**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**


**______________**




**FORM
      10-K**




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





**For
      the fiscal year ended December 31, 2007**





**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:** **001-33456**




**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, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.**





**Large
                accelerated filer o**
            **Accelerated
                filer o****Non-accelerated
                filer o**
            **Smaller
                reporting company 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 March 31, 2008****Common
                Stock, $.001 par value per share**
            
            **29,756,000****shares**











**PART
      I**





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




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





**Introduction**





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





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




**Description
      of Business**





We,
      through the operations of Xelent, have been engaged since May 2003 in the
      business of designing, manufacturing and distributing economically priced
      cellular phones for retail and wholesale distribution. In February of 2004,
      Xelent registered “ORSUS” with the State Administration for Industry and
      Commerce in the People’s Republic of China (the “ *PRC* ”)
      as its
      product trademark, also known as “Orsus Cellular” within the
      industry.  In
      January 2007, the trademark “PROXLINK” was registered for the Company's
      specialized application mobile series. From April 2004 through the end of the
      third quarter of 2007, we sold over 1.6 million mobile phones.





Our
      cellular products are customarily equipped with leading features including
      1.8-inch to 2.8-inch CSTN (Color Super Twisted Nematic) or TFT (Thin Film
      Transistor) dual-color displays, up to 160 minutes video recording, up to 3
      million pixels photography, MP3 (Moving Picture Experts Group Audio Layer III),
      MPEG4 (Moving Picture Experts Group Audio Layer) and Universal disk (U disk)
      support, dual stereo speakers, e-mail messaging multimedia messaging, 40 to
      64
      polyphonic ring tones, slim bar-phone and flip-phone technology, ultra thin
      innovative lightweight design with handwriting and PDA functions, all at low
      to
      moderate price points.





We
      have
      established an industrial design center for the sole purpose of developing
      proprietary mobile phones reflecting features and designs that are favored
      by
      our PRC customers. Most of our mobile phones are designed by us for our
      exclusive sale and distribution with the remainder developed in conjunction
      with
      outside design firms. In addition, the long-term partners and manufacturers
      we
      employ to produce our cell-phones and accessories are the same experienced
      OEM
      plants utilized by global brands such as Motorola, Nokia or Ericsson. Our
      current operations include the purchase of raw materials and spare parts,
      outsourcing of manufacturing and customization, oversight of production and
      quality control at our OEM factories, and coordination of the distribution
      of
      the products to retailers and customers. In an effort to reduce our reliance
      on
      third-party manufacturers, we are currently in negotiations to acquire a factory
      to enable the self-production of our phones and accessories.




1




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





**Organizational
      Structure**





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





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





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





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





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





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





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





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





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





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





·
            Logistics
                Department, responsible for collecting phones from each maintenance
                station nationwide and sending the repaired phones to
                customers.





2





**Market
      Overview and Strategic Partners**




The
      penetration rate for cellular phones in the PRC was approximately 35% in 2006.
      According to the statistics issued by PRC Ministry of Information Industry
      on
      July 23, 2007, mobile subscribers in the PRC have grown by 40 million in the
      past half year to 502 million, which accounted for approximately 38% of the
      population of the PRC. Nokia, currently the industry’s most competitive mobile
      manufacturer and supplier, estimated there would be 630 million subscribers
      in
      the PRC by 2010.





According
      to In-Stat, 165 million multimedia phones will be sold in the PRC by 2011,
      representing a penetration rate of 81%. High-pixel camera phones will be the
      next competitive focus in the PRC’s multimedia phone market. Mobile phone makers
      are aiming to change cell phones into personal communication and entertainment
      centers. PRC mobile users show a strong preference for combined MP3
      players/mobile phones. Around 70% of PRC music phone and camera phone owners
      express strong interest in more high-end equipment. ABI Research forecasts
      total
      mobile video users at more than 32 million in 2008 in the PRC: about 27% of
      these consumers will use broadcasting technology, and 73% will use unicast
      streaming technology, while a number of viewers are likely to use both. Also,
      ABI Research forecasts approximately 715,000 mobile video users in Hong Kong
      in
      2008, of which 99% will be streaming users. In Taiwan, ABI Research forecasts
      that there will be over 1.5 million mobile video users in 2008, with 97%
      receiving content via streaming.





On
      February 26, 2006, the TD-SCDMA technology standard was officially announced
      as
      the 3G (Third Generation) technology standard in the PRC. However, sales of
      products incorporating the 3G have not developed as rapidly as generally
      anticipated (it was thought that 3G network construction and issuance of 3G
      licenses would be approved by the end of 2006). Although the granting of 3G
      licenses has been delayed until 2008 **,** once
      introduction to the market of products utilizing the 3G technology is commenced,
      Xelent should be in a good position to take advantage of this business
      opportunity. We have commenced the development of our own 3G cellular phone
      products, including 3G PCBA (3G technologies platform) and cellular phones
      with
      3G PCBA, based on our existing 2G and 2.5G cellular technologies and cooperation
      with our 3G solution and chips providers. Additionally, we are planning to
      join
      the TD-SCDMA Industry League, and we are working toward obtaining 3G cellular
      phones manufacturing licenses from the PRC government.





Our
      relationships with some strategic partners, CEC
      Cellular Limited (“ *CECM* ”), Beijing
      Xingwang Shidai Tech & Trading Co., Ltd. (“ *XWSD* ”) and
      CECT-Chinacom Communications Co., Ltd. (“ *CECT-Chinacom* ”) have
      helped us increase our market penetration. CECM serves as a manufacturer for
      our
      cellular phone products and also has its own sales network, which is currently
      utilized to resell our products to its own provincial and national sales
      distributors and dealers, thus increasing the distribution capabilities for
      our
      products. XWSD is also one of our major agents, selling our cellular phones
      to
      provincial distributors, city distributors and dealers.




3




More
      recently, in 2007, we signed a Letter of Procurement with Unicom Huasheng
      Telecommunications Technology Co. Ltd., a wholly-owned subsidiary of China
      Unicom, proposing to purchase 50,000 units of our Proxlink X180. In July 2007,
      an agreement was signed with Shanghai Yuede Computer Networking Engineering
      Co.,
      Ltd. (“ *SYCN* ”),
      a
      professional designer and developer of computer software and application
      systems, which works for The Shanghai Baoshan Municipal Administration
      Inspection Bureau to develop and launch a municipal networking management
      inspection system, where the Proxlink X180 is used by law executors as their
      wireless operations terminal. The cooperation with SYCN should further promote
      the adoption of the X180 in the municipal management system of other cities
      throughout the PRC, while also providing Orsus with an important, new
      application software development partner. Meanwhile, an agreement was signed
      with Beijing Enxiang Networking Engineering Company (“ *BENE* ”).
      BENE
      is authorized by two of the dominant PRC telecommunications operators, China
      Mobile and China Unicom, as their service provider partner to run the business
      through their entire network throughout the PRC. The cooperation with this
      entire network service provider company should bring us more support from these
      telecommunications operators and also build our recognition among their
      specialized users. Meanwhile, we have continued to extend our business range
      and
      share the charges by supplying telecomm services to specialized
      consumers.





Since
      we
      launched our first mobile phones in April 2004, our Orsus mobiles have
      maintained robust increases in sales for each period. The design of our Orsus
      mobiles continues to reflect our consideration and understanding of the habits
      and tastes of our customers in the PRC, and we incorporate such desirable
      features as overlapped dual screens and powerful color messaging and
      photography. The Orsus mobiles were introduced into the market as lower and
      moderately priced products and continued to gain popularity among consumers
      in
      the market following their launch in 2004. On November 23, 2004, the premier
      consulting firm, CCIDNET Information Technology Co., Ltd. granted the “2004 Most
      Potential Wireless Terminal Prize” to OS70, a mobile model of Orsus, during its
      Annual Exhibition in the PRC. In addition, in the high performance category,
      our
      M62 model was awarded the “2004 Most Fashionable Wireless Terminal Prize” during
      the same Annual Exhibition. These awards further evidenced the acceptance of
      Orsus mobiles by the industry and the market.





Building
      upon the Company’s firm foundation of success in 2004, we increased our focus on
      our R&D efforts and the expansion of our sales channels. In 2005, the
      Company incorporated multimedia features in response to changes in consumer
      preferences for mobile phone products, and the R&D successes and the strong
      sales of our multimedia mobile phones have reflected our excellent market
      competitiveness. We have also made developments in the super thin mobile phone
      market, which have resulted in sales that surpassed our successful multimedia
      mobile phones. We were also able to position ourselves well for the introduction
      of smart mobile phones in 2007, including the letter of intent for mobile
      subscriptions we executed with China Unicom, a large domestic telecommunication
      operator. In 2008, we will continue our development of product sales channels
      and cooperation with domestic mobile operators, expand our focus on the
      technology for business functions (including embedded GPS (Global Positioning
      System), PUSH MAIL and information safety), and set up information platforms
      for
      mobile products reflecting the operating demands of our industrial users
      (including the enforcement of industrial and commercial bureaus and office
      platform for lawyers, which will be distributed under the name
      Proxlink).




4




**Description
      of Products & Services**





Since
      2006, Xelent
      has developed and launched nearly 20 cellular phone models with attractive
      features and functions. We outsource the manufacturing of our products to
      unaffiliated third parties. Once our products have been manufactured, they
      are
      delivered to a network of unaffiliated national sales distributors (see
“ *Description
      of Current Business - Market Overview and Strategic Partners* ”)
      and
      dealers that, in turn, distribute the products to provincial sales distributors
      and dealers and these provincial sales distributors and dealers distribute
      our
      products to retailers throughout the PRC.





Within
      several months of our start in 2003, we established ourselves in the PRC mobile
      product market with our launch of the first mode of wrist mobile phone in the
      PRC. We followed this with single color dual screen mobiles, models F16 and
      F18,
      and a dual screen multi-color screen mobile, model FG25, in response to rapid
      growth of color screen mobile products in the PRC. In response to customer
      preferences, we equipped models F16 and F18 with cameras, laying the foundation
      for our R&D into camera and video functions and the introduction of many
      models of 300,000 pixel camera mobile products, including models FG830, FG850,
      OS83, OS85, OS70, OS86 and M851. We also met consumer demand with our launch
      of
      the 1M camera mobiles, models OSM62 and OSM72, which reflected a simple design
      style with multiple functions. We followed these early successes with many
      models of multimedia mobiles, such as K600, X188 and D8120. In 2007 we launched
      our X180 mobile information terminals to meet the market’s demand for
      information office products, providing swift and convenient mobile terminal
      products for industrial application and specific customers, such as China
      Unicom. In addition to those products listed above, we have also developed
      many
      models of GSM/GPRS mobiles, such as models N3200 and H8801. To meet changing
      market demands, we will continue to introduce products of economic prices and
      high performance that will reflect our advantages in appearance design and
      functional development and will continue to strengthen our competitiveness
      in
      the domestic PRC mobile sector.





**Research
      & Development**





Our
      R&D Department
      is responsible for new products research and the development of new
      technologies. It has made significant contributions to the Company's ability
      to
      quickly adjust our overall strategy, sustain advanced product development,
      and
      most importantly, enhance the technical strength and core competitive edge
      of
      the Company in the market. Most of our patented models and samples are developed
      exclusively by our R&D Department, i ncluding
      the first telecommunications terminal fully supporting the CDMA2000-1X protocol,
      the first watch-style wireless mobile, the first mobile made in China using
      three-color OLED organic EL secondary display with TFT main display, the first
      mobile made in China supporting four frequencies: 850/900/1800/1900MHz, the
      first mobile made in China with 64 polyphonic melody, the first mobile
      supporting a USB interface and 16M flash U-disk (NAND-FLASH), the first mobile
      made in China with an internal 300K camera, Ultra-red, EMS, MMS, JAVA and USB.
      At the Annual
      Conference on Network Application Technology, Beijing, held by CCID in February
      2007, our Model M62 received the Most
      Fashionable Cell Phone of 2004 award, and our Model OS70 won the Best Potential
      of 2004 award.




