**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**









**FORM
      10-K/A**




**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)
            
            **20-1198142******
              (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:**




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




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




**None**





**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 29, 2007, the aggregate market value of the registrant’s common stock
      held by non-affiliates of the registrant was $50,170,400 based on the closing
      price as reported on the American Stock Exchange.** ****





**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 February 15****,
                2008****Common
                Stock, $.001 par value per share**
            
            **29,756,000****shares**








This
      Annual Report amends and supplements the Form 10-K of Orsus Xelent Technologies,
      Inc. for the fiscal year ended December 31, 2006, filed with the Securities
      and
      Exchange Commission on April 2, 2007, as follows:





**PART
      II**




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




The
      following graph compares the cumulative total return to shareholders on the
      Company’s common stock from April 30, 2005 (the first month quotations of the
      Company’s common stock were available) through December 31, 2007, relative to
      the cumulative total returns of the Russell Microcap Index + and a
      customized peer group of three companies, which are: Wireless Telecom Group,
      Inc., Axesstel Inc. and Wireless Xcessories Group, Inc. (the “Peer
      Group”).







page1




+
            The
                Russell Microcap Index is made up of the smallest 1,000 securities
                in the
                small-cap Russell 2000 Index plus the next smallest 1,000 securities
                trading on national exchanges. The index excludes lesser-regulated
                OTC
                bulletin board securities and pink-sheet stocks.





*
            $100
                invested on April 30, 2005 in stock or index, including reinvestment
                of
                dividends.


**4/30/05**
            
            **12/31/05**
            
            **12/31/06**
            
            **12/31/07****Orsus
                Xelent Technologies Inc.**
            
            
            100.00
            
            
            67.00
            
            
            98.00
            
            
            85.00**Russell
                Microcap**
            
            
            100.00
            
            
            117.81
            
            
            137.30
            
            
            126.31**Peer
                Group**
            
            
            100.00
            
            
            82.65
            
            
            74.01
            
            
            36.46





The
      stock
      price performance included in this graph is not necessarily indicative of future
      stock price performance.


1


**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 the consolidated financial statements and
      the
      notes to the consolidated financial statements starting on page F-1 and with
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.”





**Consolidated
                Statements of Operations**
            
            **Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004*****(in
                thousands, except share and per share
                amounts)***Revenues
            
            $
            68,108
            
            $
            28,705
            
            $
            70,822Operating
                Expenses
            
            
            60,102
            
            
            25,711
            
            
            62,164Other
                Income - Interest, net
            
            
            75
            
            
            544
            
            
            64Net
                Income
            
            
            6,718
            
            
            3,492
            
            
            8,699Weighted
                Average Common Shares Outstanding (Basic and diluted)
            
            
            29,756
            
            
            29,756
            
            
            29,756Net
                Income Per Common Share - Basic and Diluted
            
            
            0.23
            
            
            0.12
            
            
            0.29








**Consolidated
                Balance Sheets**
            
            **As
                of December 31,****2006**
            
            **2005**
            
            **2004*****(in
                thousands)***Current
                Assets
            
            $
            45,567
            
            $
            30,230
            
            $
            28,243Total
                Assets
            
            
            45,887
            
            
            31,011
            
            
            29,021Current
                Liabilities
            
            
            23,604
            
            
            16,072
            
            
            17,923Total
                Liabilities
            
            
            23,604
            
            
            16,072
            
            
            17,923Total
                Stockholders’ Equity
            
            
            22,283
            
            
            14,939
            
            
            11,098


2





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




The
      following table sets forth our statements of operations for the fiscal years
      ended December 31, 2006, 2005 and 2004, respectively:





**Results
                of Operations**
            
            **Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004*****(in
                thousands, except share and per share
                amounts)***Revenues
            
            $
            68,108
            
            $
            28,705
            
            $
            70,822Costs
                of Sales
            
            
            55,226
            
            
            22,272
            
            
            56,231Sales
                & Marketing Expenses
            
            
            1,045
            
            
            1,554
            
            
            3,314General
                & Admin Expenses
            
            
            1,560
            
            
            1,064
            
            
            1,435R&D
                Expenses
            
            
            255
            
            
            413
            
            
            586Depreciation
                & Amortization
            
            
            175
            
            
            310
            
            
            598Allowance
                for Obsolete Inventory
            
            
            1,387
            
            
            98
            
            
            -Allowance
                for Trading Deposit Receivable
            
            
            -
            
            
            -
            
            
            -Loss
                on Disposal of property, Plant and Equipment
            
            
            454
            
            
            -
            
            
            -Interest
                Expenses
            
            
            116
            
            
            25
            
            
            143Other
                Income, net
            
            
            75
            
            
            544
            
            
            64Income
                Before Taxes and Minority Interest
            
            
            7,965
            
            
            3,513
            
            
            8,579Minority
                Interest
            
            
            -
            
            
            -
            
            
            120Income
                Tax
            
            
            1,247
            
            
            21
            
            
            -Net
                Income
            
            
            6,718
            
            
            3,492
            
            
            8,699Weighted
                Average Common Shares Outstanding
            
            
            29,756
            
            
            29,756
            
            
            29,756Net
                Income Per Common Share -Basic and Diluted
            
            
            0.23
            
            
            0.12
            
            
            0.29




**Results
      of operation**





**Years
      Ended December 31, 2006 and 2005**





**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 providers in the second quarter of
      2006.





We
      continued cooperating with telecommunication operators 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 quarters.




3




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 is in line with the latest trends, including
      being ultra slim and using 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 demand in the market for
      this type of product.





In
      2006,
      we withdrew from the overseas market and restructured our product strategy
      to
      focus on the development of mobile phones for customers in the PRC. As an
      emerging enterprise, we believed it was very important to increase our market
      share in the large domestic market of the PRC.




*Products
      Segment*





For
      the
      year ended December 31, 2006, products which contributed over  10% of
      our
      revenues are shown as follows:




**Twelve
                months ended**
              **December
                31, 2006****$’000**
            
            
            **%
                of revenue**D8120
            
            
            10,805
            
            
            15.86
            %C8000
            
            
            10,442
            
            
            15.33
            %D8110
            
            
            10,124
            
            
            14.86
            %Daxian
                X5
            
            
            8,395
            
            
            12.33
            %Others
            
            
            17,923
            
            
            26.32
            %





In
      2006,
      we continued our self-developed handsets business and jointly cooperated 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 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 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). CDMA sales have
      sharply increased by $20,012,000, or 397.69%, as compared to $5,032,000 in
      fiscal year 2005.





