                the
                numerator is the number of shares of our common stock beneficially
                owned
                by the person, including shares the beneficial ownership of which
                may be
                acquired within 60 days upon the exercise of options or warrants
                or
                conversion of convertible securities, and (b) the denominator is
                the total
                of (i) the 29,756,000 shares of our common stock outstanding
                on****March
                17, 2006 and (ii) any shares of our common stock which the person
                has the
                right to acquire within 60 days upon the exercise of options or warrants
                or conversion of convertible securities. Neither the numerator nor
                the
                denominator include shares which may be issued upon the exercise
                of any
                other options or warrants or the conversion of any other convertible
                securities.





*Securities
      Authorized for Issuance Under Equity Compensation Plans.*





As
      of the
      fiscal year ended December 31, 2006, we have no shares of our common stock
      or
      preferred stock that are issuable under compensation plans approved by our
      security holders.





**Item
      13.**  **Certain
      Relationships and Related Transactions, and Director
      Independence.**





Messrs
      Wang Xin, Liu Yu and Wang Zhibin have outstanding loans to the company in the
      amount of $330,000, which loans are unsecured, interst-free and repayable by
      the
      Company on demand.




38





The
      Company has bank loans amounting of $6,268,000 which were guaranteed by the
      director, Messrs Liu Yu.





*Director
      Independence*





Messrs.
      Naizhong Che, Peng Wang, Zhixiang Zhang, Nathaniel K. Hsieh, and Howard S.
      Barth
      are all non-employee Directors, and all of whom our Board of Directors has
      determined are independent pursuant to the rules of the AMEX Rules and the
      Securities and Exchange Commission. All of the members of members of our Board
      of Directors Audit Committee, Nominating/Corporate Governance Committee and
      Compensation Committee are independent pursuant to the rules of the AMEX Rules
      and the Securities and Exchange Commission.





**Item
      14.**  **Principal
      Accounting Fees and Services.**




The
      firm
      of Moores Rowland Mazars acts as our principal accountant. The following is
      a
      summary of fees paid to our principal accountant for services
      rendered.





**Audit
      Fees**





During
      the fiscal year ended December 31, 2006, the fees for our principal accountant
      were $81,500, which was composed of $22,500 for quarters review and $59,000
      for
      Form 10-K.





**Audit
      Related Fees**





During
      2006, our principal accountant did not render assurance and related services
      reasonably related to the performance of the audit or review of financial
      statements.





**Tax
      Fees**





During
      2006, our principal accountant did not render services to us for tax compliance,
      tax advice and tax planning.





**All
      Other Fees**





During
      2006, there were no fees billed for products and services provided by the
      principal accountant other than those set forth above.





**Audit
      Committee Approval**





As
      of
      December 31, 2006, our Board of Directors had not established an audit
      committee. The Audit Committee was established subsequent to the fiscal year
      end
      on December 31, 2006, but the Audit Committee has not held a meeting since
      its
      establishment and the members of the Audit Committee were not involved in the
      review and approval of this annual report on Form 10-K. Our equity securities
      are not currently listed on an exchange and automated quotation system that
      require its listed companies to appoint an audit committee. Our Board of
      Directors approved the engagement of Moores Rowland Mazars as our independent
      registered public accounting firm in a meeting held May 9, 2005.





39




**PART
      IV**  ****




**Item
      15.**  **Exhibits
      and Financial Statement Schedules**




**(a)**
              ****Financial
                  Statements.****




Our
      financial statements as set forth in the Index to Financial Statements attached
      hereto commencing on page F-1 are hereby incorporated by
      reference.




**(b)**
              ****Exhibits.****




The
      following exhibits, which are numbered in accordance with Item 601 of
      Regulation S-K, are filed herewith or, as noted, incorporated by reference
      herein:


**Exhibit**
                  **Number**
                
                **Exhibit
                    Description**3.1
                
                Certificate
                    of Incorporation (1)3.2
                
                Bylaws
                    (1)10.1
                
                Securities
                    Exchange Agreement by and among Universal Flirts Corp, United
                    First
                    International Limited and the Shareholders of United First International
                    Limited (2)10.2
                
                National
                    Sales and Agency Contract by and among CEC Mobile Co. Ltd., Beijing
                    Prosperous Times Commercial & Trading Co., Ltd. and Beijing Orsus
                    Xelent Technology & Trading Company Limited dated May 26, 2004.
                    (2)10.3
                
                National
                    Sales and Agency Contract by and among CEC Mobile Co. Ltd., Beijing
                    Prosperous Times Commercial & Trading Co., Ltd. and Beijing Orsus
                    Xelent Technology & Trading Company Limited dated March 18, 2004.
                    (2)10.4
                