5




As
      3G
      technology continues to develop in the PRC, we anticipate that we will be able
      to develop our own 3G mobile phones based
      on
      both our own research and development efforts and cooperation with our strategic
      industry partners. We
      will
      put our efforts toward the development of products utilizing the TD-SCDMA and
      WCDMA standard. We have established a team for technology development, which
      includes members from our product planning division, project management division
      and industrial design center. Our p roduct
      planning division is responsible for constructing the
      medium term strategic plans and
      research and development scheduling. Our p roject
      management division administers
      our research and development efforts, overseas manufacturing and quality control
      of our products  and
      monitors costs, including human resource costs. Our i ndustrial
      design center is
      responsible for evaluating design plans provided by our R&D Department or by
      third party industrial design companies, confirming
      model structural design and tracing the issues on module
      production and quality.





In
      addition, we have continued to negotiate with several parties, including
      foreign 3G
      technology providers, such as Spreadtrum Communication (Shanghai) Inc.
      (“ *SCI* ”),
      and
      several 3G chipset and solution providers in order to prepare for the launch
      of
      3G services in coming year. Our strategic partners, such as SCI, develop 2.5G
      and 3G integrated circuit and provide 2.5G GPRS and 3G TD-SCDMA chipset and
      software development platforms and solutions. We believe our cooperation with
      these 3G technology providers and our cooperation on future research and
      development projects will help facilitate our entry into the 3G wireless
      market.





Furthermore,
      we have cooperation agreements with professional design houses, such as Shanghai Huntel
      Technology Limited and Tranzda Wireless, who are
      mainly involved with us in the design of MMI (U2), software and hardware
      testing, CTA (China Type Approval) certification, acquisition **** and
      phone
      main board **** updating
      and software adaptability testing. We are also working with our cooperative
      partners, such as Dalian
      Daxian Telecom Co., Ltd., to develop ID/MD
      and the layout of cellular phone main boards. Based on our research and
      development, we are able to design and develop new products. Whenever possible,
      we use and lease the instruments and equipment of other professional design
      houses, rather than purchasing it ourselves. In the area of software compiling,
      testing & updating, we utilize data cables and computers installed with
      professional software in a testing environment. All the computers and data
      cables are owned by Xelent.





In
      general, cell phone industry manufacturers of the PRC conduct their research
      and
      development based on the existing chip functions, which reflect in the form
      of
      application or interface level development. Both application level and interface
      level development is categorized as adaptability systems, while only protocol
      stack and source procedure development is recognized as software development.
      Therefore, there is no exclusive right or limited use of any such systems for
      us.





**Competition**





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




6




In
      addition to the pursuit of operational turnover of inventory, the Company will
      continue its two year strategy to increasingly stabilize its growth, which
      we
      believe will result in a sound increase in revenues and profits. We will also
      seek to launch our 3G products as soon as possible in order to take advantage
      of
      the open market and offer the products meeting consumer demands and trends
      before our competitors. Due to the short history of 3G products we can develop
      our brands and products in this immature market and compete strongly with all
      cell phone suppliers.




**Government
      Regulation** ****




There
      are
      limited government regulations restricting or having a material effect on
      Xelent, including but not limited to, any law, rule or regulation or any order,
      writ, judgment, injunction, decree, determination or award binding on or
      applicable to Xelent. In the PRC cellular market, cellular manufacturers are
      responsible for repair, replacement and return of cellular phone to customers
      within the warranty period in accordance with certain rules and regulation
      in
      the PRC.





The
      PRC
      cellphone industry is one of the most advanced in the world. The PRC government
      does not promulgate obstruction or entry-restricted industry policies.
      Meanwhile, the PRC owns a huge customer base and transaction system. Currently,
      the industry is a relatively free environment, and we expect that future policy
      will not adversely impact industrial development.





**Intellectual
      Property and Proprietary Rights**





Xelent
      has been approved to use “  ” as a
      registered trademark and the China Trademark Agency has distributed a
“Notification of Acceptance” with serial number ZC3878232SL. Xelent has also
      applied to use “Proxlink” as a trademark and it is expected to become a
      registered trademark after two years’ probation verified by the China Trademark
      Agency.





We
      utilize other intellectual property with partners pursuant to contracts or
      agreements in accordance with the governing laws and regulations of the
      PRC.





**Employees** ****





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





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




7




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





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




**RISKS
      RELATED TO OUR BUSINESS**





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




Our
      success depends substantially upon retaining our significant clients. We cannot
      guarantee that we will be able to retain long-term relationships or secure
      renewals of short-term relationships with our significant clients in the future.
      For the twelve months ended December 31, 2007, we had one major customers:
      Beijing Xingwang Shidai Tech & Trading Co., Ltd., which was responsible for
      over 92.35% of our revenues. We have developed and enhanced our relationship
      with them and positioned ourselves for long-term cooperation with them by taking
      the following steps:





·
            we
                assisted them in coordinating their sales channels and
                carriers;





·
            we
                ensured they received high performance products at the specified
                prices;
                and





·
            we
                responded to their feedback regarding consumer demands for our products
                and reacted by adjusting our product lines and providing them our
                most
                favorable products.





**Competition
      from providers of similar products and services could materially adversely
      affect our revenues and financial condition.**





The
      industry in which we compete is a rapidly evolving, highly competitive and
      fragmented market driven by consumer preferences and quickly evolving
      technology. Our competitors are comprised of overseas brands, such as Nokia,
      Motorola and Samsung, and domestic brands, such as Lenovo, Bird, Amoi, Changhong
      and Gionee, among others. We believe that the main competitive factors in the
      cell phone industry are effective marketing and sales, brand recognition,
      product quality, product placement and availability, niche marketing and
      segmentation. We expect competition to intensify in the future due to the
      increased number of competitors and the factors discussed below. Other
      companies, both foreign companies and Chinese enterprises, may also enter the
      PRC market with better products or services, greater financial and human
      resources and/or greater brand recognition. Competitors will also continue
      to
      improve or expand current products and introduce new products. There can be
      no
      assurance that we will be able to compete effectively or that we will have
      the
      significant resources in technical innovation, business development, advertising
      and marketing necessary to compete effectively and build our brand awareness.
      Remaining competitive will require substantial human and capital resources
      of us
      and further developing brand awareness of our products and services, features
      and functionality, and cost. We may also have to continue to rely on strategic
      partnerships for critical branding and relationship leverage, which partnerships
      may or may not be sufficient. We cannot assure that we will have sufficient
      resources to make these investments or that we will be able to make the advances
      necessary to be competitive. Increased competition may result in price
      reductions, reduced gross margin and loss of market share. Failure to compete
      successfully against current or future competitors could have a material adverse
      effect on the Company’s business, operating results and financial
      condition.




8




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





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





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





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





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





**The
      acquisition of a manufacturing facility is costly and such acquisition may
      not
      enhance our financial condition.**





The
      process of identifying and consummating an acquisition could result in the
      use
      of substantial amounts of cash, potentially dilutive issuances of equity
      securities and exposure to undisclosed or potential liabilities of acquired
      companies. In addition, even if we are successful in acquiring a manufacturing
      facility, there are no assurances that the operations of these businesses will
      enhance our future financial conditions. To the extent the business acquired
      does not remain competitive, some or all of the goodwill related to that
      acquisition could be charged against our future earnings, if any.





**Any
      acquisitions that we undertake could be difficult to integrate, disrupt our
      business, dilute stockholder value, and harm our operating
      results.**





We
      plan
      to review opportunities to buy other businesses or technologies that would
      complement our current products, expand the breadth of our markets and sales
      channels, enhance our technical capabilities, or otherwise offer growth
      opportunities. If we make any future acquisitions, we could issue stock that
      would dilute existing stockholders’ percentage ownership, incur substantial
      debt, or assume contingent liabilities.




9




Our
      experience in acquiring other businesses and technologies is limited. Potential
      acquisitions also involve numerous risks, including the following:





·
            problems
                integrating the purchased operations, technologies, products, or
                services
                with our own;





·
            unanticipated
                costs associated with the
                acquisition;





·
            diversion
                of management’s attention from our core businesses;





·
            adverse
                effects on existing business relationships with suppliers and customers;





·
            risks
                associated with entering markets in which we have no or limited prior
                experience;





·
            potential
                loss of key employees and customers of purchased organizations;





·
            increased
                costs and efforts in connection with compliance with Section 404
                of the
                Sarbanes-Oxley Act; and





·
            risk
                of impairment charges related to potential write-downs of acquired
                assets
                in future acquisitions.





Our
      acquisition strategy entails reviewing and potentially reorganizing acquired
      business operations, corporate infrastructure and systems, and financial
      controls. Unforeseen expenses, difficulties, and delays frequently encountered
      in connection with rapid expansion through acquisitions could inhibit our growth
      and negatively impact our profitability. We may be unable to identify suitable
      acquisition candidates or to complete the acquisitions of candidates that we
      identify. In addition, we may encounter difficulties in integrating the
      operations of acquired businesses with our own operations or managing acquired
      businesses profitably without substantial costs, delays, or other operational
      or
      financial problems.





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





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





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





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




10




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





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





**Unless
      we are able to take advantage of technological developments on a timely basis,
      we may experience a decline in a demand for our services or may be unable to
      implement our business strategy.**





Our
      industry is experiencing rapid change as new technologies are developed that
      offer consumers an array of choices for their communications needs. In order
      to
      grow and remain competitive, we will need to adapt to future changes in
      technology, to enhance our existing offerings and introduce new offerings to
      address our customers’ changing demands. If we are unable to meet future
      advances in competing technologies on a timely basis or at an acceptable cost,
      we could lose customers to our competitors. Technological advances, the
      introduction of new products, new designs and new manufacturing techniques
      could
      render our inventory obsolete, or it could shift demand into areas where we
      are
      not currently engaged. If we fail to adapt to those changing conditions in
      a
      timely and efficient manner, our revenues and profits would likely decline.
      To
      remain competitive, we must continue to incur significant costs in product
      development, equipment and facilities and to make capital investment. These
      costs may increase, resulting in greater fixed costs and operating expenses.
      As
      a result, we could be required to expend substantial funds for and commit
      significant resources to the following: research and development activities
      on
      existing and potential products; additional engineering and other technical
      personnel; advanced design, production and test equipment; manufacturing
      services that meet changing customer needs; and technological changes in
      manufacturing processes. Our future operating results will depend to a
      significant extent on our ability to continue to provide new products that
      compare favorably on the basis of time to market, cost and performance with
      the
      design and manufacturing capabilities and competing third-party suppliers and
      technologies. Our failure to increase our net sales sufficiently to offset
      these
      increased costs would reduce our profitability.





**Our
      research and development efforts may not lead to successful development of
      commercially viable or acceptable products, which could cause a decline in
      customer use of our products.**





The
      markets in which we compete are characterized by:





·
            rapidly
                changing technology;





·
            evolving
                industry standards and transmission protocols;





·
            frequent
                improvements in products and services; and





·
            fierce
                competition from well-funded and technologically advanced companies.




11




To
      succeed, we must continually improve our current products and develop and
      introduce new or enhanced products that adequately address the requirements
      of
      our customers and are competitive in terms of functionality, performance,
      quality and price. We are currently developing new 3G products, however, our
      research and development efforts may not lead to any new or enhanced products
      or
      generate sufficient market share to justify commercialization. For example,
      3G
      is a new and evolving technology, and we may not be able to recoup our research
      and development costs and expenses, we may not be able to serve our customers’
3G needs, and customers may refuse to purchase our products.