4




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), and 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), and C109 (a low-end bar phone with colorful
      screen).





*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
            
            
            1,995
            
            
            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. (“XWSD”), CEC Cellular Limited
      (“CECM”) and CECT-Chinacomm Communications Co., Ltd (“CECT-Chinacom”) were
      $36,406,000, $12,902,000, and $10,485,000 respectively. XWSD has been one of
      the
      most important customers of Xelent for a long period of time. The sales to
      XWSD
      accounted for 53.45% of the total revenues in 2006. The other two major domestic
      customers accounted for 18.94% (CECM) and 15.39% (CECT-Chinacom) respectively.
      Both XWSD and CECM are distributors and dealers in mainland PRC, and their
      sales
      networks cover most of the major cities in the PRC. CECT-Chinacom is a new
      customer which began to cooperate with us from the fourth quarter of 2006.
      CECT-Chinacom is a telecommunication devices and services operator. In the
      overseas market, we distribute our products to two Singapore customers, 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.




5




**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 included sales and marketing, general
      and administrative and R & D expenses and depreciation 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
            
            
            1,045
            
            
            1.53
            %
            
            1,554
            
            
            5.41
            %
            
            (509
            )
            
            -32.75
            %General
                & Admin
            
            
            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
            %
            
            -
            
            
            -
            
            
            454
            
            
            100.00
            %**Total**
            
            
            60,102
            
            
            88.25
            %
            
            25,711
            
            
            89.57
            %
            
            34,391
            
            
            133.76
            %





*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
      reason 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. Additionally $8,107,000 of the sales in
      the
      second quarter of 2006 was 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 as a result of the increase of the portion of
      trading of cellular phones, where no after-sales service is provided for the
      trading activities.





6




*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 a 38.26% decrease, as compared with
      $413,000 or 1.44% of total revenues in the same period of 2005. This decrease
      in
      R&D expenses was attributable to an increase in our trading activities and
      the change of the business model to purchase mature projects instead of R&D
      independently. The reduction of staff further decreased our R&D
      expenses.





*General
      and administrative expenses*





General
      and administrative expenses primarily consisted 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 represented 2.29% of total revenue. Included in general and
      administrative expenses was an allowance for doubtful accounts amounting to
      $767,000, due primarily to the uncertainty of long outstanding accounts
      receivable and trade deposits. Except for the allowance factor, 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.
      Since the second half of 2005, we adjusted our business strategy and eliminated
      some personnel, which made ordinary staff costs, including wages and insurance
      for personnel, decrease.





*Allowance
      for repairs and returns*





For
      the
      twelve months ended December 31, 2006, the allowance for repairs and returns
      was
      $146,203, representing a decrease of $294,244 or 66.81% as compared to $440,447
      for the corresponding period in 2005.





**** *Allowance
      for obsolete inventories*





For
      the
      twelve months ended December 31, 2006, allowance for obsolete inventories was
      $1,387,000, which was due to the provision for certain aged materials of mobile
      models whose production had been terminated.





**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 represented
      a
      3.5% decrease, as compared to 22.41% for 2005.





The
      changes in our gross profit margin are attributable to:





1.
            Competition
                from domestic cellular manufacturers and overseas cellular providers
                through strategic price-cutting. We believe that the keys to strengthening
                our competitiveness in the market are our products strategy of providing
                tailor-made products to operators and supplying specialized application
                mobile terminals to end-users of special government and business
                sectors;
                diversification of our product lines to minimize competition from
                similar
                products in the market; and maintaining sufficient revenues streams
                and
                earning abilities.




7




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 was approximately
                15%





3.
            An
                increase in the sales of low-ended products. The demand for low-end
                products was stimulated by the reduction of monthly charges by
                telecommunications operators.




**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 of 12.17% in 2005. The improvement
      in our net profit was due primarily to the fact that we were successful in
      changing the new business strategy, and positioning in the domestic market
      played an important part in the increase in our net income. The improvement
      in
      net income was also a result of a 30% decline in labor costs resulting from
      our
      cost control efforts.





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
                amounted to $1,387,000 and $767,000, respectively, and the loss on
                the
                disposal of old models amounted to
                $454,000.





2.
            Income
                tax totaled $1,247,000 in 2006.




Other
      than the two factors above, our net profit was $10,573,000 and net profit margin
      reached 15.52%, representing an increase of $6,833,000, as compared to net
      income of $3,740,000 for 2005 (other than the provision of $98,000 and $141,000
      for obsolete inventories and for trade receivable doubtful accounts,
      respectively). Our profitability increased substantially in 2006.




8




**Years
      Ended December 31, 2005 and 2004**




**Revenues**




Our
      revenues for 2005 were $28,705,000 in 2005, representing a decrease of 59.47%
      as
      compared to the same period in 2004. The decrease was primarily due to fierce
      competition in the PRC cellular phone market. The cellular phone manufacturer’s
      enlarging production capability during the past years and the rapid growth
      of
      the industry, together with the accelerating speed of new products launched,
      all
      contributed to a shorter products lifecycle and over supply of obsolete
      inventory. Additionally, competition from the counterfeit and “black market”
cellular phones in the PRC market affected the operations and market environment
      of the PRC cellular phones industry. In order to meet changing market demands,
      we developed series of new products with innovative functions and extended
      our
      product lines by using our newly developed platform SpreadTrum and MTK in the
      second half of the year.




Our
      revenues increased from $3,440,000 in the first half of the year to $25,265,000
      in the second half of the year, representing 88.02% of the revenues for the
      year
      ended December 31, 2005. The significant growth in revenues was primarily due
      to
      the introduction of a series of new products with innovative functions, such
      as
      70A, 62+, 8205, 60+, M72 and M36. During 2005, multimedia cellular phones were
      the mainstream product in the market. We captured the latest demand trend of
      the
      domestic consumption market to launch new models with leading features including
      MP3, MPEG4, FM radio and large memory capacity. Such new products also generated
      a higher profit margin for us.




Additionally,
      in the second half of 2005, we changed our strategy to develop cellular phones
      for platforms other than the GSM system. We adopted a strategy to strengthen
      cooperation with telecommunications operators and other cellular phone
      manufacturers to provide solution consultation in the production of CDMA
      cellular phone model C100. The solution consultation included knowledge of
      the
      software application, field testing, mechanical and molding design and
      marketing. Through co-operation with telecommunications operators and other
      cellular phone manufacturers, we participated in the production of CDMA cellular
      phones and also built relationships with the telecommunications operators,
      providing us with opportunities to develop a potential CDMA market and generate
      additional orders from the telecommunications operators in the future. During
      this quarter, sales of C100 phones were $5,032,000, representing 17.53% of
      our
      revenues.