                National
                    Sales and Agency Contract by and among CEC Mobile Co. Ltd., Beijing
                    Prosperous Times Commercial & Trading Co., Ltd. and Beijing Orsus
                    Xelent Technology & Trading Company Limited dated April 29, 2004.
                    (2)10.5
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Chengxin Electronic Technology Co.,
                    Ltd.
                    dated May 28, 2004 (2)10.6
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Chengxin Electronic Technology Co.,
                    Ltd.
                    dated May 28, 2004 (2)
  40
  10.7
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Chengxin Electronic Technology Co.,
                    Ltd.
                    dated May 28, 2004 (2)10.8
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Suncom Logidtics Limited dated April
                    14, 2004
                    (2)10.9
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Suncom Logistics Limited dated May
                    27, 2004
                    (2)10.10
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Suncom Logistics Limited dated May
                    27, 2004
                    (2)10.11
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Suncom Logistics Limited dated May
                    27, 2004
                    (2)10.12
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Truly Semiconductor Co., Ltd. dated May 21,
                    2004
                    (2)10.13
                
                National
                    Sales and Agency Contract by and among CEC Mobile Co., Ltd.,
                    Beijing
                    Prosperous Times Commercial & Trading Co., Ltd. and Beijing Orsus
                    Xelent Technology & Trading Company Limited dated May 26, 2004
                    (2)10.14
                
                National
                    Sales and Agency Contract by and among CEC Mobile Co., Ltd.,
                    Beijing
                    Prosperous Times Commercial & Trading Co., Ltd. and Beijing Orsus
                    Xelent Technology & Trading Company Limited dated May 26, 2004
                    (2)21.1
                
                Subsidiaries
                    of the Company (3)24.1
                
                Power
                    of Attorney (set forth on signature page)31.1
                
                Certification
                    of Principal Executive Officer under Section 302 of the Sarbanes-Oxley
                    Act
                    of 2002 (3)31.2
                
                Certification
                    of Principal Financial Officer under Section 302 of the Sarbanes-Oxley
                    Act
                    of 2002 (3)32.2
                
                Certification
                    under Section 906 of the Sarbanes-Oxley Act of 2002 (3)





(1)
            Incorporation
                by reference to the Company's Registration Statement on Form S-1,
                as
                amended (Registration No. 333-125687).


(2)
            Incorporated
                by reference to the Company's Current Report on Form 8-K dated May
                4,
                2005.


(3)
            Filed
                herewith.




41




**Orsus
      Xelent Technologies, Inc.**





**Index
      to Consolidated Financial Statements**


Year
      ended December 31, 2006








PageReport
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Statements of Operations
            
            F-2Consolidated
                Balance Sheets
            
            F-3Consolidated
                Statements of Changes in Stockholders’ Equity
            
            F-4Consolidated
                Statements of Cash Flows
            
            F-5Notes
                to Consolidated Financial Statements
            
            F-6
                - F-16





42




**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Stockholders and Board of Directors


**Orsus
      Xelent Technologies, Inc.**




We
      have
      audited the accompanying consolidated balance sheets of Orsus Xelent
      Technologies, Inc. and its subsidiaries (the “Company”) as of December 31, 2006
      and 2005, and the related consolidated statements of operations, changes in
      stockholders' equity and cash flows for the years then ended. These consolidated
      financial statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the
      standards of the Public Company Accounting Oversight Board (United
      States). Those
      standards require that we plan and perform the audit to obtain reasonable
      assurance about whether the financial statements are free of material
      misstatement. An audit includes examining, on a test basis, evidence supporting
      the amounts and disclosures in the financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Company as of December
      31, 2006 and 2005 and the results of its operations and its cash flows for
      the
      years then ended in conformity with accounting principles generally accepted
      in
      the United States of America.






**Moores
      Rowland** **Mazars**


*Chartered
      Accountants*


*Certified
      Public Accountants*


Hong
      Kong





Date:
      March 30, 2007




F-1




**Orsus
      Xelent Technologies, Inc.**





**Consolidated
      Statements of Operations**


Years
      ended December 31, 2006 and 2005







***Note***
            
            **2006**
            
            2005***US$’000***
            
            *US$’000****Operating
                revenues - Net sales***
            
            
            
            
            
            **68,108**
            
            
            28,705***Operating
                expenses:***Cost
                of sales
            
            
            
            
            
            **55,226**
            
            
            22,272Sales
                and marketing
            
            
            
            
            
            **1,045**
            
            
            1,554General
                and administrative
            
            
            
            
            
            **1,560**
            
            
            1,064Research
                and development
            
            
            
            
            
            **255**
            
            
            413Depreciation
            
            
            
            
            
            **175**
            
            
            310Allowance
                for obsolete inventories
            
            
            
            
            
            **1,387**
            
            
            98Loss
                on disposal of property, plant andequipment
            
            
            
            
            
            **454**
            
            
            -Total
                operating expenses
            
            
            
            
            
            **60,102**
            
            
            25,711**Operating
                income**
            
            
            
            
            
            **8,006**
            
            
            2,994Interest
                expense
            
            
            
            
            
            **(116**
            **)**
            
            (25
            )Other
                income, net
            
            
            
            
            
            **75**
            
            
            544**Income
                before income taxes**
            
            
            
            
            
            **7,965**
            
            
            3,513Income
                taxes
            
            
            *4*
            
            
            **(1,247**
            **)**
            
            (21
            )**Net
                income**
            
            
            
            
            
            **6,718**
            
            
            3,492**Other
                comprehensive income**Foreign
                currency translation adjustment
            
            
            
            
            
            **626**
            
            
            349**Comprehensive
                Income**
            
            
            
            
            