**Changes
      in industry standards, technology, customer requirements and government
      regulation could limit our ability to sell our products.**





The
      mobile phone market is characterized by changing end-user preferences and demand
      for new and advanced functions and applications on wireless handsets, rapid
      product obsolescence and price erosion, intense competition, evolving industry
      standards and wide fluctuations in product supply and demand. This requires
      us
      to continuously develop new products and enhance our existing products to keep
      pace with evolving industry standards and rapidly changing customer
      requirements. In order to encourage widespread market adoption of 2G, 2.5G,
      2.75G and 3G technologies, efforts have been made to develop industry standards,
      and we have designed our products to comply with these standards. Changes in
      industry standards, or the development of new industry standards, may make
      our
      products obsolete or negate the cost advantages we believe we have in our
      products.





Our
      business, operating results, financial condition and cash flows could be
      adversely affected by any decline in demand for our existing products, the
      introduction of products and technologies by our competitors that serve as
      a
      replacement or substitute for, or represent an improvement over, our existing
      products, technological innovations or new standards that our existing products
      do not address, or our inability to release enhanced versions of our existing
      products on a timely basis. We have begun to offer products based on the 3G
      standard promoted by the PRC government, and are focusing a significant portion
      of our product design and sales and marketing efforts on products that comply
      with such standard. We also are devoting significant resources to the
      development of solutions that will support certain 2.5G wireless standards
      and
      3G wireless standards. If the wireless standards for which we are developing
      products are not widely adopted by the market, we may not be able to sell these
      2.5G and 3G solutions and our revenue could decline. Because it is not
      practicable to develop products that comply with all current standards and
      standards that may be adopted in the future, our ability to compete effectively
      will depend on our ability to accurately select industry standards that will
      be
      widely adopted by the market and to design our products to support those
      relevant industry standards. We may be required to invest significant effort
      and
      to incur significant expense to redesign our products to address relevant
      standards. We may not have the financial resources to fund future innovations.
      If our products do not meet relevant industry standards that are widely adopted
      for a significant period of time, our revenue would decline, adversely affecting
      our operating results, business and prospects.




12




**If
      the wireless communication sector in China does not maintain its current pace
      of
      growth, or the PRC government does not issue the Company a 3G license in the
      near future, the profitability and future prospects of our business and our
      liquidity could be materially and adversely affected.**





Our
      future success depends on the continued growth of the PRC wireless communication
      industry. Any slowdown in the development of the wireless communication industry
      in China or reduction in our customers’ expenditures on mobile phone products
      and services may reduce market demand for our products and services.
      Alternatively, if the PRC government or other relevant regulatory authorities
      fail to allow construction of new wireless communication networks, or decide
      to
      terminate, delay or suspend construction or extension of new or existing
      wireless communication networks, the profitability and future prospects for
      our
      business could be materially and adversely affected.





The
      third
      generation wireless communication, or 3G, network deployment will require
      significant capital investment by PRC telecommunication operators, including
      investments in wireless coverage products and services, RF parts and components
      and wireless communication systems. Therefore, we believe that issuance of
      3G
      licenses will in general have a positive impact on the growth of our business.
      Until we receive our 3G license from the PRC government, the expected return
      on
      our investments in 3G technology is uncertain. Continued delay in the issuance
      of 3G licenses will negatively impact our business growth and
      liquidity.





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





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





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





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





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




13




**Our
      products may be subject to counterfeiting and/or imitation, which could harm
      our
      business and competitive position.**





We
      cannot
      guarantee that counterfeiting or imitation of our products will not occur in
      the
      future or that we will be able to detect it and deal with it effectively. Any
      occurrence of counterfeiting or imitation could impact negatively upon our
      corporate and brand image. In addition, counterfeit or imitation products could
      result in a reduction in our market share, a loss of revenues or an increase
      in
      our administrative expenses in respect of detection or prosecution.





**We
      have limited business insurance coverage** .





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





**Product
      defects or the failure of our products to meet specifications could cause us
      to
      lose customers and revenue or to incur unexpected
      expenses.**





If
      our
      products do not meet our customers’ performance or requirements, our customer
      relationships may suffer. Also, our products may contain defects or fail to
      meet
      product specifications. Any failure or poor performance of our products could
      result in:




·
            delayed
                market acceptance of our products;





·
            delayed
                product shipments;





·
            unexpected
                expenses and diversion of resources to replace defective products
                or
                identify and correct the source of errors;





·
            damage
                to our reputation and our customer relationships;





·
            delayed
                recognition of sales or reduced sales; and





·
            product
                liability claims or other claims for damages that may be caused by
                any
                product defects or performance
                failures.





If
      the
      limited warranty provisions in our contracts are unenforceable in a particular
      jurisdiction or if we are exposed to product liability claims that are not
      covered by insurance, a claim could harm our business.





**We
      may have difficulty collecting our accounts receivable.**





During
      the normal course of business, we extend unsecured credit to our customers.
      Typical credit terms require payment to be made within 90 days of the invoice
      date. We do not require collateral from our customers.




14




We
      regularly evaluate and monitor the creditworthiness of each customer on a
      case-by-case basis. We include any account balances that are determined to
      be
      uncollectible in the allowance for doubtful accounts. After all attempts to
      collect a receivable have failed, the receivable is written off against the
      allowance. Based on the information available to management, the Company
      believes that its allowance for doubtful accounts as of December 31, 2007 and
      December 31, 2006 were adequate, respectively. However, actual write-off may
      exceed the recorded allowance.





We
      currently offer and intend to offer open account terms to certain of our
      customers, which may subject us to credit risks, particularly in the event
      that
      any receivables represent sales to a limited number of customers or are
      concentrated in particular geographic markets. The collection of our accounts
      receivable and our ability to accelerate our collection cycle through the sale
      of accounts receivable is affected by several factors, including, but not
      limited to:





·
            our
                credit granting policies,





·
            contractual
                provisions,





·
            our
                customers’ and our overall credit rating as determined by various credit
                rating agencies,





·
            industry
                and economic conditions, and





·
            the
                customer’s and our recent operating results, financial position and cash
                flows.





Adverse
      changes in any of these factors, certain of which may not be wholly in our
      control, could create delays in collecting or an inability to collect our
      accounts receivable which could impair our cash flows and our financial position
      and cause a reduction in our results of operations.





**Our
      financial results may be affected by mandated changes in accounting and
      financial reporting.**





We
      prepare our financial statements in conformity with accounting principles
      generally accepted in the United States of America. These principles are subject
      to interpretation by the Securities and Exchange Commission and various bodies
      formed to interpret and create appropriate accounting policies. A change in
      these policies may have a significant effect on our reported results and may
      even retroactively affect previously reported transactions.





**The
      cyclical nature of the aluminum industry causes variability in our production
      costs and cash flows.**





Our
      costs
      of production depend on the market for primary aluminum, which is a highly
      cyclical commodity with prices that are affected by global demand and supply
      factors and other conditions. Historically, aluminum prices have been volatile
      and we expect such volatility to continue. These prices are driven, in part,
      by
      global demand for aluminum arising from favorable global economic conditions
      and
      strong demand in China.




15




**RISKS
      RELATED TO DOING BUSINESS IN** **THE
      PRC**





There
      are
      substantial risks associated with doing business in greater China, as set forth
      in the following risk factors.





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





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





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





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





**Because
      we depend on governmental agencies for a portion of our revenue, our inability
      to win or renew government contracts could harm our operations and reduce our
      profits.**





Our
      inability to win or renew Chinese government contracts could harm our operations
      and reduce our profits. Chinese government contracts are typically awarded
      through a regulated procurement process. Some Chinese government contracts
      are
      awarded to multiple competitors, causing increases in overall competition and
      pricing pressure. The competition and pricing pressure, in turn may require
      us
      to make sustained post-award efforts to reduce costs in order to realize
      revenues under these contracts. If we are not successful in reducing the amount
      of costs we anticipate, our profitability on these contracts will be negatively
      impacted. Finally, Chinese government clients can generally terminate or modify
      their contracts with us at their convenience.




**We
      rely on sales to the Chinese government and a significant decline in overall
      government expenditures or a delay in the payment of our invoices by the
      government could have a negative impact on our future operating
      results.**





We
      believe that some of the success and growth of our business will continue to
      depend on our ability to win government contracts. Many of our government
      customers are subject to budgetary constraints and our continued performance
      under these contracts, or award of additional contracts from these agencies,
      could be jeopardized by spending reductions or budget cutbacks at these
      agencies. Our operating results may also be negatively impacted by other
      developments that affect these government programs generally, including the
      following:





·
            adoption
                of new laws or regulations relating to government contracting or
                changes
                to existing laws or regulations;




16




·
            delays
                or changes in the government appropriations process; and





·
            delays
                in the payment of our invoices by government payment offices.





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





The
      PRC
      legal system is a civil law system based on written statutes. Unlike common
      law
      systems, it is a system in which decided legal cases have little value as
      precedent in the PRC. There are substantial uncertainties regarding the
      interpretation and application of PRC laws and regulations, including but not
      limited to the laws and regulations governing our business, or the enforcement
      and performance of our arrangements with customers in the event of the
      imposition of statutory liens, death, bankruptcy or criminal proceedings. In
      the
      late 1970s, the PRC government began to promulgate a comprehensive system of
      laws and regulations governing economic matters. The overall effect of
      legislation enacted over the past 20 years has significantly enhanced the
      protections afforded to foreign invested enterprises in the PRC. However, these
      laws, regulations and legal requirements are relatively recent are evolving
      rapidly, and their interpretation and enforcement involve uncertainties. New
      laws and regulations that affect existing and proposed future businesses may
      also be applied retroactively. These uncertainties could limit the legal
      protections available to foreign investors, such as the right of foreign
      invested enterprises to hold licenses and permits such as requisite business
      licenses.





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





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





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





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





·
            a
                general slowdown in the PRC
                economy.





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





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





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





·
            economic
                structure;




17




·
            level
                of government involvement in the
                economy;





·
            level
                of development;





·
            level
                of capital reinvestment;





·
            control
                of foreign exchange;





·
            methods
                of allocating resources; and





·
            balance
                of payments position.





As
      a
      result of these differences, our business may not develop in the same way or
      at
      the same rate as might be expected if the PRC economy were similar to those
      of
      the OECD member countries. As the PRC economy has been transitioning from a
      planned economy to a more market-oriented economy, the PRC government has
      implemented various measures to encourage economic growth and guide the
      allocation of resources by controlling payment of foreign currency-denominated
      obligations, setting monetary policy and imposing policies that impact
      particular industries or companies in different ways. While these measures
      may
      benefit the overall PRC economy, they may also have a negative effect on us,
      especially if such measures create an unfriendly environment for businesses
      in
      the technology sector of the economy.





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





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




18




**Because
      our revenues are generated in RMB and our results are reported in U.S. dollars,
      devaluation of the RMB could negatively impact our results of
      operations.**





The
      value
      of RMB is subject to changes in the PRC’s governmental policies and to
      international economic and political developments. In January, 1994, the PRC
      government implemented a unitary managed floating rate system. Under this
      system, the People’s Bank of China, or PBOC, began publishing a daily base
      exchange rate with reference primarily to the supply and demand of RMB against
      the U.S. dollar and other foreign currencies in the market during the previous
      day. Authorized banks and financial institutions are allowed to quote buy and
      sell rates for RMB within a specified band around the central bank’s daily
      exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange
      rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system
      by
      which the exchange rates are determined. This modification has resulted in
      an
      approximate 7.3% appreciation of the RMB against the U.S. dollar from July
      21,
      2005 to May 2, 2007. While the international reaction to the RMB revaluation
      has
      generally been positive, there remains significant international pressure on
      the
      PRC government to adopt an even more flexible currency policy, which could
      result in further fluctuations of the exchange rate of RMB against the U.S.
      dollar, including possible devaluations. As all of our net revenues are recorded
      in RMB, any future devaluation of RMB against the U.S. dollar could negatively
      impact our results of operations.