In
      addition, during this quarter, we commenced cellular phone trading activities
      with domestic and overseas customers. In the domestic market, we still can
      earn
      profits by using our existing strategic partners’ sales networks, although the
      margin would be lower than the sales of self-produced cellular phones. In the
      overseas market, we sold over 10,000 units of M18+ to a customer in Hong Kong
      during the last quarter of 2005.




*Product
      Segment*




For
      the
      year ended December 31, 2005, products contributing over 5% of our revenues
      are
      shown as follows:




**Twelve
                months ended**
              **December
                31, 2005****$’000**
            
            
            **%
                of revenue****C100**
            
            
            5,032
            
            
            17.53
            %**N108**
            
            
            2,326
            
            
            8.10
            %**8068**
            
            
            2,326
            
            
            8.10
            %**OS70+**
            
            
            1,959
            
            
            6.82
            %**K600**
            
            
            1,443
            
            
            5.03
            %




9




The
      sales
      of OS70+, represented 6.82% of our revenues and resulted from the new products
      launched in 2005. In the second half of 2005, total sales of new products were
      over $4,410,000, representing 15.36% of total revenues.




The
      sales
      of C100 amounted to $5,032,000, representing 17.53% of revenues, which was
      the
      result of cooperation with telecommunications operators. The trading activities
      generated from the sales of GSM cellular phones N108 and 8068 and CDMA cellular
      phone K600 were $2,326,000, $ 2,326,000 and $1,443,000, respectively,
      representing 8.10%, 8.10% and 5.03% of revenues, respectively. Through the
      introduction of new innovative features models and the development of new
      business streams, our revenues achieved stable growth since this
      quarter.





*Customers
      Segment*




**Twelve
                months ended**
              **December
                31, 2005****$’000**
            
            
            **%
                of revenue**Beijing
                Xingwang Shidai Tech & Trading Co., Ltd.
            
            
            16,175
            
            
            56.35
            %Hebei
                Mascot Communication Equipment Co., Ltd.
            
            
            5,871
            
            
            20.45
            %CEC
                Cellular Limited
            
            
            5,777
            
            
            20.13
            %Others
            
            
            882
            
            
            3.07
            %




Our
      revenues were primarily derived from three major customers. For the year ended
      December 31, 2005, our revenues were mainly generated from orders from Beijing
      Xingwang Shidai Tech & Trading Co., Ltd. (“XWSD”), Hebei Mascot
      Communication Equipment Co., Ltd. (“MASCOT”) and CEC Cellular Limited (“CECM”)
      were $16,175,000, $5,871,000 and $5,777,000 respectively, which represents
      56.35%, 20.45% and 20.13% of the revenue respectively. We established a
      strategic partnership with CECM and XWSD for a long period of time, both of
      which are provincial and national distributors and dealers, with sales networks
      covering most of the main cities of the PRC. MASCOT is a newly developed
      provincial distributor since the 3 rd quarter
      of 2005, and its sales networks cover most of the main cities of the PRC,
      particularly in the northern region.




It
      is our
      primary policy to broaden our distribution channels so as to minimize the
      concentration risk of few distributors. We will explore other opportunities
      to
      further develop our distribution channels. To enhance healthy competition,
      MASCOT is mainly responsible for distributing our old products. Through the
      cooperation with different strategic partners in different areas, we believe
      we
      can further extend our distribution channels and stimulate our revenues in
      the
      short-run and also strengthen our brand awareness.




**Other
      income, net**




For
      the
      year ended December 31, 2005, other income, net was $544,000, and accounted
      for
      1.62% of total revenue, as compared to $64,000, or 0.09% of total revenue for
      the corresponding period in 2004. Other income, net had a sharp period-to-period
      increase that is mainly due to a royalty fee rebate amounting to $309,000 in
      the
      2 nd quarter
      of 2005.




10




**Operating
      expenses**




For
      year
      ended December 31, 2005, operating expenses mainly included sales and marketing
      expenses, general and administrative expenses and R & D expenses shown as
      follows:




**Twelve
                months ended**
              **December
                31, 2005**
            
            
            **Twelve
                months ended**
              **December
                31, 2004**
            
            
            **Comparison****$’000**
            
            
            **%
                of revenue**
            
            
            **$’000**
            
            
            **%
                of revenue**
            
            
            **$’000**
            
            
            **%**Cost
                of sales
            
            
            22,272
            
            
            77.59
            %
            
            56,231
            
            
            79.40
            %
            
            (33,959
            )
            
            (60.39
            %)Sales
                & marketing exp.
            
            
            1,554
            
            
            5.41
            %
            
            3,314
            
            
            4.68
            %
            
            (1,760
            )
            
            (53.11
            %)General
                & admin. Exp.
            
            
            1,064
            
            
            3.71
            %
            
            1,435
            
            
            2.03
            %
            
            (371
            )
            
            (25.85
            %)R&D
            
            
            413
            
            
            1.44
            %
            
            586
            
            
            0.83
            %
            
            (173
            )
            
            (29.52
            %)Allowance
                for Obsolete Inventory
            
            
            98
            
            
            0.34
            %
            
            -
            
            
            -
            
            
            98
            
            
            100.00
            %Depreciation
            
            
            310
            
            
            1.08
            %
            
            598
            
            
            0.84
            %
            
            (288
            )
            
            (48.16
            %)**Total**
            
            
            25,711
            
            
            89.57
            %
            
            62,164
            
            
            87.77
            %
            
            (36,453
            )
            
            (58.64
            %)




*Cost
      of sales*




For
      the
      year ended December 31, 2005, our cost of sales were $22,272,000, representing
      77.59% of revenue, compared to $56,231,000 and 79.40% of revenue for the
      corresponding period in 2004. Compared to the corresponding period in 2004,
      the
      cost of sales had a period-to-period decrease of 60.39%, which corresponded
      with
      our sales revenues decrease of 59.47%. Although the fierce competition led
      to
      the cutting of sales prices for old products, the cost of sales percentage
      to
      revenues can be maintained through our effective control of raw materials used
      and negotiation of lower materials prices with suppliers, as well as the high
      profit margin of our new products launched in the second half of the
      year.




*Sales
      and marketing expenses*




Sales
      and
      marketing expenses mainly consisted of free-gifts and product models to
      customers and dealers respectively, the cost of provision for after-sales
      services, remunerations for sales personnel and development of our
      market.