            **7,344**
            
            
            3,841**Earnings
                per share**Basic
                and diluted (US$)
            
            
            *5*
            
            
            **0.23**
            
            
            0.12**Weighted
                average number of common shares outstanding**
            
            
            
            
            
            **29,756,000**
            
            
            29,756,000




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




F-2





**Orsus
      Xelent Technologies, Inc.**





**Consolidated
      Balance Sheets**


As
      of
      December 31, 2006 and 2005








***Note***
            
            **2006**
            
            2005***US$’000***
            
            *US$’000***ASSETS****Current
                assets**Cash
                and cash equivalents
            
            
            
            
            
            **2,421**
            
            
            2,974Accounts
                receivable, net of allowance for doubtful accounts of $230,000 (2005:
                $149,000)
            
            
            
            
            
            **31,425**
            
            
            12,034Inventories
            
            
            *6*
            
            
            **1,230**
            
            
            4,460Trade
                deposits paid
            
            
            
            
            
            **8,989**
            
            
            10,580Advance
                to third party
            
            
            
            
            
            **288**
            
            
            -Other
                current assets
            
            
            
            
            
            **86**
            
            
            182Pledged
                deposit
            
            
            *7*
            
            
            **1,128**
            
            
            -Total
                current assets
            
            
            
            
            
            **45,567**
            
            
            30,230Property,
                plant and equipment, net
            
            
            *8*
            
            
            **320**
            
            
            781**Total
                assets**
            
            
            
            
            
            **45,887**
            
            
            31,011**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities**Short-term
                bank loan
            
            
            *9*
            
            
            **6,268**
            
            
            -Accounts
                payable - Trade
            
            
            
            
            
            **10,964**
            
            
            7,939Accrued
                expenses and other accrued liabilities
            
            
            
            
            
            **4,444**
            
            
            2,238Trade
                depositsreceived
            
            
            
            
            
            **251**
            
            
            5,432Due
                to directors
            
            
            *12*
            
            
            **330**
            
            
            320Provision
                for warranty
            
            
            
            
            
            **53**
            
            
            122Tax
                payables
            
            
            
            
            
            **1,294**
            
            
            21Total
                current liabilities
            
            
            
            
            
            **23,604**
            
            
            16,072**Commitments
                and contingencies**
            
            
            *13***Stockholders’
                equity**Preferred
                stock, US$0.001 par value:Authorized:
                100,000,000 shares, no shares issued
            
            
            
            
            
            **-**
            
            
            -Common
                stock and paid-in capital, US$0.001 par value:Authorized:
                100,000,000 sharesIssued
                and outstanding: 29,756,000 shares as ofDecember
                31, 2006 and as of December 31, 2005
            
            
            
            
            
            **30**
            
            
            30Additional
                paid-in capital
            
            
            
            
            
            **2,484**
            
            
            2,484Dedicated
                reserves
            
            
            
            
            
            **1,042**
            
            
            1,042Other
                comprehensive income
            
            
            
            
            
            **975**
            
            
            349Retained
                earnings
            
            
            
            
            
            **17,752**
            
            
            11,034Total
                stockholders’ equity
            
            
            
            
            
            **22,283**
            
            
            14,939**Total
                liabilities and stockholders’ equity**
            
            
            
            
            
            **45,887**
            
            
            31,011





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




F-3





**Orsus
      Xelent Technologies, Inc.**





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


Years
      ended December 31, 2006 and 2005







**Common
                stock issued**
            
            **Additional**
            
            **Dedicated**
            
            **Other**
              **compre-****No.
                of**
              **shares**
            
            ***Amount***
            
            **paid-in**capital
            
            **reserves**
            
            **hensive**income
            
            **Retained**
              **earnings**
            
            ***Total****US$’000*
            
            *US$’000*
            
            *US$’000*
            
            *US$’000*
            
            *US$’000*
            
            *US$’000*Balance
                as of January 1, 2005
            
            
            29,756,000
            
            
            30
            
            
            2,484
            
            
            1,042
            
            
            -
            
            
            7,542
            
            
            11,098Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,492
            
            
            3,492Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            349
            
            
            -
            
            
            349Balance
                as of December 31, 2005
            
            
            29,756,000
            
            
            30
            
            
            2,484
            
            
            1,042
            
            
            349
            
            
            11,034
            
            
            14,939Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            6,718
            
            
            6,718Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            626
            
            
            -
            
            
            626**Balance
                as of December 31, 2006**
            
            
            **29,756,000**
            
            
            **30**
            
            
            **2,484**
            
            
            **1,042**
            
            
            **975**
            
            
            **17,752**
            
            
            **22,283**




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




F-4





**Orsus
      Xelent Technologies, Inc.**





**Consolidated
      Statements of Cash Flows**


Years
      ended December 31, 2006 and 2005







**2006**
            
            2005***US$’000***
            
            *US$’000***Cash
                flows from operating activities****Net
                income**
            
            
            **6,718**
            
            
            3,492Adjustments
                to reconcile net income to net cash used in operating
                activities:Depreciation
            