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





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





**Inflation
      in the PRC could negatively affect our profitability and
      growth.**





While
      the
      PRC economy has experienced rapid growth, such growth has been uneven among
      various sectors of the economy and in different geographical areas of the
      country. Rapid economic growth can lead to growth in the money supply and rising
      inflation. During the past decade, the rate of inflation in the PRC has been
      as
      high as approximately 20% and the PRC has experienced deflation as low as
      approximately minus 2%. If prices for our products and services rise at a rate
      that is insufficient to compensate for the rise in the costs of supplies such
      as
      raw materials, it may have an adverse effect on our profitability. In order
      to
      control inflation in the past, the PRC government has imposed controls on bank
      credits, limits on loans for fixed assets and restrictions on state bank
      lending. The implementation of such policies may impede economic growth. In
      October 2004, the People’s Bank of China, the PRC’s central bank, raised
      interest rates for the first time in nearly a decade and indicated in a
      statement that the measure was prompted by inflationary concerns in the PRC
      economy. In April 2006, the People’s Bank of China raised the interest rate
      again. Repeated rises in interest rates by the central bank would likely slow
      economic activity in the PRC which could, in turn, materially increase our
      costs
      and also reduce demand for our products and services.




19




**We
      are subject to the United States Foreign Corrupt Practices
      Act.**





We
      are
      required to comply with the United States Foreign Corrupt Practices Act, which
      generally prohibits United States companies from engaging in bribery or other
      prohibited payments to foreign officials for the purpose of obtaining or
      retaining business. In addition, we are required to maintain records that
      accurately and fairly represent our transactions and have an adequate system
      of
      internal accounting controls. Foreign companies, including some that may compete
      with us, are not subject to these prohibitions, and therefore may have a
      competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft
      and other fraudulent practices occur from time-to-time in the PRC, particularly
      in our industry since it deals with contracts from the Chinese Government,
      and
      our executive officers and employees have not been subject to the United States
      Foreign Corrupt Practices Act prior to the completion of the Exchange Agreement
      (defined herein). If our competitors engage in these practices they may receive
      preferential treatment from personnel of some companies, giving our competitors
      an advantage in securing business or from government officials who might give
      them priority in obtaining new licenses, which would put us at a disadvantage.
      We can make no assurance that our employees or other agents will not engage
      in
      such conduct for which we might be held responsible. If our employees or other
      agents are found to have engaged in such practices, we could suffer severe
      penalties and other consequences that may have a material adverse effect on
      our
      business, financial condition and results of operations.





**RISKS
      RELATED TO** **OUR
      COMMON STOCK**





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





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





·
            actual
                or anticipated fluctuations in our quarterly operating
                results,





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





·
            changes
                in financial estimates by securities
                analysts,





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





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





·
            additions
                or departures of key personnel,





·
            potential
                litigation, or





·
            conditions
                in the cellular phone market.





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




20




**Stockholders
      could experience substantial dilution** .





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





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





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





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





50.41%
      or
      15,00,000 shares of our common stock are held by three stockholders, including
      30.25% held by our executive officers and directors as a group. As a result,
      these stockholders are able to control the outcome of stockholder votes on
      various matters, including the election of directors and extraordinary corporate
      transactions including business combinations. In addition, the occurrence of
      sales of a large number of shares of our common stock, or the perception that
      these sales could occur, may affect our stock price and could impair our ability
      to obtain capital through an offering of equity securities. Furthermore, the
      current ratios of ownership of our common stock reduce the public float and
      liquidity of our common stock which can in turn affect the market price of
      our
      common stock.





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





Not
      applicable.





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





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




21




The
      following is relevant information on our offices:





**Address**
            **Office
                / Production**
            **Process
                / Lease**
            **Monthly
                Rental (rmb)**
            **Monthly
                Rental (usd)**
            **Lease
                period**No.
                2, Unit 1, Building 2,Guanhaixi Plaza, Chuangye Road, Nanshan Dist.,
                Shenzhen
            Office
            Lease
            5,500.00
            741
            09/19/07
                to 02/19/0812thFloor, Tower B, Chaowai MEN Office Building, 26 Chaowai Street, Chaoyang
                Disc., Beijing
            Office
            --
                (1)
            50,000.00
            6,738
            01/08
                to 12/08No.185,
                Xinda Road, Hebei District, Tianjin
            Office
            --
                (2)
            --
            --
            --No.
                1, Fuyou Street, Airport Huoyun Road, Shunyi Dist.,
                Beijing
            Office
            --
                (3)
            --
            --
            --Room
                1502, Jubilee Centre, 18 Fenwick Street, 46 Gloucester Road, Wanchai,
                Hong
                Kong
            Office
            Lease
            19,500(HKD)
            2,471
            9/5/07
                to 9/4/09


________________


(1)  From
      May
      1, 2006 to December 31, 2006, there is a rent-free period for our headquarters
      in Beijing. We intend to renew the contract with landlord by the end of each
      year.


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


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





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





We
      are
      party to certain litigation/arbitration with regards to amounts payable to
      suppliers for  which
      the
      Company was not satisfied with the quality and timing of the goods
      supplied. However, the amount in question is not material to the Company
      and we believe that such litigation/arbitration will not have a material adverse
      effect on us or our business and that we will be able to resolve these issues
      through further business negotiations.




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




Our
      2007
      Annual Meeting of Stockholders was held on December 18, 2007. At the Annual
      Meeting, (i) each of our 7 nominees was elected to serve on the Board of
      Directors of the Company until the next Annual Meeting of Stockholders, and
      (ii)
      the proposed 2007 Omnibus Long-Term Incentive Plan (the “ *2007
      Omnibus Plan* ”)
      was
      approved by the stockholders. The election results are as follows:





The
      voting results for the election of Directors were as follows:





**Nominated
                Person**
            
            **Votes
                For**
            
            **Votes
                Against**Wang
                Xin
            
            
            21,003,808
            
            
            27,156Liu
                Yu
            
            
            21,003,808
            
            
            27,156Naizhong
                Che
            
            
            21,000,308
            
            
            27,156Peng
                Wang
            
            
            21,003,808
            
            
            27,156Zhixiang
                Zhang
            
            
            21,003,808
            
            
            27,156Nathaniel
                K. Hsieh
            
            
            21,001,008
            
            
            27,156Howard
                S. Barth
            
            
            20,986,608
            
            
            44,556




No
      stockholders withheld their vote. No other person received any
      votes.




22




The
      voting results for the approval of the 2007 Omnibus Plan were as
      follows:





**Votes
                received**For
            15,931,664Against
            61,147Abstain
            22,046





*Description
      of the 2007 Omnibus Plan*





The
      purpose of the 2007 Omnibus Plan is to assist the Company in attracting,
      retaining, and rewarding high-quality executives, employees, directors and
      other
      persons who provide services to the Company, enabling such persons to acquire
      or
      increase a proprietary interest in the Company and to strengthen the mutuality
      of interests between such persons and to provide annual and long-term incentives
      to expend their maximum efforts in the creation of shareholder value. The 2007
      Omnibus Plan will be administered by the Compensation Committee, such other
      committee as determined by the Board of Directors, or a subcommittee consisting
      solely of non-employee, outside directors. The 2007 Omnibus Plan does not limit
      the availability of awards to any particular class or classes of Eligible
      Employees. If an award were to lapse or rights to an award otherwise were to
      terminate, the shares subject to the award would be available for future awards
      to the extent permitted by applicable federal securities laws. Awards granted
      under the 2007 Omnibus Plan are not transferable, except in the event of the
      participant's death. In the event of a change in control, a right to exercise
      that was not previously exercisable and vested shall become fully exercisable
      and vested at the time of change in control. The total number of shares reserved
      and available for delivery in connection with awards under the 2007 Omnibus
      Plan
      shall be 4,500,000.





Awards
      to
      Eligible Employees under the 2007 Omnibus Plan will be made in the form of
      stock
      options, stock appreciation rights (“ *SARs* ”),
      restricted stock, restricted stock units (“ *RSUs* ”)
      and
      annual incentive and performance awards. The Compensation Committee, in its
      sole
      discretion, designates whom is eligible to receive awards, determines the form
      of each award, determines the number of shares of stock subject to each award,
      establishes the exercise price of each award and such other terms and conditions
      applicable to the award as the Compensation Committee deems
      appropriate.





Stock
      option awards can be either incentive or non-incentive. In either case, the
      exercise price of the option would not be less than the fair market value of
      the
      underlying shares as of the date the award is granted. Options would become
      exercisable at such times as may be established by the Compensation Committee
      when granting the award. No stock option could be exercised more than ten years
      after the date the option is granted.





A
      SAR
      allows the holder, upon exercise, to receive the excess of the fair market
      value
      of one share of Common Stock of the Company on the date of exercise over the
      grant price of the SAR. The Compensation Committee shall determine the
      circumstances under which a SAR may be exercised, the month of exercise and
      method of settlement. SARs may be awarded independently or in tandem with other
      awards.




23




Restricted
      stock awards are awards of shares subject to such restrictions as to
      transferability and risk of forfeiture as imposed by the Compensation Committee,
      which restrictions may lapse separately under such circumstances such as
      achievement of performance goals and/or future service requirements. Except
      to
      the extent restricted under the terms of the 2007 Omnibus Plan, any employee
      granted restricted stock shall have all the rights of a shareholder including
      the right to vote and receive dividends.





The
      Compensation Committee is authorized to grant RSUs to participants which are
      rights to receive stock, cash, or a combination thereof at the end of a
      specified deferral period. The Compensation Committee is also authorized to
      grant stock as a bonus or to grant stock in lieu of


obligations
      to pay cash under the 2007 Omnibus Plan or under other compensatory
      arrangements.





The
      Board
      of Directors of the Company may amend or terminate the 2007 Omnibus Plan at
      any
      time, except that any amendment or alteration to the 2007 Omnibus Plan shall
      be
      contingent on the approval of the Company's shareholders not later than the
      annual meeting next following such Board action if such shareholder approval
      is
      required by any federal or state law or regulation or the rules of any stock
      exchange, provided that, without the consent of an affected Participant, no
      such
      Board action may materially and adversely affect the rights of such Participant
      under any previously granted and outstanding award.




**PART
      II**




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





Shares
      of
      our common stock have been listed for trading on AMEX under the ticker symbol
      “ORS” since May 10, 2007. The following table sets forth the quarterly average
      high and low bid prices per share for our common stock for the two most recently
      completed fiscal years in the period that ended on December 31,
      2007:





**Fiscal
                Year Ended**
            
            **Common
                Stock****High**
            
            **Low****December
                31, 2006**First
                Quarter
            
            $
            2.40
            
            $
            1.85Second
                Quarter
            
            $
            2.60
            
            $
            1.90Third
                Quarter
            
            $
            2.06
            
            $
            1.10Fourth
                Quarter
            
            $
            3.00
            
            $
            1.60**December
                31, 2007**First
                Quarter
            
            $
            4.04
            
            $
            2.55Second
                Quarter
            
            $
            5.60
            
            $
            3.05Third
                Quarter
            
            $
            4.05
            
            $
            2.00Fourth
                Quarter
            
            $
            7.90
            
            $
            2.25




24




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





**Holders** .





As
      of
      March 31, 2008, we had approximately 2,500 stockholders of our common stock
      of
      record, and our common stock had a closing bid price of $2.37 per
      share.





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





As
      of
      December 31, 2007, there were no warrants or options outstanding to acquire
      any
      shares of our common stock.





**Preferred
      Stock** .





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





There
      are
      no shares of preferred stock outstanding.





**Dividends
      and Related Policy** .





We
      do not
      expect to declare or pay any cash dividends on our common stock in the
      foreseeable future, and we currently intend to retain future earnings, if any,
      to finance the expansion of our business. The decision whether to pay cash
      dividends on our common stock will be made by our board of directors, in their
      discretion, and will depend on our financial condition, operating results,
      capital requirements and other factors that the board of directors considers
      significant.