For
      the
      year ended December 31, 2005, sales and marketing expenses were $1,554,000,
      accounting for 5.41% of the total revenues, as compared to $3,314,000, or 4.68%
      of total revenues for the corresponding period in 2004. Sales and marketing
      expenses had a period-to-period decrease of 53.11%. The percentage in total
      revenues increased from 4.68% to 5.41% as compared to the corresponding period
      in 2004 were due to the decrease of total revenue and the lack of change in
      expenses. A large portion of sales and marketing expenses were fixed expenses,
      such as remunerations for sales personnel. Compared to the period ended June
      30,
      2005, the percentage of total revenues decreased from 20.38% to 5.41% due to
      the
      sharp recovery of our revenues and our effective control of the cost of
      marketing, including remunerations for sales personnel, after-sales repair
      cost
      and free-gift and product model to customers and dealers.




11




*R&D
      expenses*




The
      R&D costs were $413,000 for the year ended December 31, 2005, which
      represented 1.44% of total revenue, compared with $586,000 and 0.83% of total
      revenue respectively in the same period in 2004. R&D expenses incurred in
      2004 were due to ADI platform development expenses and research expenses for
      several models of mobile phones. R&D expenses incurred in the year were due
      to development costs on platforms for SPREADTRUM and MTK (MediaTek), two
      dominant cellphone chip suppliers in the PRC. Some innovative features
      functions, such as MP3, MPEG4 and U-disk could be developed with the utilization
      of these new platforms.




Our
      R&D investment will allow us to respond to market changes quickly. We
      introduced many models of cellular phones with innovative functions this
      quarter, such as OS70+, M62+ and OX8205. We expect the investment in R&D
      activities to continue next year. We believe that our R&D activities will
      strengthen our technologies, reduce the costs of existing products and also
      provide future revenue streams through the launch of new innovative
      products.




*General
      and administrative expenses*




General
      and administrative expenses consisted of compensation for personnel, travel
      expenses, materials expenses related to ordinary administration and fees for
      professional services.




For
      the
      year of December 31, 2005, general and administrative expenses were $1,064,000,
      accounting for 3.71% of the total revenues, as compared to $1,435,000, or 2.03%
      of the total revenues for the corresponding period in 2004. General and
      administrative expenses had a period-to-period decrease of 25.85%. This decrease
      was due to a reduction in personnel and personnel compensation, and the
      reduction of daily expenses by economizing travel expenses and administrative
      expenses.




**Gross
      profit and gross margin**




For
      the
      year December 31, 2005, our gross profit was $6,335,000, which represented
      a
      decrease of 56.58% as compared to the gross profit of $14,591,000 in the same
      period in 2004. Our gross margin for the last quarter of 2005 increased slightly
      from 20.06% in 2004 to 22.07% in 2005.




A
      slight
      increase in our gross margin under fierce market competition is attributable
      to
      new products successfully launched into the market and changes in our product
      mix. Although our gross margin decreased due to price reductions for sales
      promotions, it was offset by the high gross margin of new products such as
      CDMA
      cellular phone C100. Overall, the gross margin slightly increased. We tried
      to
      make use of raw materials effectively and reduce materials prices by negotiating
      with suppliers in order to control our cost of sales.




**Net
      income**




For
      the
      year ended of December 31, 2005, net income was $3,492,000, as compared to
      $8,699,000 for the same period in 2004. The reduction is due to a difficult
      market environment since the fourth quarter of 2004, created by such factors
      as
      competition from ‘black market’ (counterfeit) cell phones in the PRC market and
      customer demand for music phones rather than camera phones. **** Compared
      with the second quarter of 2005, our net income increased sharply from a net
      loss of $524,000 to net income of $4,016,000 in the second half of
      2005.





12





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




Reference
      is made to pages F-1 through F-12 comprising a portion of this annual
      report on Form 10-K.




**PART
      III**




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




*Compensation
      Committee Interlocks and Insider Participation in Compensation
      Decisions*





During
      the last fiscal year, none of the Company’s executive officers served on the
      board of directors or compensation committee of any other entity whose executive
      officers served either the Company’s Board of Directors or Compensation
      Committee.





*Audit
      Committee Report*





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, and is composed
      of non-management Directors. It is currently composed of three independent
      Directors, Nathaniel K. Hsieh (Chair), Howard S. Barth and Zhixiang Zhang,
      and
      operates under the written Audit Committee charter adopted by the Board of
      Directors on February 7, 2007.





U nder
      its
      charter, the Audit Committee provides assistance and guidance to the Board
      in
      fulfilling its oversight responsibilities to the Company’s stockholders with
      respect to the Company’s corporate accounting and reporting practices as well as
      the quality and integrity of the Company’s financial statements and reports. The
      Company’s principal executive officer and principal financial officer have the
      primary responsibility for the financial statements and the reporting process,
      including the systems of internal controls. The Company’s independent auditors
      are responsible for auditing the Company’s financial statements and expressing
      an opinion on the conformity of the audited financial statements with generally
      accepted accounting principles. The Audit Committee’s responsibility is to
      monitor and oversee these processes.





As
      the Audit
      Committee had not held a meeting prior to the filing of the annual report on
      Form 10-K and the members of the Audit Committee were not involved in the review
      and approval of this annual report on Form 10-K, the Board of Directors as
      a
      whole reviewed
      and discussed the audited financial statements of the Company for the fiscal
      year ended December 31, 2006 with management and Moores
      Rowland Mazars ,
      the
      Company’s independent auditor. The Board of Directors as a whole discussed with Moores
      Rowland Mazars certain
      matters related to the conduct of the audit as required by Statement on Auditing
      Standards 61, as amended by Statement on Auditing Standards 90. In addition,
      the
      Audit Committee has received from Moores
      Rowland Mazars the
      written disclosures and the letter regarding the auditor’s independence required
      by Independence Standards Board Standard No. 1 and has discussed with Moores
      Rowland Mazars its
      independence.




13




In
      reliance on the reviews and discussions described above, the Board of Directors
      decided that the Company’s audited financial statements for the fiscal year
      ended December 31, 2006 be included in the Company’s Annual Report on Form 10-K
      for the year ended December 31, 2006.




The
      Board
      of Directors acting as a whole selected Moores
      Rowland Mazars as the
      Company’s independent auditors for the fiscal year ending December 31, 2007. Now
      that the Audit Committee has been established, the selection of auditors will
      be
      determined by the Audit Committee. This matter is not being submitted to the
      stockholders for approval as this is not required under applicable
      law.