            
            **175**
            
            
            310Loss
                on disposal of property, plant and equipment
            
            
            **454**
            
            
            -Allowance
                for doubtful accounts
            
            
            **767**
            
            
            149Allowance
                for obsolete inventories
            
            
            **1,387**
            
            
            98Interest
                expense
            
            
            **116**
            
            
            53Exchange
                difference
            
            
            **151**
            
            
            -Changes
                in assets and liabilities:Accounts
                receivable - trade
            
            
            **(19,072**
            **)**
            
            (3,715
            )Inventories,
                net
            
            
            **1,989**
            
            
            1,376Trade
                deposits paid
            
            
            **1,245**
            
            
            (2,239
            )Other
                current assets
            
            
            **102**
            
            
            34Trade
                deposits received
            
            
            **(5,359**
            **)**
            
            2,879Accounts
                payable - trade
            
            
            **2,765**
            
            
            (6,266
            )Provision
                for warranty
            
            
            **(73**
            **)**
            
            (65
            )Accrued
                expenses and other accrued liabilities
            
            
            **2,133**
            
            
            1,317Provisionfor taxation
            
            
            **1,272**
            
            
            21**Net
                cash used in operating activities**
            
            
            **(5,230**
            **)**
            
            (2,556
            )**Cash
                flows from investing activities**Purchase
                of property, plant and equipment
            
            
            **(156**
            **)**
            
            (503
            )Repayment
                from a related company
            
            
            **-**
            
            
            3,407Loan
                to third party
            
            
            **(288**
            **)**
            
            -Decrease
                in restricted cash
            
            
            **-**
            
            
            2,395Pledged
                deposit paid
            
            
            **(1,128**
            **)**
            
            -**Net
                cash (used in) from investing activities**
            
            
            **(1,572**
            **)**
            
            5,299**Cash
                flows from financing activities**Interest
                expense
            
            
            **(116**
            **)**
            
            -Advance
                from stockholders
            
            
            **-**
            
            
            1Borrowing
                from bank
            
            
            **6,268**
            
            
            -**Net
                cash from financing activities**
            
            
            **6,152**
            
            
            1**Net
                (decrease) increase in cash and cash equivalents**
            
            
            **(650**
            **)**
            
            2,744**Cash
                and cash equivalents, beginning of the year**
            
            
            **2,974**
            
            
            224**Exchange
                gain on cash and cash equivalents**
            
            
            **97**
            
            
            6**Cash
                and cash equivalents, end of the year**
            
            
            **2,421**
            
            
            2,974**Supplemental
                disclosure information:**Interest
                expenses
            
            
            **116**
            
            
            -





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




F-5


**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**







**1.**  **BASIS
      OF FINANCIAL STATEMENT PRESENTATION AND REORGANIZATION**





Orsus
      Xelent Technologies, Inc. (“ORXT”), formerly known as Universal Flirts Corp.,
      was organized under the laws of the State of Delaware on May 25, 2004. Through
      its subsidiary, Universal Flirts, Inc., ORXT engaged in developing and operating
      an online dating service.





Prior
      to
      the reorganization with United First International Limited (“UFI”), a company
      incorporated in the Hong Kong Special Administrative Region (“HK”) of the
      People’s Republic of China (the “PRC”), on March 31, 2005, ORXT was a
      development stage company, which, other than providing an online dating service,
      had no operations or revenues. After recapitalization, ORXT exited the
      development stage after March 31, 2005.





Upon
      the
      completion of the reorganization, ORXT assumed the business operations of UFI
      as
      primarily undertaken by its subsidiary, Beijing Orsus Xelent Technologies &
Trading Co., Limited (“BOXT”) (English translation for identification purpose
      only), an enterprise incorporated in Beijing, the PRC that is engaged in the
      business of design, retail and wholesale distribution cellular
      phones.






On
          July
          14, 2005, Orsus Xelent Holdings (BVI) Limited (“OXHBVI”) was incorporated in the
          British Virgin Islands (“BVI”) with issued capital of US$2. OXHBVI is 100% owned
          by ORXT and the principal activity of OXHBVI is investment holding. On
          July 22,
          2005, Orsus Xelent Trading (HK) Company Limited (“OXTHK”) was incorporated in HK
          with issued capital of HK$100 (equivalent to US$13), a company engaged
          in
          trading of cellular phone and accessories, and is 100% owned by
          OXHBVI.




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**






**Accounting
          principles**


The
          consolidated financial statements and accompanying notes are prepared in
          accordance with generally accepted accounting principles in the United
          States of
          America (“USGAAP”).




**Basis
          of consolidation**


The
      results of the subsidiaries acquired or disposed of during the year are
      consolidated from the effective dates of acquisition or to the effective dates
      of disposal, respectively.




All
      significant intercompany accounts and transactions have been eliminated upon
      consolidation.





**Revenue
      recognition**




Net
      sales
      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. The Company has a policy of
      including handling costs incurred for finished goods, which are not significant,
      in sales and marketing expenses.




F-6


**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**




2.  SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





**Research
      and development**


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





**Warranties**




The
      Company offers warranties for products it manufactures. Terms generally are
      for
      one year from the date of sale. Provision for warranty expense is established
      for costs that are expected to be incurred after the sales and delivery of
      products under warranty. The Company provided for anticipated warranty expense
      in the amount of US$81,000 and paid warranty claims of US$157,000 during the
      year ended December 31, 2006. The warranty provision is determined based on
      known product failures, historical experience of the level of repairs and
      replacements, and other currently available evidence.