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





As
      of the
      fiscal year ended December 31, 2007,





**Plan
                category**
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected at
                left)**Equity
                compensation plans approved by security holders
            0(1)
            --(1)
            4,500,000Equity
                compensation plans approved by security holders
            None
            None
            NoneTotal
            
            
            4,500,000





(1)
            As
                of December 31, 2007, no securities, options, warrants or rights
                have been
                issued under the 2007 Omnibus Plan approved by our security holders
                on
                December 18, 2007.




25




**Transfer
      Agent and Registrar.**





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





**Recent
      Sales of Unregistered Securities** .





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





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




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





**Purchases
      of Equity Securities by the Issuer and Affiliated
      Purchasers.**





None.




26


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





The
      following selected financial data has been extracted from our financial
      statements for the year ended December 31, 2007. 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,****2007**
            
            **2006**
            
            **2005**
            
            **2004*****(in
                thousands, except share and per share
                amounts)***Revenues
            
            **$**
            **89,923**
            
            $
            68,108
            
            $
            28,705
            
            $
            70,822Operating
                Expenses
            
            
            **78,368**
            
            
            60,102
            
            
            25,711
            
            
            62,164Other
                Income - Interest, net
            
            
            **765**
            
            
            75
            
            
            544
            
            
            64Net
                Income
            
            
            **9,683**
            
            
            6,718
            
            
            3,492
            
            
            8,699Weighted
                Average Common Shares Outstanding (Basic and diluted)
            
            
            **29,756**
            
            
            29,756
            
            
            29,756
            
            
            29,756Net
                Income Per Common Share - Basic and Diluted
            
            
            **0.33**
            
            
            0.23
            
            
            0.12
            
            
            0.29




**Consolidated
                Balance Sheets**
            
            **As
                of December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004*****(in
                thousands)***Current
                Assets
            
            **$**
            **66,916**
            
            $
            45,567
            
            $
            30,230
            
            $
            28,243Total
                Assets
            
            
            **67,234**
            
            
            45,887
            
            
            31,011
            
            
            29,021Current
                Liabilities
            
            
            **33,332**
            
            
            23,604
            
            
            16,072
            
            
            17,923Total
                Liabilities
            
            
            **33,337**
            
            
            23,604
            
            
            16,072
            
            
            17,923Total
                Stockholders’ Equity
            
            
            **33,897**
            
            
            22,283
            
            
            14,939
            
            
            11,098




27




**Item
              7.**
            **Management
                Discussion and Analysis of Financial Conditions and Results of
                Operations**





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





The
      following discussion and analysis should be read in conjunction with our
      consolidated financial statements and the related notes thereto and other
      financial information contained elsewhere in this Form 10-K.





**OVERVIEW**





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





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





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





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




28




On
      April
      19, 2005, the Company, formerly known as Universal Flirts Corp., changed its
      list name to Orsus Xelent Technologies, Inc.




In
      July,
      2005, a wholly owned subsidiary, Orsus Xelent Trading (HK) Company Limited
      (“ *OXHK* ”),
      was
      incorporated under the laws of Hong Kong. This subsidiary is engaged in the
      trading of cellular phones and accessories with overseas customers. In September
      2005, OXHK commenced its Hong Kong operations to sell and distribute our
      cellular phone products and technical support services to customers outside
      the
      People’s Republic of China (the “ *PRC* ”).





The
      business operations of UFIL are conducted through its wholly-owned subsidiary,
      Xelent, which is also commonly called “Orsus Cellular” within the cellular phone
      industry. Xelent sells its handsets and total solutions, including economically
      priced and fully-loaded cell phones for both Global System for Mobile
      communications (“ *GSM* ”)
      and
      Code Division Multiple Access (“ *CDMA* ”)
      platforms, to a diverse base of customers and dealers, such as ordinary users,
      tailored operators, specialized users from all field of business or government.
      Most of our mobile phone models are either designed by us for both our exclusive
      distribution and joint sales under established co-brands, or developed in
      conjunction with outside design firms. In February 2004, Xelent registered
      “ORSUS” with the PRC State Administration for Industry and Commerce as its
      product trademark.





The
      cellular phone products produced by Xelent are customarily equipped with
      industry leading features, including 1.8-inch
      to 2.8-inch CSTN, TFT or QVGA dual-color display, 1
      minute
      to 4 hours video recording, 300K to 3 million pixel photography, MP3,
      MPEG4 and U disk support, dual stereo speakers, e-mail
      messaging, multimedia messaging, 40 to 64 ring tone storage, slim bar-phone
      & flip-phone technology and ultra thin innovative lightweight design. Xelent
      has sold approximately 1,792,300 cellular phones since its first product
      launched in 2004.





In
      the
      market of GSM mobiles, Xelent provided its handsets to all types of customers
      and dealers and continues to maintain good relationships with them. At present,
      the GSM mobile devices constitute a significant percentage of the sales and
      profit of the Company. In addition, Xelent has emphasized the development of
      specialized application mobile terminals in accordance with market changes
      and
      popular features. The Company has established itself in the specialized
      application field and made great efforts in its marketing since entering the
      field in September 2006. Based on its evaluation of the market and the
      engagement proposals received from its major customers, the Company began to
      produce X180 in large volumes starting in April 2007 and took advantage of
      the
      great opportunity to win the specialized application mobile terminal market.





In
      April
      2007, the Company’s common shares were approved for listing on the American
      Stock Exchange (“ *AMEX* ”),
      and
      began trading on AMEX on May 10, 2007 under the ticker symbol “ORS”. The
      Company's CUSIP Number is 68749U106.




29




**Business
      Review**





In
      the
      beginning of 2006, the Company made the strategic decision to set up cooperative
      relationships with telecom operators and suppliers to increase sales and orders
      for the Company. The benefits of this policy have been realized since the second
      quarter of 2007.





In
      early
      2007, the Company, like the majority of cell-phone makers, were optimistic
      that
      the PRC government would issue the 3G telecom commercial license in 2007, but
      this did not develop as expected. The
      Company and other cell-phone manufacturers currently expect  3G
      licenses will be
      released to China’s telecom carriers prior to August 8, 2008- the opening of
      Beijing Olympic Games. To this end, the Company still be
      able
      to take advantage of the tremendous business opportunities brought by the 3G
      mobile phone rollout and will focus on the implementation of 3G mobile
      technologies in the PRC. The Company will continue to negotiate and cooperate
      with many 3G design companies and expects to provide qualified samples to China
      Mobile for testing **** to
      obtain
      its 3G licenses .





In
      the
      past two years, the Company has been examining
      possible opportunities to
      purchase a production facility. The Company has been trying to increase the
      value of fixed assets and restructure the pattern of its development, both
      of
      which has seen great progress in 2007. The Company is planning to put more
      efforts to its analysis
      of potential acquisitions and
      expects to fulfill its industrialized development strategy in the first half
      year of 2008. Specifically, we are planning to join into the TDS-CDMA Industry
      League, and are working toward obtaining 3G cellular phones manufacturing
      licenses for the Company (or its holding company) from the PRC government in
      2008. The Company has positioned itself well to take advantage of this
      opportunity.





To
      further its goal of becoming less
      reliant on third-party manufacturers, the Company is continuing its discussions
      with Hebei Lemon Times Communications Equipment Manufacturing Co. Ltd.
      (“ *Lemon
      Times* ”)
      to
      acquire a factory and will consummate the acquisition upon the completion of
      negotiations and its due diligence of the target company. By the end of 2007,
      both the Company and the factory were
      still  continuing
      their negotiations
      and reviews and are addressing any uncertainties that arise as a result
      of the
      initial audit conducted. The Company has decided to expend
      additional time and effort in this endeavor and expects to
      complete the acquisition in the second quarter of 2008. The completion of the
      acquisition of Lemon Times would mean the Company would change from OEM
      production to independent production of its own-brand mobile phones.





The
      Company’s management team has become more experienced and has a clearer focus on
      sales targets and its distribution market. Furthermore, the Company optimized
      the organization of its operations during the last year. The newly setup
      business center has begun to strengthen the ties between the Company, the market
      and its customers. Meanwhile, the Company continued to work diligently to expand
      its customer base, including that of our traditional cellphones, our tailor-made
      products for telecomm operators, and our specialized application mobile
      terminals, such as mobile TV, mobile Stock and Mobile Law Enforcement terminals,
      including a continued push into the field of specialized applications. Even
      with
      these initiatives, the Company continued to grow its traditional markets, as
      evidenced by the great contribution it made to the fiscal year’s highlights. For
      the fiscal year ended December 31, 2007, we have achieved a 32.03% increase
      in
      operational revenues and 44.15% increase in net profit as compared to the same
      period last year.





Throughout
      2007, although the Company did not make significant
      changes regarding its
      specific operations or undertake changes and initiatives in response  to
      China's macroeconomic industrial policies, the Company still saw a strong growth
      of its operational revenues. In addition the Company made overall adjustments
      and innovations in its business model. The new industrial model of the Company
      has helped
      it
      stand out among
      many other mobile phone makers in terms of brand awareness, reputation,
      interests and other
      important criteria .
      All of
      the above will allow the Company to
      continue to develop its good
      ideology and build
      on
      its firm
      foundation in 2008.




30





The
      following table summarizes our operating results for the twelve months ended
      December 31, 2007 and December 31, 2006, respectively:





**Twelve
                months ended**
              **December
                31, 2007**
            
            **Twelve
                months ended**
              **December
                31, 2006**
            
            **Comparison****$000**
            
            **%
                of Revenue**
            
            **$000**
            
            **%
                of Revenue**
            
            **$000**
            
            **%**Revenue
            
            
            89,923
            
            
            -
            
            
            68,108
            
            
            -
            
            
            21,815
            
            
            32.03
            %Cost
                of sales
            
            
            74,174
            
            
            82.49
            %
            
            55,226
            
            
            81.09
            %
            
            18,948
            
            
            34.31
            %Sales
                & marketing expenses
            
            
            553
            
            
            0.61
            %
            
            1,045
            
            
            1.53
            %
            
            (492
            )
            
            (47.08
            %)General
                & admin. expenses
            
            
            1,290
            
            
            1.43
            %
            
            793
            
            
            1.16
            %
            
            497
            
            
            62.67
            %R&D
                expenses
            
            
            340
            
            
            0.38
            %
            
            255
            
            
            0.37
            %
            
            85
            
            
            33.33
            %Depreciation
            
            
            142
            
            
            0.16
            %
            
            175
            
            
            0.26
            %
            
            (33
            )
            
            (18.86
            %)Allowance
                for obsolete inventories
            
            
            875
            
            
            0.97
            %
            
            1,387
            
            
            2.04
            %
            
            (512
            )
            
            (36.91
            %)Allowance
                for trading deposit receivable
            
            
            923
            
            
            1.03
            %
            
            767
            
            
            1.13
            %
            
            156
            
            
            20.34
            %Impairment
                of Fixed Assets
            
            
            71
            
            
            0.08
            %
            
            454
            
            
            0.67
            %
            
            (383
            )
            
            (84.36
            %)Finance
                cost
            
            
            989
            
            
            1.10
            %
            
            116
            
            
            0.17
            %
            
            873
            
            
            752.59
            %Other
                net income
            
            
            765
            
            
            0.85
            %
            
            75
            
            
            0.11
            %
            
            690
            
            
            920.00
            %Pre-tax
                profit
            
            
            11,331
            
            
            12.60
            %
            
            7,965
            
            
            11.69
            %
            
            3,366
            
            
            42.26
            %Income
                tax
            
            
            1,648
            
            
            1.83
            %
            
            1,247
            
            
            1.83
            %
            
            401
            
            
            32.16
            %Profit
            
            
            9,683
            
            
            10.77
            %
            
            6,718
            
            
            9.86
            %
            
            2,965
            
            
            44.14
            %




**CRITICAL
      ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES**





Our
      discussion and analysis on our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses, and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate our estimates based on historical experience and
      various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions.