Following
      the reorganization of Moores Rowland Mazars (the "Former Auditors") on June
      1,
      2007, eight of its partners have joined Mazars CPA Limited and the Former
      Auditors changed its name to Moores Rowland. As such, the Former Auditors
      resigned as the independent auditors of the Company, effective June 29, 2007.
      The Audit Committee of the Board of Directors of the Company (the "Audit
      Committee") approved the resignation of the Former Auditors on June 29, 2007.




As
      key
      members of the Former Auditors servicing the Company previously have joined
      Mazars CPA Limited, the Audit Committee appointed Mazars CPA Limited as the
      Company's new independent auditors (the "New Auditors"), effective from June
      29,
      2007.




BOARD
      OF
      DIRECTORS





Wang
      Xin


Liu
      Yu


Naizhong
      Che


Peng
      Wang


Zhixiang
      Zhang


Nathaniel
      K. Hsieh


Howard
      S.
      Barth





AUDIT
      COMMITTEE





Nathaniel
      K. Hsieh (Chair)


Howard
      S.
      Barth


Zhixiang
      Zhang




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





*Compensation
      Committee Report*





As
      of
      December 31, 2006, our Board of Directors had not established a compensation
      committee. The Compensation Committee was established subsequent to the fiscal
      year end on December 31, 2006, and is composed
      of non-management Directors. It is currently composed of Naizhong Che (Chair),
      Zhixiang Zhang and Peng Wang, each of whom is independent under applicable
      SEC
      and American Stock Exchange Rules. Prior to this time, the entire Board of
      Directors acted as the Compensation Committee. **** The
      Compensation Committee operates under the written Compensation Committee charter
      adopted by the Board of Directors on February 7, 2007 and approves salary
      practices and performance objectives for executive officers, including the
      Chief
      Executive Officer. The
      Compensation Committee also evaluates the performance of the executive officer
      in light of those goals and objectives, and determines the compensation for
      the
      executive officers.




14




The
      Company’s policy in compensating executive officers is to establish methods and
      levels of compensation that will provide strong incentives to promote its growth
      and profitability and reward superior performance. Compensation of executive
      officers consists solely of salary.





The
      Compensation Committee assesses the information it receives in accordance with
      its business judgment. All decisions with respect to executive compensation
      are
      approved by the Compensation Committee and recommended to the full Board of
      Directors for ratification. The Compensation Committee also periodically reviews
      director compensation. All decisions with respect to director compensation
      are
      made by the Compensation Committee and presented to the full Board of Directors
      for a final determination.





As
      the
      Compensation Committee had not
      held a meeting prior to the filing of the annual report on Form 10-K and the
      members of the Compensation Committee were not involved in the review and
      approval of this annual report on Form 10-K, the Board of Directors as a whole
      the Compensation Discussion and Analysis (“CD&A”) for the year ended
      December 31, 2006 with management. In reliance on such reviews and discussions,
      the Board of Directors as a whole decided that the CD&A be included in this
      Proxy Statement and the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006.





BOARD
      OF
      DIRECTORS





Wang
      Xin


Liu
      Yu


Naizhong
      Che


Peng
      Wang


Zhixiang
      Zhang


Nathaniel
      K. Hsieh


Howard
      S.
      Barth





COMPENSATION
      COMMITTEE





Naizhong
      Che (Chair)


Zhixiang
      Zhang


Peng
      Wang





15





**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)21.1
            
            Subsidiaries
              of the
              Company (2)24.1
            
            Power
              of Attorney (2)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 SB-2,
                as
                amended (Registration No.
                333-125687).




(2)
            Incorporated
                by reference to the Company's Annual Report on Form 10-K as filed
                with the
                SEC on April 2, 2007.




(3)
            Filed
                herewith.





16





**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-18









**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 ended December 31, 2006 and
      2005 and 2004. 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 ended December 31, 2006 and 2005 and 2004 in conformity with accounting
      principles generally accepted in the United States of America.






/S/ Mazars
      CPA Limited





**Mazars
      CPA Limited**


*Certified
      Public Accountants*


Hong
      Kong


Date:
      January 17, 2008




F-1


**Orsus
      Xelent Technologies, Inc.**





**Consolidated
      Statements of Operations**


Years
      ended December 31, 2006, 2005 and 2004





***Note***
            
            **2006**
            
            2005
            
            2004***US$’000***
            
            *US$’000*
            
            *US$’000***Operating
                revenues - Net sales**
            
            
            
            
            
            **68,108**
            
            
            28,705
            
            
            70,822**Operating
                expenses:**Cost
                of sales
            
            
            
            
            
            **55,226**
            
            
            22,272
            
            
            56,231Sales
                and marketing
            
            
            
            
            
            **1,045**
            
            
            1,554
            
            
            3,314General
                and administrative
            
            
            
            
            
            **1,560**
            
            
            1,064
            
            
            1,435Research
                and development
            
            
            
            
            
            **255**
            
            
            413
            
            
            586Depreciation
            
            
            
            
            
            **175**
            
            
            310
            
            
            598Allowance
                for obsolete inventories
            
            
            
            
            
            **1,387**
            
            
            98
            
            
            -Loss
                on disposal of property, plant andequipment
            
            
            
            
            
            **454**
            
            
            -
            
            
            -Total
                operating expenses
            
            
            
            
            
            **60,102**
            
            
            25,711
            
            
            62,164**Operating
                income**
            
            
            
            
            
            **8,006**
            
            
            2,994
            
            
            8,658Interest
                expense
            
            
            
            
            
            **(116**
            **)**
            
            (25
            )
            
            (143
            )Other
                income, net
            
            
            
            
            
            **75**
            
            
            544
            
            
            64**Income
                before income taxes and minority interest**
            
            
            
            
            
            **7,965**
            
            
            3,513
            
            
            8,579Income
                taxes
            
            
            *5*
            
            
            **(1,247**
            **)**
            
            (21
            )
            
            -**Income
                before minority interest**
            
            
            
            
            
            **6,718**
            
            
            3,492
            
            
            8,579Minority
                interest
            
            
            
            
            
            **-**
            
            
            -
            
            
            120**Net
                income**
            
            
            
            
            
            **6,718**
            
            
            3,492
            
            
            8,699**Other
                comprehensive income**Foreign
                currency translation adjustment
            
            
            
            
            
            **626**
            
            
            349
            
            
            -**Comprehensive
                Income**
            
            
            
            
            
            **7,344**
            
            
            3,841
            
            
            8,699**Earnings
                per share**Basic
                and diluted (US$)
            