**Income
      taxes**




Provision
      for income and other related taxes have been provided in accordance with the
      tax
      rates and laws in effect in various countries of operations.





Income
      tax expense is computed based on pre-tax income included in the consolidated
      statements of operations. Deferred income taxes are 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 of 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.





**Comprehensive
      income**




SFAS
      No.
      130, "Reporting Comprehensive Income", requires the presentation of
      comprehensive income, in addition to the existing statements of operations.
      Comprehensive income is defined as the change in equity during the year from
      transactions and other events, excluding the changes resulting from investments
      by owners and distributions to owners.





**Trade
      receivables**




Trade
      receivables are recorded at original invoice amount, less an estimated allowance
      for uncollectible accounts. Trade credit is generally extended on a short-term
      basis, thus trade receivables do not bear interest. Trade receivables are
      periodically evaluated for collectibility based on past credit history with
      customers and their current financial condition. Changes in the estimated
      collectibility of trade receivables are recorded in the results of operations
      for the year in which the estimate is revised. Trade receivables are presented
      net of an allowance for uncollectible amounts of US$230,000 and US$149,000
      as of
      December 31, 2006 and of 2005 respectively.





**Inventories**




Inventories
      are stated at the lower of cost or market. Potential losses from obsolete and
      slow-moving inventories are provided for when identified. Cost, which comprises
      all costs of purchase and, where applicable, other costs that have been incurred
      in bringing the inventories to their present location and condition, is
      calculated using the weighted average method. Market represents the estimated
      selling price in the ordinary course of business less the estimated costs of
      completion and the estimated costs necessary to make the sale.





F-7


**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Property,
      plant and equipment**




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





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 year 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 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 costs of property, plant and equipment over their
      useful lives from the date on which they become fully operational and after
      taking into account their estimated residual values, using the following
      methods:





Moulds
            
            Sum-of-the-units
                methodLeasehold
                improvements
            
            Straight-line
                method over the lease termMachinery
                and equipment
            
            Straight-line
                method at 20% p.a.Office
                equipment
            
            Straight-line
                method at 20% p.a.Motor
                vehicles
            
            Straight-line
                method at 20% p.a.





**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 payables
      under
      operating leases are recognized as expenses on the straight-line basis over
      the
      lease terms.




F-8




**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**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 functional currency are translated into 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 year.





Translation
      adjustments, when material, resulting from this process are recorded in
      accumulated other comprehensive income within stockholders’ equity.





**Cash
      equivalents**




The
      Company considers short-term, highly liquid investments with original maturities
      of three months or less to be cash equivalents.





**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 year. 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, inventory allowance, provision for warranty, taxes and
      contingencies.





**Segment
      information**




Operating
      segments are defined as components of a company about which separate financial
      information is available that is evaluated regularly by the operating decision
      maker in deciding how to allocate resources and in assessing performance. The
      Company operates in a single business segment of trading of cellular phones





The
      Company adopted SFAS No. 131, “Disclosure about Segments of an Enterprise and
      Related Information”. The Company’s results of operations and financial position
      were affected by the implementation of SFAS No. 131 as it operates in more
      than
      one geographical areas. Segment information is disclosed in note 3 to the
      consolidated financial statements.




F-9


**Orsus
          Xelent Technologies, Inc.**
 
 **Notes
          to Consolidated Financial Statements**




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**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.





**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.




**3.**  **CONCENTRATIONS**





The
      Company is engaged principally in the design and trading of cellular phones
      primarily to three dealers in the PRC. The Company buys certain major products
      from five major suppliers. In addition, the Company subcontracts material
      purchasing and assembly works of cellular phones mainly to three subcontracting
      factories. Management believes that the sole agent arrangement gives the dealers
      more incentive to promote the Company’s products and reduce the Company’s
      exposure to the distribution market. On the other hand, the diversification
      of
      suppliers will reduce the risk of increasing production cost.





(a)
            Customers
                accounted for over 10% of the Company's operating revenues are as
                follows:





**2006**
            
            2005%
            
            
            %*Customer
                A*
            
            
            **53**
            
            
            56*Customer
                B*
            
            
            **19**
            
            
            20*Customer
                C*
            
            
            **15**
            
            
            -*Customer
                D*
            
            
            **-**
            
            
            20





No
      trade
      deposit was received from the above customers as of December 31, 2006. Trade
      receivables from the above customers were US$31,425,000 and US$11,359,000 as
      of
      December 31, 2006 and December 31, 2005, respectively.




F-10


**Orsus
          Xelent Technologies, Inc.**
 
 **Notes
          to Consolidated Financial Statements**




**3.**  **CONCENTRATIONS
      (CONTINUED)**





(b)
            Suppliers
                accounted for over 10% of the Company's purchases are as
                follows:





**2006**
            
            2005%
            
            %*Supplier
                A*
            
            
            **20**
            
            
            12*Supplier
                B*
            
            
            **15**
            
            
            -*Supplier
                C*
            
            
            **15**
            
            
            -*Supplier
                D*
            
            
            **11**
            
            
            15*Supplier
                E*
            
            
            **10**
            
            
            19*Supplier
                F*
            
            
            **-**
            
            
            10*Supplier
                G*
            
            
            **-**
            
            
            14





Gross
      trade deposits paid to the above suppliers were US$6,753,000 and US$187,000
      as
      of December 31, 2006 and December 31, 2005 respectively. Trade payables owed
      to
      the above suppliers were US$1,348,000 and US$530,000 as of December 31, 2006
      and
      December 31, 2005 respectively.