**RESULTS
      OF OPERATIONS**





**Revenues**





Our
      Revenues were $89,923,000 for the twelve months ended December 31, 2007,
      representing an increase of 32.03% as compared to $68,108,000 in the
      corresponding period in 2006. The increase of our operation revenues as compared
      to the same period last year was mainly due to several factors:
      (1) we experienced a slow business period in 2006 because of the reformation
      of
      the cellular industry and products which affected our operation revenues for
      that period, (2) in the second half year of 2007
      the
      Company reduced
      its operator-tailored products and increased the production and sales of
      GSM/GPRS cellular phones to account for 55.14% of the total revenues ,
      due to
      the fact that the telecom operators could not determine their customized orders
      before the institutional reformation of communication management was commenced
      by the PRC government, and (3) in the fourth quarter in 2007, product sales
      achieved a record high, with our GSM products continuing to meet the market’s
      demand for mid-level and high-end handsets, which resulted in a higher sales
      volume and triggered the increased revenue growth over the same period last
      year.




31




At
      present, we have three series of product lines based on the nature of the
      products, such as function, appearance, price, target market and so on. Our
      mid-level and low-end products contain a number of attractive features, such
      as
      MP3, MPEG4, video recording and outer card storage, while our high-end products
      contain the above-mentioned features as well as PDA, GPS and office software
      functions, Mobile TV, special industry applications and other attractive
      features and functions.





*Products
      Segment*





In
      the
      second half year of 2007, in order to offset the impact of reducing customized
      cell-phones, we took advantage of our strong market adaptability formed through
      many years to recover traditional channels in mass market and significantly increase
      the sales of our GSM products.





At
      the
      same time, we have increased our trading activities in order to widen our
      revenue streams. We have increased the number of our models of mobile phones
      sold in the market as compared to the same period last year, most of which
      were
      newly created in the current year. In 2007, our mid-level and high-end GSM
      performed extraordinarily well and accounted
      for accumulated sales of $49,585,000.





The
      following table sets forth the revenues of product segments for the twelve
      months ended December 31, 2007:





**Twelve
                months ended December 31, 2007****$000**
            
            **%
                of Revenue****C8100**
            
            
            8,578
            
            
            9.53
            %**C8000**
            
            
            6,912
            
            
            7.69
            %**D907**
            
            
            4,180
            
            
            4.65
            %**M5**
            
            
            4,096
            
            
            4.56
            %**X180**
            
            
            4,017
            
            
            4.47
            %**H8801**
            
            
            3,478
            
            
            3.87
            %**M6**
            
            
            2,985
            
            
            3.32
            %**M85**
            
            
            2,513
            
            
            2.79
            %**N808**
            
            
            2,289
            
            
            2.55
            %**G588**
            
            
            1,290
            
            
            1.43
            %**TY725D**
            
            
            10,435
            
            
            11.60
            %**TY725E**
            
            
            9,560
            
            
            10.63
            %**CECTA2000**
            
            
            7,967
            
            
            8.86
            %**TY732**
            
            
            7,574
            
            
            8.42
            %**D8110**
            
            
            6,452
            
            
            7.18
            %**OBEE007**
            
            
            4,488
            
            
            4.99
            %**T680**
            
            
            1,571
            
            
            1.75
            %**N3200**
            
            
            645
            
            
            0.72
            %**N3201**
            
            
            690
            
            
            0.77
            %**Other**
            
            
            203
            
            
            0.22
            %**Total**
            
            
            89,923
            
            
            100.00
            %




32




For
      the
      twelve months ended December 31, 2007, the total revenues were $89,923,000.
      The
      sales of CDMA products reached $40,338,000, representing 44.86% of our total
      revenue, as
      our operator-tailored section kept growing since the beginning of the year. This
      growth was
      triggered by specialized application mobile terminals Proxlink X180 and other
      intelligent mobile phones. The CDMA products included C8100, C8000, D907, M5,
      X180, H8801, M6, M85, N808 and G588 with revenues of $8,578,000, $6,912,000,
      $4,180,000, $4,096,000, $4,017,000, $3,478,000, $2,985,000, $2,513,000,
      $2,289,000 and $1,290,000, respectively. The sale of GSM products in this period
      accounted for $49,585,000, or 55.14%, of our total revenue, which was mainly
      from the sales of TY725D, TY725E, CECT A2000, TY732, D8110, OBEE007, T680,
      N3200, N3201 and other small sales products with revenues of $10,435,000,
      $9,560,000, $7,967,000, $7,574,000, $6,452,000, $4,488,000, $1,571,000,
      $645,000, $690,000 and $203,000, respectively.





Our
      GSM
      products are purchased from Tianjin Communication and Broadcasting Group Co.,
      Ltd and Hebei Jvyuan Commerce and Trade Co., Ltd., which include TY725D/E (300K
      pixel camera, Multimedia Player),CECTA2000 (Multimedia Player, Camera, Remote
      Control, Anti-stolen, U-disk). Our CDMA products are provided by China
      Electronic Appliance Corporation and Beijing Tian Hong Bo Communication
      Apparatus Company Limited, from whom the trading products included C8100
      (high-end PDA, MP3, MP4, Camera, T-flash Card, GSM & CDMA Simultaneous
      Standby Dual Mode handset), and C8000 (high-end PDA, MP3, MP4, Camera, T-flash
      Card, GSM & CDMA Simultaneous Standby Dual Mode handset).





The
      increase in the Company’s revenues was attributable to: (1) the launch of
      specialized application mobile terminals to meet the specific application
      market, (2) the introduction of fashionable appearances and features to satisfy
      market demand, and (3) the distribution through traditional channels.




33




*Customer
      Segments*





The
      following table sets forth the revenues of customer segments for the twelve
      months ended December 31, 2007:





**Twelve
                months ended December 31, 2007****$000**
            
            **%
                of Revenue**Beijing
                Xingwang Shidai Tech & Trading Co., Ltd.
            
            
            83,045
            
            
            92.35
            %Tianjin
                Communication and Broadcasting Group Co., Ltd.
            
            
            2,861
            
            
            3.18
            %China
                Electronic Appliance Corporation
            
            
            4,017
            
            
            4.47
            %Total
            
            
            89,923
            
            
            100.00
            %





For
      the
      twelve months ended December 31, 2007, our revenues were mainly derived from
      three major domestic customers, Beijing Xingwang Shidai Tech & Trading Co.,
      Ltd. (“ *XWSD* ”),
      Tianjin Communication and Broadcasting Group Co., Ltd (“ *TCB* ”)
      and
      China Electronic Appliance Corporation (“ *CEAC* ”),
      in
      the amounts of $83,045,000, $2,861,000 and $4,017,000, respectively, for a
      total
      amount of $89,923,000. In particular, XWSD has been our most important customer
      for a long period, and accounted for 92.35% of the total sales in this year.
      It
      is the largest distributor and dealer in Mainland China and has sales networks
      in major cities in the PRC.





**Other
      net income**





For
      the
      twelve months ended December 31, 2007, other net income accounted for $765,000,
      or 0.85% of the total revenue. It was mainly subject to accounting adjustment
      as
      some prepaid trade deposits were recovered and this contributed to other net
      income.





**Operating
      expenses**





For
      the
      twelve months ended December 31, 2007, our operating expenses were $78,296,000.
      The operating expenses include sales and marketing, general and administrative
      expenses, R & D expenses, and depreciation are set forth in the following
      table together with a comparison with the corresponding amounts from the same
      period in 2006:





**Twelve
                months ended December 31, 2007**
            
            **Twelve
                months ended December 31, 2006**
            
            **Comparison****$000**
            
            **%
                of Revenue**
            
            **$000**
            
            **%
                of Revenue**
            
            **$000**
            
            **%**Cost
                of sales
            
            
            74,174
            
            
            82.49
            %
            
            55,226
            
            
            81.09
            %
            
            18,948
            
            
            34.31
            %Sales
                & marketing expenses
            
            
            553
            
            
            0.61
            %
            
            1,045
            
            
            1.53
            %
            
            (492
            )
            
            (47.08
            %)General
                & Admin. expenses
            
            
            1,290
            
            
            1.43
            %
            
            793
            
            
            1.16
            %
            
            497
            
            
            62.67
            %R&D
                expenses
            
            
            340
            
            
            0.38
            %
            
            255
            
            
            0.37
            %
            
            85
            
            
            33.33
            %Depreciation
            
            
            142
            
            
            0.16
            %
            
            175
            
            
            0.26
            %
            
            (33
            )
            
            (18.86
            %)Allowance
                for obsolete inventories
            
            
            875
            
            
            0.97
            %
            
            1,387
            
            
            2.04
            %
            
            (512
            )
            
            (36.91
            %)Allowance
                for trading deposit receivable
            
            
            923
            
            
            1.03
            %
            
            767
            
            
            1.13
            %
            
            156
            
            
            20.34
            %Total
            
            
            78,297
            
            
            87.07
            %
            
            59,648
            
            
            87.58
            %
            
            18,649
            
            
            31.27
            %




34




**Cost
      of sales**





For
      the
      twelve months ended December 31, 2007, our cost of sales was $74,174,000, or
      82.49% of revenues. The cost of sales to revenues increased by 1.40%, as
      compared to 81.09% of the corresponding period in 2006. The principal reasons
      for the increase were that both production and sales of high margin
      operator-customized products were reduced due to the impact of the telecom
      operators split and restructuring.





**Sales
      and marketing expenses**





Sales
      and
      marketing expenses mainly represent salaries of sales personnel, and marketing
      and transportation costs.





For
      the
      twelve months ended December 31, 2007, sales and marketing expenses were
      $553,000, or 0.61% of the revenues, which shows a decrease of 47.08% as compared
      to $1,045,000, or 1.53% of the revenues for the corresponding period in 2006.
      This sharp decrease was caused by the reduction in the number of personnel
      while
      changing our business model, which resulted in a corresponding decrease in
      the
      costs for salaries and social insurances.





In
      addition, the after-sale maintenance services were shifted to the materials
      suppliers, and the costs of all the after-sale services, excluding the
      employees’ salaries, were borne by our cooperative partners. This resulted in a
      significant reduction of our sales and marketing expenses.





**R&D
      expenses**





Our
      R&D expenses were $340,000 or 0.38% of total revenue for the twelve months
      ended December 31, 2007, which represented a 33.33% increase, as compared with
      $255,000 and 0.37% of total revenue in the same period of 2006. The increase
      was
      attributed to the increased spending in the research and development of
      promising and high profit margin advanced smart mobile terminals.





**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, 2007, the total general and administrative
      expenses including allowance of obsolete inventories, allowance for trading
      deposit receivable and impairment of fixed assets were $3,159,000, or 3.51%
      of
      the total revenue. After deducting the allowance for trading deposit receivable
      of $923,000, the allowance for obsolete inventories of $875,000, and impairment
      of fixed assets of $71,000, the actual general and administrative expenses
      were
      $1,290,000 or 1.43% of the total revenue, representing an increase of $497,000
      or 62.67% as compared to $793,000 or 1.16% of the total revenues for the
      corresponding period in 2006.




35




The
      sharp
      increase was mainly due to accounting reclassification that some provision
      for
      bad debts previously recorded under the administrative expenses were removed
      and
      included to other net income.





**Allowance
      for obsolete inventories**





For
      the
      twelve months ended December 31, 2007, allowance for obsolete inventories were
      $875,000, which was due to the fact that old models prior to 2007 were not
      popular any more and some related obsolete inventories could not be used to
      produce new models of handsets.





**Gross
      Profit and Gross Profit Margin**





For
      the
      twelve months ended December 31, 2007, our gross profit was $15,749,000,
      reflecting a significant increase of $2,867,000, or 22.26% as compared to
      $12,882,000 for the same period of last year. In addition, our gross profit
      margin for the reporting period was 17.51%, representing a decrease of 1.40%
      as
      compared to 18.91% for the same period of 2006.