            
            *6*
            
            
            **0.23**
            
            
            0.12
            
            
            0.29**Weighted
                average number of common shares outstanding**
            
            
            
            
            
            **29,756,000**
            
            
            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
            
            
            *7*
            
            
            **1,230**
            
            
            4,460Trade
                deposits paid
            
            
            
            
            
            **8,989**
            
            
            10,580Advance
                to third party
            
            
            
            
            
            **288**
            
            
            -Other
                current assets
            
            
            
            
            
            **86**
            
            
            182Pledged
                deposit
            
            
            *8*
            
            
            **1,128**
            
            
            -Total
                current assets
            
            
            
            
            
            **45,567**
            
            
            30,230Property,
                plant and equipment, net
            
            
            *9*
            
            
            **320**
            
            
            781**Total
                assets**
            
            
            
            
            
            **45,887**
            
            
            31,011**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities**Short-term
                bank loan
            
            
            *10*
            
            
            **6,268**
            
            
            -Accounts
                payable - Trade
            
            
            
            
            
            **10,964**
            
            
            7,939Accrued
                expenses and other accrued liabilities
            
            
            
            
            
            **4,444**
            
            
            2,238Trade
                depositsreceived
            
            
            
            
            
            **251**
            
            
            5,432Due
                to directors
            
            
            *13*
            
            
            **330**
            
            
            320Provision
                for warranty
            
            
            
            
            
            **53**
            
            
            122Tax
                payables
            
            
            
            
            
            **1,294**
            
            
            21Total
                current liabilities
            
            
            
            
            
            **23,604**
            
            
            16,072**Commitments
                and contingencies**
            
            
            *14***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 sharesAuthorized,
                issued and outstanding: 29,756,000 shares as of December 31, 2006
                and as
                of December 31, 2005
            
            
            
            
            
            **30**
            
            
            30Additional
                paid-in capital
            
            
            
            
            
            **2,484**
            
            
            2,484Dedicated
                reserves
            
            
            *11*
            
            
            **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, 2005 and 2004




**Common
                stock issued****No.
                of****shares**
            
            **Amount**
            
            **Additional**
                  **paid-in**
                  **capital**
            
            **Dedicated**
                **reserves**
            
            **Other**
                  **comprehensive**
                  **income**
            
            **Retained**
                    **earnings/**
                    **(Accumulated**
                    **losses)**
            
            ***Total****US$’000*
            
            *US$’000*
            
            *US$’000*
            
            *US$’000*
            
            *US$’000*
            
            *US$’000*Balance
                as of January 1, 2004
            
            
            15,000,000
            
            
            15
            
            
            2,549
            
            
            -
            
            
            -
            
            
            (115
            )
            
            2,449Reverse
                merger and recapitalization
            
            
            14,756,000
            
            
            15
            
            
            (65
            )
            
            -
            
            
            -
            
            
            -
            
            
            (50
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,699
            
            
            8,699Transfer
                to dedicated reserves
            
            
            -
            
            
            -
            
            
            -
            
            
            1,042
            
            
            -
            
            
            (1,042
            )
            
            -Balance
                as of December 31, 2004
            
            
            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, 2005 and 2004





**2006**
            
            2005
            
            2004***US$’000***
            
            *US$’000*
            
            *US$’000***Cash
                flows from operating activities****Net
                income**
            
            
            **6,718**
            
            
            3,492
            
            
            8,699Adjustments
                to reconcile net income to net cash used in operating
                activities:Depreciation
            
            
            **175**
            
            
            310
            
            
            598Loss
                on disposal of property, plant and equipment
            
            
            **454**
            
            
            -
            
            
            7Allowance
                for doubtful accounts
            
            
            **767**
            
            
            149
            
            
            -Allowance
                for obsolete inventories
            
            
            **1,387**
            
            
            98
            
            
            269Interest
                expense
            
            
            **116**
            
            
            -
            
            
            -Loss
                on liquidation of a subsidiary
            
            
            **-**
            
            
            -
            
            
            120Minority
                interest
            
            
            **-**
            
            
            -
            
            
            (120
            )Exchange
                difference
            
            
            **151**
            
            
            53
            
            
            -Changes
                in assets and liabilities:Accounts
                receivable - trade
            
            
            **(19,072**
            **)**
            
            (3,715
            )
            
            (8,250
            )Inventories,
                net
            
            
            **1,989**
            
            
            1,376
            
            
            (5,687
            )Trade
                deposits paid
            
            
            **1,245**
            
            
            (2,239
            )
            
            (8,125
            )Other
                current assets
            
            
            **102**
            
            
            34
            
            
            (149
            )Trade
                deposits received
            
            
            **(5,359**
            **)**
            
            2,879
            
            
            2,487Accounts
                payable - trade
            
            
            **2,765**
            
            
            (6,266
            )
            
            13,651Provision
                for warranty
            
            
            **(73**
            **)**
            
            (65
            )
            
            182Accrued
                expenses and other accrued liabilities
            
            
            **2,133**
            
            
            1,317
            
            
            959Provisionfor taxation
            
            
            **1,272**
            
            
            21
            
            
            -**Net
                cash (used in) provided by operating activities**
            
            
            **(5,230**
            **)**
            
            (2,556
            )
            
            4,641**Cash
                flows from investing activities**Purchase
                of property, plant and equipment
            
            
            **(156**
            **)**
            
            (503
            )
            
            (1,397
            )Proceeds
                from sales of property, plant andequipment
            
            
            **-**
            
            
            -
            
            
            43Repayment
                from a related company
            
            
            **-**
            
            
            3,407
            
            
            4,524Loan
                to a related company
            
            
            **-**
            
            
            -
            
            
            (7,107
            )Loan
                to third party
            
            
            **(288**
            **)**
            
            -
            
            
            -Decrease
                (Increase) in restricted cash
            
            
            **-**
            
            
            2,395
            
            
            (2,333
            )Pledged
                deposit paid
            
            
            **(1,128**
            **)**
            
            -
            
            
            -Repayment
                from stockholders
            
            
            **-**
            
            
            -
            
            
            1,352**Net
                cash (used in) provided by investing activities**
            
            
            **(1,572**
            **)**
            
            5,299
            
            
            (4,918
            )**Cash
                flows from financing activities**Interest
                expense
            
            
            **(116**
            **)**
            
            -
            
            
            -Advance
                from stockholders
            
            
            **-**
            
            
            1
            
            
            311Borrowing
                from bank
            
            
            **6,268**
            
            
            -
            
            
            -**Net
                cash****provided
                by****financing
                activities**
            
            
            **6,152**
            
            
            1
            
            
            311**Net
                (decrease) increase in cash and cash equivalents**
            
            
            **(650**
            **)**
            
            2,744
            
            
            34**Cash
                and cash equivalents, beginning of the year**
            
            
            **2,974**
            
            
            224
            
            
            190**Exchange
                gain on cash and cash equivalents**
            
            
            **97**
            
            
            6
            
            
            -**Cash
                and cash equivalents, end of the year**
            
            
            **2,421**
            
            
            2,974
            
            
            224**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**


Years
      ended December 31, 2006 and 2005 and 2004




**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.





As
      described in Note 2 below, 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.**  **REORGANIZATION**





(a)
            Reorganization





On
      March
      18, 2005, the board of directors approved a 4-for-1 forward split of its issued
      and outstanding common stock with a record date of March 28, 2005.