(c)
            Geographical
                segments accounted for over 10% of the Company’s revenue are as
                follows:





**2006**
            
            2005**US*****$’000***
            
            *$*
            *US’000****Revenues****PRC*
            
            
            **60,001**
            
            
            27,841*Singapore*
            
            
            **8,107**
            
            
            -*Hong
                Kong*
            
            
            **-**
            
            
            864**68,108**
            
            
            28,705




**2006**
            
            2005**US*****$’000***
            
            *US$’000****Carrying
                amount of long-lived assets****PRC*
            
            
            **310**
            
            
            16*HK*
            
            
            **10**
            
            
            765*Total
                long -lived assets*
            
            
            **320**
            
            
            781*Reconciling
                items:**Others*
            
            
            **45,567**
            
            
            30,230**45,887**
            
            
            31,011




F-11




**Orsus
      Xelent Technologies, Inc.**





**Notes
      to Consolidated Financial Statements**





**4.** **INCOME
        TAXES**





The
      Company is subject to income taxes on an entity basis on income arising in
      or
      derived from the tax jurisdictions in which it operates. Provision for income
      and other related taxes have been provided in accordance with the tax rates
      and
      laws in effect in the various countries of operations.





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.





UFI
      was
      incorporated in Hong Kong and has no assessable profit for the years presented.
      OXTHK was also incorporated in Hong Kong and Hong Kong Profits Tax has been
      provided at the rate of 17.5% on OXTHK’s estimated assessable profits for the
      year.





Since
      BOXT has 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 for two years since 2005 followed by a 50%
      reduction for the next three years.





(a)
      Income tax expenses comprised the following:





**2006**
            
            2005**US$’000**
            
            
            U$S’000*Current
                tax**Hong
                Kong*
            
            
            **32**
            
            
            21*PRC*
            
            
            **1,215**
            
            
            -**1,247**
            
            
            21





(b)
      Reconciliation from the expected statutory tax rate in the PRC of 24% *(2005:
      24%)* is as
      follows:




**2006**
            
            2005***%***
            **
            *%**Statutory
                rate - PRC*
            
            
            **24.0**
            
            
            24.0*Difference
                in tax rates in the countries that the Company
                operates*
            
            
            **(0.1**
            **)**
            
            (0.1
            )*Tax
                exemption*
            
            
            **(14.7**
            **)**
            
            (23.8
            )*Non-deductible
                expenses*
            
            
            **6.3**
            
            
            0.6*Effective
                tax rate*
            
            
            **15.5**
            
            
            0.7




F-12
 
 **Orsus
          Xelent Technologies, Inc.**
 
 **Notes
          to Consolidated Financial Statements**




**5.** **EARNINGS
        PER SHARE**





Basic
      earnings per share is computed based on the net income for the year and on
      the
      weighted average number of shares of common stock outstanding during each period
      as restated as a result of the reorganization and recapitalization. The
      29,756,000 shares in connection with the recapitalization were included in
      the
      computation of earnings per share as if outstanding at the beginning of each
      period presented.





The
      Company had no potential common stock equivalents with a dilutive effect for
      any
      period presented, therefore basic and diluted earnings per share are the
      same.





**6.** **INVENTORIES**





Inventories
      consisted of the followings:




**2006**
            
            2005***US$’000***
            
            *US$’000*Raw
                materials
            
            
            **1,115**
            
            
            4,257Trading
                goods
            
            
            **115**
            
            
            203**1,230**
            
            
            4,460




**7.** **PLEDGED
        DEPOSIT**





The
                Company pledged this deposit to a guaranty company to secure the
                loan
                borrowing of US$6,268,000.





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





Property,
      plant and equipment is summarized as follows:




**2006**
            
            2005***US$’000***
            
            *US$’000*Moulds
            
            
            **107**
            
            
            1,239Leasehold
                improvements
            
            
            **115**
            
            
            112Plant
                and machinery
            
            
            **18**
            
            
            14Office
                equipment
            
            
            **266**
            
            
            255Motor
                vehicles
            
            
            **89**
            
            
            86**595**
            
            
            1,706Accumulated
                depreciation
            
            
            **(275**
            **)**
            
            (925
            )**320**
            
            
            781




F-13
 
  **Orsus
          Xelent Technologies, Inc.**
 
 **Notes
          to Consolidated Financial Statements**


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




The
                bank loans were guaranteed by the director, Mr. Liu Yu and a deposit
                paid
                to a guaranty company, and were charged at interest rate of 6.7%
                - 7.956%
                per annum and repayable between January 19, 2007 and August 20,
                2007.




**10.**
            **DISTRIBUTION
                OF INCOME**





The
      Company's income is substantially contributed by BOXT, a company incorporated
      in
      the PRC. Income of BOXT is distributable to its stockholders after transfer
      to
      dedicated reserves as required under its articles of association and relevant
      PRC rules and regulations.