The
      gross
      profit margin decrease in general is attributable to:




1.
            the
                impact that operators’ business restructuring were still in the
                transitional period, leading to their failure to timely implement
                the
                customized mobile terminals.




2.
            the
                reduction of operator-tailored production and sales and the increase
                in
                sales of low profit margin traditional cell-phone by the
                Company.




3.
            the
                fact that 74.4% of products lines generated less than 17% gross profit
                margin.




**Net
      profit**





For
      the
      twelve months ended December 31, 2007, our net profit was $9,683,000 or a net
      profit margin of 10.77%, representing an increase of $2,965,000, or 44.14%,
      as
      compared to $6,718,000, or a net profit margin of 9.86% in the same period
      of
      2006. The increase in our net profit is due to our new business strategy on
      marketing and cost controls.





**LIQUIDITY
      AND SOURCE OF CAPITAL**





We
      generally finance our operations from cash flow generated internally and the
      short-term loans from the domestic banks.





As
      of
      December 31, 2007, we had current assets of $66,916,000. Current assets are
      mainly comprised of accounts receivable of $57,743,000, trade deposits paid
      of
      $839,000, cash and cash equivalents of $2,928,000, inventories of $4,000, other
      current assets of $4,196,000 and a pledge deposit of $1,206,000. Our current
      liabilities of $33,332,000 included accounts payable of $10,854,000, short-term
      bank loan of $9,160,000, short-term mortgage loan of $68,000, other accrued
      expenses and the accrued liabilities of $8,048,000, tax payables of $3,047,000,
      amounts due to directors of $323,000, trade deposits received of $1,709,000
      and
      provision of warranty of $123,000. Also, we had a long-term mortgage loan of
      $5,000 as of December 31, 2007.





We
      offer
      two different trading terms to our customers: cash-on-delivery and on credit
      term within 30-60 days. As of December 31, 2007, our accounts receivable had
      increased from $31,425,000 as of December 31, 2006 to $57,743,000. Our accounts
      receivable consisted of (1) $33,791,000, or 58.52% of
      the
      total accounts receivable, that
      was
      newly created in the fourth quarter of 2007, and (2) $23,952,000, or 41.48%
      that
      was aged by four to six months. Subsequent payments of $6,413,000 were received
      as of March 10, 2008.




36




As
      of
      December 31, 2007, our trade deposits paid were $839,000, which represented
      a
      decrease of $8,150,000 or 90.67%, as compared to $8,989,000 as of December
      31,
      2006. The trade deposit paid was comprised of the deposit for the order of
      specialized application devices and the advance payment on other popular
      cellular phones. The decrease of trade deposits paid was caused by the
      reduction in the
      productions and sales of operator-tailored handsets that demand large amount
      of
      advance payment.





As
      of
      December 31, 2007, our other current assets were $4,196,000, which represented
      a
      deep increase, as compared to $86,000 as of December 31, 2006. It mainly
      represented a deposit of investment of $4,102,000 for acquiring our production
      facility.





As
      of
      December 31, 2007, accounts payable were $10,854,000, which represented a
      decrease of $110,000 or 1.00%, as compared to $10,964,000 as of December 31,
      2006. The mainly accounts payable was attributable to unpaid products from
      our
      vendor China Electronic Apparatus Company and Shanghai Simcom
      Limited.





As
      of
      December 31, 2007, accrued expenses and other accrued liabilities were
      $8,048,000, indicating a significant growth of $3,604,000 or 81.10%, as compared
      to $4,444,000 as of December 31, 2006. The increase was constituted by the
      outstanding tax of $6,953,000 caused by the time difference between USGAAP
      and
      PRCGAAP determinations
      of the
      value-added tax (VAT).





As
      of
      December 31, 2007, tax payable was $3,047,000, which was attributable mainly
      to
      profit tax at the rate of 12% and the deferred tax in 2007.





As
      of
      December 31, 2007, cash and bank balances were mainly denominated in Renminbi
      (“ *RMB* ”).
      Our
      revenue and expenses, assets and liabilities are mainly denominated in RMB
      and
      USD. Our activities in the operation are mainly denominated in RMB. In the
      accounting period, RMB currency is quoted officially against USD currency
      according to a floating exchange rate. However, the appreciation of the RMB
      against USD did not bring us with risks of currency exchanges because we had
      few
      USD in stock.





**CASH
      FLOWS**





As
      of
      December 31, 2007, we had cash and cash equivalents of $2,928,000. This
      represented an increase of $507,000, or 20.94% as compared to $2,421,000 as
      of
      December 31, 2006.





As
      of
      December 31, 2007, our short-term bank loans were $9,160,000, which was mainly
      comprised of $2,461,000 from Huaxia Bank and $6,699,000 from Beijing Rural
      Bank.





During
      the year, we had obtained a mortgage loan of $122,000 from a financial
      institution when acquiring a motor vehicle. As of December 31, 2007, $68,000
      was
      matured within one year and $5,000, which was matured over one year, was
      considered a long-term loan.




37




Our
      gearing ratio, calculated as total debts over total assets, was 49.58%, as
      of
      December 31, 2007. It decreased slightly compared to 51.44% as of December
      31,
      2006.





**CONTINGENT
      LIABILITIES**





On
      June
      20, 2007, we entered into a guarantee contract to serve as guarantor of a loan
      in the amount of RMB120,000,000 to CECT-Chinacom Communications Co., Ltd.
      (“ *CECT-Chinacom* ”)
      from
      Beijing Rural Bank to provide CECT-Chinacom with capital for equipment purchases
      between June 20, 2006 and June 16, 2010. Under the guarantee contract, we shall
      perform all obligations of CECT-Chinacom under the Loan Contract if
      CECT-Chinacom fails to perform its obligations as set forth in the Loan Contract
      for any reason, including, but not limited to, ceasing production, going out
      of
      business, dissolving the business, having its business license withdrawn, and
      filing for bankruptcy.





**OFF
      BALANCE SHEET ARRANGEMENTS**





As
      of
      December 31, 2007, we had no off balance sheet arrangements.





**CONTRACTUAL
      COMMITMENTS**





We
      are
      obligated to make future payments under various contracts, including purchase
      and operating leases. The Company does not have any long-term debt or capital
      lease obligations. The following table summarized the Company’s contractual
      obligations at December 31, 2007, reported by maturity of obligation.





**Payments due by period****Contractual Obligations**
            
            **Total**
            
            **Less than**
              **1 year**
            
            **1-3 years**
            
            **3-5 years**
            
            **More than**
              **5 years**$
            000
            
            $
            000
            
            $
            000
            
            $
            000
            
            $
            000Operating
                Lease Obligations
            
            
            51
            
            
            31
            
            
            20
            
            
            -
            
            
            -Purchase
                Obligations
            
            
            14,083
            
            
            14,083
            
            
            -
            
            
            -
            
            
            -Total
            
            
            14,134
            
            
            14,114
            
            
            20
            
            
            --
            
            
            --





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





Market
      risk is the sensitivity of income to changes in interest rates, foreign
      exchanges, commodity prices, equity prices and other market-driven rates or
      prices. The Company, in the normal course of doing business, is exposed to
      market risk through changes in interest rates with respect to bank loans. Bank
      loans at December 31, 2007 were $9,160,000. The interest rate for the twelve
      months ended December 31, 2007 was charged at 7.344% to 7.956% per
      annum.





*Currency
      Risk*





The
      Company considers RMB its functional currency since a substantial portion of
      the
      Company’s business activities are based in RMB. However, the Company has chosen
      the United States dollar as its reporting currency. Our sales and purchases
      are
      conducted within the PRC in RMB. Conversion of RMB into foreign currencies
      is
      regulated by the People’s Bank of China through a unified floating exchange rate
      system. Although the PRC government has stated its intention to support the
      value of the RMB, there can be no assurance that such exchange rate will not
      again become volatile or that the RMB will not devalue significantly against
      the
      U.S. dollar. Exchange rate fluctuations may adversely affect the value, in
      U.S.
      dollar terms, of our net assets and income derived from our operations in the
      PRC. In addition, the RMB is not freely convertible into foreign currency and
      all foreign exchange transactions must take place through authorized
      institutions.




38




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





For
      translation of financial statements into the reporting currency, assets and
      liabilities are translated at the exchange rate at the balance sheet date,
      equity accounts are translated at historical exchange rates, and revenues,
      expenses, gains and losses are translated at the weighted average rates of
      exchange prevailing during the period. When there are material adjustments
      under
      this process they are recorded in accumulated other comprehensive income under
      the stockholders’ equity section of the balance sheet.





*Country
      Risk*




Our
      business, assets and operations are located and conducted in the PRC. While
      the
      PRC’s economy has experienced significant growth in the past twenty years,
      growth has been uneven, both geographically and among various sectors of the
      economy. The PRC government has implemented various measures to encourage
      economic growth and guide the allocation of resources. Some of these measures
      benefit the overall economy of the PRC, but may also have a negative effect
      on
      us. For example, our operating results and financial condition may be adversely
      affected by government control over capital investments or changes in tax
      regulations applicable to us. If there are any changes in any policies by the
      PRC government and our business is negatively affected as a result, then our
      financial results, including our ability to generate revenues and profits,
      will
      also be negatively affected.





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




Reference
      is made to pages F-1 through F-18 comprising a portion of this annual
      report on Form 10-K.




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





None.




39




**Item
              9A(T).**
            **Controls
                and Procedures.**




*Disclosure
      Controls and Procedures*





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our Exchange Act reports is recorded,
      processed, summarized and reported within the time periods specified in the
      Securities and Exchange Commission’s rules and forms, and that such information
      is accumulated and communicated to our management, including our Chief Executive
      Officer and our Chief Financial Officer, as appropriate, to allow timely
      decisions regarding required disclosures. Our management, including our Chief
      Executive Officer and our Chief Financial Officer, does not expect that our
      disclosure controls or procedures will prevent all error and all fraud. A
      control system, no matter how well conceived and operated, can provide only
      reasonable, not absolute, assurance that the objectives of the control system
      are met. Further, the benefits of controls must be considered relative to their
      costs. Because of the inherent limitations in all control systems, no evaluation
      of controls can provide absolute assurance that all control issues are instances
      of fraud, if any, within the Company have been detected. These inherent
      limitations include the realities that judgments in decision-making can be
      faulty, and that breakdowns can occur because of simple error or mistake.
      Additionally, controls can be circumvented by the individual acts of some
      persons, by collusion of two or more people, or by management override of the
      control. The design of any system of controls is also based in part upon certain
      assumptions about the likelihood of future events, and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions. Because of the inherent limitations in a cost-effective
      control system, misstatements due to error or fraud may occur and not be
      detected.





We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and our Chief Financial
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures as of [December 31, 2007], the end of the annual period
      covered by this report. The evaluation of our disclosure controls and procedures
      included a review of the disclosure controls’ and procedures’ objectives,
      design, implementation and the effect of the controls and procedures on the
      information generated for use in this report. In the course of our evaluation,
      we sought to identify errors, control problems or acts of fraud and to confirm
      the appropriate corrective actions, including process improvements, were being
      undertaken.





Based
      on
      the foregoing, our Chief Executive Officer and our Chief Financial Officer
      concluded that, as of the end of the period covered by this report, our
      disclosure controls and procedures were effective and were operating at the
      reasonable assurance level.





*Internal
      Control Over Financial Reporting*





(a)
      Management’s Annual Report on Internal Control Over Financial
      Reporting.





The
      Company’s management is responsible for establishing and maintaining adequate
      internal control over financial reporting, as such term is defined in Exchange
      Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
      participation of the Company’s management, including the Company’s Chief
      Executive Officer and Chief Financial Officer, the Company has conducted an
      evaluation of the effectiveness of its internal control over financial reporting
      as of December 31, 2007, based on the framework in Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission. Based on management’s evaluation under the framework in Internal
      Control - Integrated Framework, management concluded that the Company’s internal
      control over financial reporting was effective as of December 31,
      2007.