Pursuant
      to a Stock Transfer Agreement dated March 29, 2005, ORXT 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 ORXT’s common stock. Subsequently, ORXT had
      14,756,000 shares of its common stock outstanding.





(b)
            Recapitalization





Effective
      on March 31, 2005, ORXT completed a stock exchange transaction with the
      stockholders of UFI. Pursuant to the Securities Exchange Agreement, ORXT issued
      15,000,000 shares of its common stock to the stockholders of UFI, in exchange
      for 20,000,000 outstanding shares of UFI and cash payment of US$50,000 from
      UFI.
      After giving effect to the exchange, ORXT had 29,756,000 shares of its common
      stock outstanding. As a result of the exchange, UFI became a wholly-owned
      subsidiary of ORXT.




F-6


**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2006 and 2005 and 2004


**2.**  **REORGANIZATION
      (CONTINUED)**




(b)
            Recapitalization
                (Continued)





For
      accounting purposes, the transaction has been treated as a recapitalization
      of
      UFI with ORXT being the legal survivor and UFI being the accounting survivor
      and
      the operating entity. That is, the historical financial statements prior to
      March 31, 2005 are those of UFI, even though they are labeled as those of ORXT.
      Retained earnings of the accounting survivor, UFI, is carried forward after
      the
      recapitalization. Operations prior to the recapitalization are those of the
      accounting survivor, UFI. Earnings per share for periods prior to the
      recapitalization are restated to reflect the equivalent number of shares. Upon
      completion of the transaction, the financial statements become those of the
      operating company, with adjustments to reflect the changes in equity structure
      and receipt of the assets/liabilities of the public shell, ORXT. Accordingly,
      the Company’s stockholders’ equity as of December 31, 2004 has been
      recapitalized and restated.





Following
      the recapitalization, ORXT held 100% of the issued and outstanding shares of
      UFI
      and UFI became a wholly-owned subsidiary of ORXT. In this report, ORXT, UFI,
      BOXT Sapphine, OXHBVI and OXTHK are collectively referred to as the
“Company”.





(c)
            Merger
                under common control





UFI
      was
      incorporated in Hong Kong on September 8, 2004 and was 20%, 40% and 40% owned
      by
      Mr. Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin respectively. UFI has had no
      operations since its incorporation.





Pursuant
      to the agreement entered into between UFI and Mr. Wang Xin, Mr. Liu Yu and
      Mr.
      Wang Zhibin, who owned 20%, 40% and 40% interests respectively in BOXT on
      November 1, 2004, UFI consummated a merger with BOXT, and paid USD1,207,000,
      to
      all owners of Xelent, in exchange for all their beneficial interests in BOXT
      (“the Agreement”). BOXT was
      established in the PRC on May 6, 2003 as a PRC company with limited liability.
      The principal activities of BOXT were the development of cellular phones
      software and technology, including the design and trading of cellular
      phones.





On
      November 3, 2004, the Beijing Municipal Bureau of Commerce (the “Bureau”)
      approved the transfer of interests and the application for the change of BOXT
      status to a wholly-owned foreign investment enterprise (“WOFIE”) with limited
      liability. Upon granting WOFIE status, the operating period of BOXT was for an
      initial term of 10 years until November 9, 2014 and UFI became the sole
      registered owner of BOXT.




F-7


**Orsus
      Xelent Technologies, Inc.**





**Notes
      to Consolidated Financial Statements**


Years
      ended December 31, 2006 and 2005 and 2004




**2.**  **REORGANIZATION
      (CONTINUED)**





(c)
            Merger
                under common control (Continued)





Consistent
      with the provisions of Statement of Financial Accounting Standards (“SFAS”) No.
      141 “Business Combinations”, transfers of net assets or exchanges of equity
      interests between entities under common control do not constitute business
      combinations. Because UFI and Xelent were beneficially owned by the same
      stockholders group, Mr. Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin, immediately
      before and after the combination, the Agreement has been accounted for as a
      combination of entities under common control on a historical cost basis in
      a
      manner similar to a pooling of interests. In accordance with USGAAP, the
      accompanying financial statements of the Company have been prepared as if the
      Merger had occurred and UFI had been incorporated at the beginning of the
      earliest period presented, as of May 6, 2003.





**3.**  **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.





**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.




F-8


**Orsus
      Xelent Technologies, Inc.**





**Notes
      to Consolidated Financial Statements**


Years
      ended December 31, 2006 and 2005 and 2004


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





**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.





**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.




F-9


**Orsus
      Xelent Technologies, Inc.**





**Notes
      to Consolidated Financial Statements**


Years
      ended December 31, 2006 and 2005 and 2004


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





**Property,
      plant and equipment (Continued)**




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 termPlant
                and machinery
            
            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 term.





**Foreign
      currency translation**




The
      Company considers Renminbi as its functional currency as a substantial portion
      of the Company’s usiness 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.




F-10


**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2006 and 2005 and 2004





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





**Foreign
      currency translation (Continued)**




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 separated 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 4 to the
      consolidated financial statements.





**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**




In
      June,
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes” (FIN 48). This interpretation clarified the accounting for
      uncertainty in income taxes recognized in the financial statements in accordance
      with SFAS Statement No. 109 “Accounting for Income Taxes” (SFAS 109).
      Specifically, FIN 48 clarifies the application of SFAS 109 by defining a
      criterion that an individual tax position must meet for any part of the benefit
      of that position to be recognized in an enterprise’s financial statements.
      Additionally, FIN 48 provides guidance on measurement, derecognition,
      classification, interest and penalties, accounting in interim periods of income
      taxes, as well as the required disclosure and transition. This interpretation
      is
      effective for fiscal years beginning after December 15, 2006. The Company is
      currently evaluating what effects the adoption of FIN 48 will have on the
      Company’s consolidated financial position and results of
      operations.