Prior
      to
      the re-organization to a WOFIE in November 2004, dedicated reserves of BOXT
      include a statutory surplus reserve and a statutory public welfare fund. In
      accordance with the relevant PRC Companies Law and rules and regulations, it
      is
      required to transfer amounts equal to at least 10% and 5% of its after-tax
      income to the statutory surplus reserve and statutory public welfare fund,
      respectively.





The
      statutory surplus reserve can only be utilized to offset prior years' losses
      or
      for capitalization as paid-in capital, whereas the statutory public welfare
      fund
      shall be utilized for collective staff welfare benefits such as building staff
      quarters or housing. No distribution of the remaining reserves shall be made
      other than on liquidation of BOXT.





Since
      BOXT has became a WOFIE, in accordance with its Articles of Association and
      the
      relevant PRC regulations, it is required to transfer to a general reserve fund
      an amount not less than 10% of the amount of after-tax income and a staff
      welfare and bonus fund an amount to be determined by the directors. No such
      transfer was made in years presented.




**11.**
            **PENSION
                COSTS**





As
      stipulated by PRC regulations, the Company maintains a defined contribution
      retirement plan for all of its employees who are residents of PRC. All retired
      employees of the Company are entitled to an annual pension equal to their basic
      annual salary upon retirement. The Company contributed to a state sponsored
      retirement plan approximately 20% of the basic salary of its employees and
      has
      no further obligations for the actual pension payments or post-retirement
      benefits beyond the annual contributions. The state sponsored retirement plan
      is
      responsible for the entire pension obligation payable to all
      employees. The
      pension expenses were US$27,000 and US$15,000 for the years
      ended December 31, 2006 and 2005 respectively.




F-14
 
  **Orsus
            Xelent Technologies, Inc.**
 
 **Notes
            to Consolidated Financial Statements**


**12.**
            **RELATED
                PARTY TRANSACTION**





**a.**
            **Name
                and relationship of related
                parties**




**Related
                party**
            
            **Relationship
                with the Company during the year ended December 31,
                2006**Mr.
                Wang Xin
            
            Director
                and stockholder of the CompanyMr.
                Liu Yu
            
            Director
                and stockholder of the CompanyMr.
                Wang Zhibin
            
            Director
                and stockholder of the Company #





**b.**
            **Summary
                of related party balances**






**2006**
            
            2005***Note***
            
            ***US$’000***
            
            *US$’000***Due
                to directors**Mr.
                Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin
            
            
            *(i*
            *)*
            
            **330**
            
            
            320








**2006**
            
            2005***US$’000***
            
            *US$’000***Bank
                loans guaranteed by a director**Mr.
                Liu Yu
            
            
            **6,268**
            
            
            -





**c.**
            **Summary
                of related party
                transactions**






**2006**
            
            2005***US$’000***
            
            *US$’000***Repayment
                from related company**Beijing
                Huan Yitong Tech & Trading Co., Ltd. *
            
            
            **-**
            
            
            3,319





Note :





(i)
            The
                amounts are unsecured, interest-free and repayable on
                demand.





#
      Ceased
      to be a director since February 7, 2007


*
      Ceased
      to be related party since April 26, 2005.




F-15
 
  **Orsus
            Xelent Technologies, Inc.**
 
 **Notes
            to Consolidated Financial Statements**


**13.**  **COMMITMENTS
      AND CONTINGENCIES**





**(a)**
            **Operating
                lease commitments**





The
      Company leases certain staff quarters and office premises under non-cancelable
      operating leases. Rental expenses under operating leases were US$51,000 and
      US$83,000 for the year ended December 31, 2006 and 2005
      respectively.





The
      following table summarizes the approximate future minimum rental payments under
      non-cancelable operating leases in effect as of December 31, 2006 and
      2005:





**2006**
            
            2005***US$’000***
            
            *US$’000*2006
            
            **-**
            
            272007
            
            
            **27**
            
            
            27**27**
            
            
            54





**(b)**
            **Contingencies**





In
      accordance with PRC’s tax regulations, BOXT’s sales are subject to a 17% of
      value added tax (“VAT”) upon the issuance of VAT invoices to customers. BOXT
      follows the practice of reporting its revenue for VAT purposes when invoices
      are
      issued. As of December 31, 2006, there were sales amounted to approximately
      US$61,324,000 *(2005:
      US$21,300,000)* for
      which
      VAT invoices have not yet been issued.





Furthermore,
      BOXT reports its revenue for PRC enterprise income tax (“EIT”) purposes when VAT
      invoices are issued instead of when goods are delivered. All unbilled revenue
      will become taxable when invoice are issued.





The
      above
      practice is not in strict compliance with the relevant laws and regulations
      in
      respect of VAT and EIT. Despite the fact that BOXT has made full provision
      on
      VAT and EIT including surcharge in the financial statements, BOXT may be subject
      to a penalty for the deferred reporting of above tax obligations. The exact
      amount of penalty cannot be estimated with any reasonable degree of certainty.
      The board of directors considers it is more likely than not that the tax penalty
      will not be imposed.




F-16
 
  **SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act
      of 1934, the Registrant has duly caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized.


**ORSUS
                XELENT TECHNOLOGIES, NC.**By:
            /s/
              Wang
              XinWang
              XinChief
                Executive Officer


DATED:
      March 31, 2007







**POWER
      OF ATTORNEY**





The
      registrant and each person whose signature appears below hereby appoint Wang
      Xin
      as attorney-in-fact with full power of substitution, severally, to execute
      in
      the name and on behalf of the registrant and each such person, individually
      and
      in each capacity stated below, one or more amendments to the annual report
      which
      amendments may make such changes in the report as the attorney-in-fact acting
      deems appropriate and to file any such amendment to the report with the U.
      S.
      Securities and Exchange Commission.





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.




Signature
            
            Title
            
            Date/s/
                Wang Xin
            
            Chief
                  Executive Officer
            
            March
                  31, 2007Wang
                Xin
            
            (Principal
                Executive Officer) and Director/s/
                Zhao Hongwei
            
            Chief
                  Financial Officer
            
            March
                  31, 2007Zhao
                Hongwei
            
            (Principal
              Accounting Officer)/s/
                Naizhong Che
            
            Director
            
            March
                  31, 2007Naizhong
                Che




S-1




/s/
                Peng Wang
            
            Director
            
            March
                  31, 2007Peng
                Wang/s/
                Zhixiang Zhang
            
            Director
            
            March
                  31, 2007Zhixiang
                Zhang/s/
                Nathaniel K. Hsieh
            
            Director
            
            March
                  31, 2007Nathaniel
                K. Hsieh/s/
                Howard S. Barth
            
            Director
            
            March
                  31, 2007Howard
                S. Barth




S-2
 
  **Index
          to Exhibits**
  **Exhibit**
                  **Number**
                
                **Exhibit
                  Description**3.1
                
                Certificate
                    of Incorporation (1)3.2
                
                Bylaws
                    (1)10.1
                
                Securities
                    Exchange Agreement by and among Universal Flirts Corp, United
                    First
                    International Limited and the Shareholders of United First International
                    Limited (2)10.2
                
                National
                    Sales and Agency Contract by and among CEC Mobile Co. Ltd., Beijing
                    Prosperous Times Commercial & Trading Co., Ltd. and Beijing Orsus
                    Xelent Technology & Trading Company Limited dated May 26, 2004.
                    (2)10.3
                
                National
                    Sales and Agency Contract by and among CEC Mobile Co. Ltd., Beijing
                    Prosperous Times Commercial & Trading Co., Ltd. and Beijing Orsus
                    Xelent Technology & Trading Company Limited dated March 18, 2004.
                    (2)10.4
                
                National
                    lSales and Agency Contract by and among CEC Mobile Co. Ltd.,
                    Beijing
                    Prosperous Times Commercial & Trading Co., Ltd. and Beijing Orsus
                    Xelent Technology & Trading Company Limited dated April 29, 2004.
                    (2)10.5
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Chengxin Electronic Technology Co.,
                    Ltd.
                    dated May 28, 2004 (2)10.6
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Chengxin Electronic Technology Co.,
                    Ltd.
                    dated May 28, 2004 (2)10.7
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Chengxin Electronic Technology Co.,
                    Ltd.
                    dated May 28, 2004 (2)10.8
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Suncom Logidtics Limited dated April
                    14, 2004
                    (2)10.9
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Suncom Logistics Limited dated May
                    27, 2004
                    (2)10.10
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Suncom Logistics Limited dated May
                    27, 2004
                    (2)10.11
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Shanghai Suncom Logistics Limited dated May
                    27, 2004
                    (2)
  1
  10.12
                
                Purchase
                    Contract by and among Beijing Orsus Xelent Technology & Trading
                    Company Limited and Truly Semiconductor Co., Ltd. dated May 21,
                    2004
                    (2)10.13
                
                National
                    Sales and Agency Contract by and among CEC Mobile Co., Ltd. Beijing
                    Prosperous Times Commercial & Trading Co., Ltd. and Beijing Orsus
                    Xelent Technology & Trading Company Limited dated May 26, 2004
                    (2)10.14
                
                National
                    Sales and Agency Contract by and among CEC Mobile Co., Ltd. Beijing
                    Prosperous Times Commercial & Trading Co., Ltd. and Beijing Orsus
                    Xelent Technology & Trading Company Limited dated May 26, 2004
                    (2)21.1
                
                Subsidiaries
                    of the Company (3)24.1
                
                Power
                    of Attorney (set forth on signature page)31.1
                
                Certification
                    of Principal Executive Officer under Section 302 of the Sarbanes-Oxley
                    Act
                    of 2002 (3)31.2
                
                Certification
                    of Principal Financial Officer under Section 302 of the Sarbanes-Oxley
                    Act
                    of 2002 (3)32.2
                
                Certification
                    under Section 906 of the Sarbanes-Oxley Act of 2002
                    (3)


(1)  Incorporation
      by reference to the Company's Registration Statement on Form S-1, as amended
      (Registration No. 333-125687).


(2)  Incorporated
      by reference to the Company's Current Report on Form 8-K dated May 4,
      2005.


(3)  Filed
      herewith.




2