F-11


**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2006 and 2005 and 2004


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





**Recently
      issued accounting standards (Continued)**




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




**4.**  **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 materials 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
              
              2004***%***
              
              ***%***
              
              ***%****Customer
                  A*
              
              
              **53**
              
              
              56
              
              
              21*Customer
                  B*
              
              
              **19**
              
              
              20
              
              
              77*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$11,508,000 as
      of
      December 31, 2006 and December 31, 2005, respectively.





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




**2006**
            
            2005
            
            2004***%***
            
            *%*
            
            *%**Supplier
                A*
            
            
            **20**
            
            
            12
            
            
            -*Supplier
                B*
            
            
            **15**
            
            
            -
            
            
            -*Supplier
                C*
            
            
            **15**
            
            
            -
            
            
            -*Supplier
                D*
            
            
            **11**
            
            
            15
            
            
            -*Supplier
                E*
            
            
            **10**
            
            
            19
            
            
            -*Supplier
                F*
            
            
            **-**
            
            
            10
            
            
            44*Supplier
                G*
            
            
            **-**
            
            
            14
            
            
            -*Supplier
                H*
            
            
            **-**
            
            
            7
            
            
            10


F-12


**Orsus
      Xelent Technologies, Inc.**





**Notes
      to Consolidated Financial Statements**


Years
      ended December 31, 2006 and 2005 and 2004




**4.**  **CONCENTRATIONS
      (CONTINUED)**





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





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$529,000 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
              
              2004**Revenues**
              
              ***US$’000***
              
              *US$’000*
              
              *US$’000*PRC
              
              
              **60,001**
              
              
              27,841
              
              
              70,822Singapore
              
              
              **8,107**
              
              
              -
              
              
              -Hong
                  Kong
              
              
              **-**
              
              
              864
              
              
              -**68,108**
              
              
              28,705
              
              
              70,822




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




**5.**  **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.




F-13


**Orsus
      Xelent Technologies, Inc.**





**Notes
      to Consolidated Financial Statements**


Years
      ended December 31, 2006 and 2005 and 2004


**5.**  **INCOME
      TAXES (CONTINUED)**





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
              
              2004***US$’000***
              
              *US$’000*
              
              *US$’000*Current
                  taxHong
                  Kong
              
              
              **32**
              
              
              21
              
              
              -PRC
              
              
              **1,215**
              
              
              -
              
              
              -**1,247**
              
              
              21
              
              
              -




(b)
            Reconciliation
                from the expected statutory tax rate in the PRC of 24%*(2005:
                24%, 2004: 33%)*is
                as follows:




**2006**
              
              2005
              
              2004**%**
              
              *%*
              
              *%*Statutory
                  rate - PRC
              
              
              **24.0**
              
              
              24.0
              
              
              33.0Difference
                  in tax rates in the countries that the Company operates
              
              
              **(0.1**
              **)**
              
              (0.1
              )
              
              -Tax
                  exemption
              
              
              **(14.7**
              **)**
              
              (23.8
              )
              
              (33.0
              )Non-deductible
                  expenses
              
              
              **6.3**
              
              
              0.6
              
              
              -Effective
                  tax rate
              
              
              **15.5**
              
              
              0.7
              
              
              -




**6.**  **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.


F-14


**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2006 and 2005 and 2004





**7.**  **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


**8.**  **PLEDGED
      DEPOSIT**





The
                Company pledged this deposit to a guaranty company to secure the
                loan
                borrowing of US$3,710,000.





**9.**  **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




**10.**  **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 to August 20,
                2007.




F-15


**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2006 and 2005 and 2004


**11.**  **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.





**12.**  **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, US$15,000 and US$9,000 for the years
      ended December 31, 2006 and 2005 and 2004 respectively.





**13.**  **RELATED
      PARTY TRANSACTION**





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




**Related
                party**
            
            **Relationship
                with the Company**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 #





F-16


**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2006 and 2005 and 2004




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





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


***Note***
              
              **2006**
              
              2005***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
              
              2004**Repayment
                  from related companies**
              
              ***US$’000***
              
              *US$’000*
              
              *US$’000*Beijing
                  Huan Yitong Tech & Trading Co., Ltd. *
              
              
              **-**
              
              
              3,319
              
              
              3,788




Note :





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





#  Ceased
      to
      be a director since February 7, 2007




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





**14.**  **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,
      US$83,000 and US$126,000 for the year ended December 31, 2006 and 2005 and
      2004
      respectively.




F-17


**Orsus
        Xelent Technologies, Inc.**
 
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2006 and 2005 and 2004


**14.**  **COMMITMENTS
      AND CONTINGENCIES (CONTINUED)**




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





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**2005*
              
              
              **-**
              
              
              -*2006*
              
              
              **-**
              
              
              27*2007*
              
              
              **27**
              
              
              27**27**
              
              
              54




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





*Tax
      penalty*




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.





*Financial
      guarantee contract*




On
      June
      20, 2007, the Company entered into a guarantee contract to serve as guarantor
      of
      a bank loan amounting to approximately US$15,350,000 (equivalent to
      RMB120,000,000) to an independent third-party, CECT-Chinacom Communications
      Co.,
      Ltd. (“CECT”), from Beijing Rural Bank to provide CECT with capital for
      equipment purchases. Under the guarantee contract, the Company shall perform
      all
      obligations of CECT under the loan contract if CECT fails to perform its
      obligations as set forth in the loan contract, including, but not limited to,
      ceasing production, going out of business, dissolving the business, having
      its
      business license withdrawn, and filing for bankruptcy. No contingent liabilities
      had been provided for in the financial statements in respect of the financial
      guarantee.





F-18




**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, INC.**DATED:
                February 15, 2008
            By:
            /s/ Wang
              XinWang
                Xin
              Chief
                  Executive Officer




S
          -
          1




**Index
      to Exhibits**


**Exhibit**
                **Number**
              
              **Exhibit**
                **Description**3.1
              
              Certificate
                  of Incorporation (1)3.2
              
              Bylaws
                  (1)21.1
              
              Subsidiaries
                  of the Company (2)24.1
              
              Power
                  of Attorney (2)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 SB-2,
                as
                amended (Registration No. 333-125687).


(2)
            Incorporated
                by reference to the Company's Annual Report on Form 10-K as filed
                with the
                SEC on April 2, 2007.


(3)
            Filed
                herewith.