40




This
      annual report does not include an attestation report of the company's registered
      public accounting firm regarding internal control over financial reporting.
      Management's report was not subject to attestation by the company's registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the company to provide only management's report
      in this annual report.





(b)
      Changes in Internal Control Over Financial Reporting.





During
      our fiscal year 2007, there were no significant changes in our internal controls
      over financial reporting that have materially affected, or are reasonably likely
      to materially affect our internal controls over financial
      reporting.





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




Not
      applicable.




**PART
      III**




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





As
      of
      December 31, 2007, our current directors and executive officers were as
      follows:





**Name**
            **Age**
            **Positions
                Held**Wang
                Xin
            38
            Chief
                Executive Officer and a DirectorZhao
                Hongwei
            41
            Chief
                Financial OfficerLiu
                Yu
            41
            DirectorNaizhong
                Che
            64
            DirectorPeng
                Wang
            35
            DirectorZhixiang
                Zhang
            39
            DirectorNathaniel
                K. Hsieh
            42
            DirectorHoward
                S. Barth
            55
            Director





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




41




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





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





Naizhong
      Che has served as a member of our Board of Directors since February 7, 2007.
      He
      earned his B.S. from Beijing University of Posts and Telecommunications. Now
      retired, he has broad experience in the communications industry including
      R&D, production, imports and exports. He served twelve years with the
      Ministry of Information Industry of China Posts and Telecommunications Industry
      Standardization Institute in various capacities.





Peng
      Wang
      has served as a member of our Board of Directors since February 7, 2007. He
      earned his bachelor’s degree at Central University of Finance and Economics and
      his master’s at Guanghua School of Management, Peking University. His expertise
      includes formulating, planning and implementing marketing strategies for
      technology companies. He is currently General Manager for Beijing Youlilianxu
      Technology Co., Ltd. where he is responsible for products in the PRC, including
      ViewSonic projection, Samsung MP4 and LG projection.





Zhixiang
      Zhang has served as a member of our Board of Directors since February 7, 2007.
      He earned bachelor and master’s degrees at Central University of Finance and
      Economics. He has extensive experience in corporate financial management, audits
      and financial strategy, and most recently was the Financial Controller for
      CECT-Chinacom Communications Co., Ltd.





Nathaniel
      K. Hsieh has served as a member of our Board of Directors since February 7,
      2007. He is a member of the Illinois and Iowa Bar Associations. He earned his
      L.L.M. at Georgetown University and his J.D. at the University Of Iowa College
      Of Law. He is the Founder and President of Tritent International Corp. of
      Chicago, Illinois, which oversees tobacco import and manufacturing operations
      for one of the 60 independent tobacco manufacturers in U.S.





Howard
      S.
      Barth has served as a member of our Board of Directors since February 7, 2007.
      He is a member of the Canadian Institute of Chartered Accountants and the
      Ontario Institute of Chartered Accountants. He earned his B.A. and M.B.A. at
      York University and has over 25 years of experience as a certified accountant.
      Until recently, he was chief executive officer and president with Yukon Gold
      Corporation, Inc., a public company which is dual-listed in the U.S. and
      Canadian markets. He is currently a director of Yukon Gold Corporation Inc.,
      an
      OTC BB and TSX listed company, and has served on its audit committee. He is
      also
      a member of the Board of Directors and chairman of the audit committee for
      Nuinsco Resources Limited, a TSX listed exploration company, and New Oriental
      Energy & Chemical Corp., a NASDAQ listed company. He is also currently a
      director for Uranium Hunter Corporation, an OTC BB company.




42




*Subsequent
      Events*





On
      March
      5, 2008, Mr. Nathaniel K. Hsieh resigned from his position as a member of the
      Board of Directors of the Company and all position held on the Board of
      Director’s committees.





On
      March
      5, 2008, Mr. Gao Jian was elected to the Board of Directors of the Company
      by
      unanimous written consent of the Board of Directors, effective immediately,
      and
      was elected by the Board of Directors to serve on its Audit Committee and
      Compensation Committee.





Mr.
      Gao
      Jian, age 39, earned his Master of Business Administration degree at the
      University of Liverpool in UK in July 2000. Mr. Gao Jian has been engaging
      in
      real estate and telecommunication industries for years. Since June 2007, Mr.
      Gao
      Jian has been serving as chairman of the Board of Directors of Royal Junction
      Construction Materials Co., Ltd. From May 2001 to January 2003, Mr. Gao Jian
      worked as the General Manager of Dacheng Real Estate Development Group and
      Dacheng Telecommunications Technology Co., Ltd. From 1996 to 1999, Mr. Gao
      Jian
      worked as sales director for CellStar International Trading Co., Ltd., where
      he
      was responsible for sales, marketing and strategic planning.





On
      March
      5, 2008, the Mr. Howard S. Barth was appointed as Chairman of the Board’s Audit
      Committee.





*Family
      Relationships*





There
      are
      currently no family relationships between the directors or executive officers
      of
      the Company.





*Involvement
      in Certain Legal Proceedings.*





None





**Board
      of Directors Meetings and Committees**




The
      Board
      of Directors held 8 meetings during the fiscal year ended December 31, 2007.
      Each Directors member attended, either in person or telephonically, at least
      75%
      of the aggregate Board of Directors meetings and meetings of committees on
      which
      he served during his tenure as a director or committee member.





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




43




Audit
                Committee
            Nominating/Corporate
              Governance
                Committee
            Compensation
                CommitteeHoward
                S. Barth (Chair)
            Naizhong
                Che (Chair)
            Naizhong
                Che (Chair)Gao
                Jian
            Zhixiang
                Zhang
            Gao
                JianZhixiang
                Zhang
            Peng
                Wang
            Peng
                Wang





*Audit
      Committee*





The
      Audit
      Committee is currently comprised of Howard S. Barth (Chair), Gao Jian and
      Zhixiang Zhang, each of whom are “independent” as independence is currently
      defined in applicable Securities and Exchange Commission’s (the “ *SEC* ”)
      rules
      and by the Company Guide of the American Stock Exchange. Since its formation
      in
      February of 2007, the Audit Committee met 4 times. The Board of Directors has
      determined that Howard S. Barth qualifies as an “audit committee financial
      expert,” as defined in applicable SEC rules implementing Section 407 of the
      Sarbanes-Oxley Act of 2002. The Board of Directors made a qualitative assessment
      of Mr. Barth’s level of knowledge and experience based on a number of factors,
      including his formal education and experience.





The
      Audit
      Committee is responsible for overseeing the Company’s corporate accounting,
      financial reporting practices, audits of financial statements and the quality
      and integrity of the Company’s financial statements and reports. In addition,
      the Audit Committee oversees the qualifications, independence and performance
      of
      the Company’s independent auditors. In furtherance of these responsibilities,
      the Audit Committee’s duties include the following: evaluating the performance
      of and assessing the qualifications of the independent auditors; determining
      and
      approving the engagement of the independent auditors to perform audit, reviewing
      and attesting to services and performing any proposed permissible non-audit
      services; evaluating employment by the Company of individuals formerly employed
      by the independent auditors and engaged on the Company’s account and any
      conflicts or disagreements between the independent auditors and management
      regarding financial reporting, accounting practices or policies; discussing
      with
      management and the independent auditors the results of the annual audit;
      reviewing the financial statements proposed to be included in the Company’s
      annual report on Form 10-K; discussing with management and the independent
      auditors the results of the auditors’ review of the Company’s quarterly
      financial statements; conferring with management and the independent auditors
      regarding the scope, adequacy and effectiveness of internal auditing and
      financial reporting controls and procedures; and establishing procedures for
      the
      receipt, retention and treatment of complaints regarding accounting, internal
      accounting control and auditing matters and the confidential and anonymous
      submission by employees of concerns regarding questionable accounting or
      auditing matters. The Audit Committee operates under the written Audit Committee
      Charter adopted by the Board of Directors in February of 2007, a copy of which
      may be obtained by writing the Secretary of the Company at 12th Floor, Tower
      B,
      Chaowai MEN Office Building, 26 Chaowai Street, Chaoyang Disc., Beijing,
      People’s Republic of China 100020. The Report of the Audit Committee is included
      elsewhere in this proxy statement.




44




*Nominating/Corporate
      Governance Committee*





The
      Nominating and Corporate Governance Committee (the “ *Nominating
      Committee* ”)
      is
      responsible for preparing a list of candidates to fill the expiring terms of
      directors serving on our Board of Directors. The Nominating Committee submits
      the list of candidates to the Board of Directors who determines which candidates
      will be nominated to serve on the Board of Directors. The names of nominees
      are
      then submitted for election at our Annual Meeting of Stockholders. The
      Nominating Committee also submits to the entire Board of Directors a list of
      nominees to fill any interim vacancies on the Board of Directors resulting
      from
      the departure of a member of the Board of Directors for any reason prior to
      the
      expiration of his term. In recommending nominees to the Board of Directors,
      the
      Nominating Committee keeps in mind the functions of this body. The Nominating
      Committee considers various criteria, including the ability of the individual
      to
      meet the American Stock Exchange “independence” requirements, general business
      experience, general financial experience, knowledge of the Company’s industry
      (including past industry experience), education, and demonstrated character
      and
      judgment. The Nominating Committee will consider director nominees recommended
      by a stockholder if the stockholder mails timely notice to the Secretary of
      the
      Company at its principal offices, which notice includes (i) the name, age and
      business address of such nominee, (ii) the principal occupation of such nominee,
      (iii) a brief statement as to such nominee’s qualifications, (iv) a statement
      that such nominee consents to his or her nomination and will serve as a director
      if elected, (v) whether such nominee meets the definition of an “independent”
director under the rules of the American Stock Exchange listing standards and
      (vi) the name, address, class and number of shares of capital stock of the
      Company held by the nominating stockholder. Any person nominated by a
      stockholder for election to the Board of Directors will be evaluated based
      on
      the same criteria as all other nominees. The Nominating Committee also oversees
      our adherence to our corporate governance standards. The members of the
      Nominating Committee are Naizhong Che (Chair), Zhixiang Zhang and Peng Wang,
      each of whom is “independent” as defined by the Company Guide of the American
      Stock Exchange. Since its formation in February of 2007, the Nominating
      Committee met 3 times. The Nominating Committee operates under the written
      Nominating Committee Charter adopted by the Board of Directors in February
      of
      2007, a copy of which may be obtained by writing the Secretary of the Company
      at
      12th Floor, Tower B, Chaowai MEN Office Building, 26 Chaowai Street, Chaoyang
      Disc., Beijing, People’s Republic of China 100020.





During
      the fiscal year ended December 31, 2007, there were no changes to the procedures
      by which holders of our common stock may recommend nominees to the Board of
      Directors.





*Compensation
      Committee*





The
      Board
      of Directors established the Compensation Committee in February 2007. The
      Compensation Committee is currently comprised of the following Directors of
      the
      Company: Naizhong Che (Chair), Gao Jian and Peng Wang, each of whom is
“independent” as defined by the Company Guide of the American Stock Exchange.
      Since its formation, the Compensation Committee met 2 times. The Compensation
      Committee reviews and, as it deems appropriate, recommends to the Board of
      Directors’ policies, practices and procedures relating to the compensation of
      the officers and other managerial employees and the establishment and
      administration of employee benefit plans. It advises and consults with the
      officers of the Company as may be requested regarding managerial personnel
      policies. The Compensation Committee also has such additional powers as may
      be
      conferred upon it from time to time by the Board of Directors. The Compensation
      Committee operates under the written Compensation Committee Charter adopted
      by
      the Board of Directors in February of 2007, a copy of which may be obtained
      by
      writing the Secretary of the Company at 12th Floor, Tower B, Chaowai MEN Office
      Building, 26 Chaowai Street, Chaoyang Disc., Beijing, People’s Republic of China
      100020.




45




*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*





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





Under
      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.





To
      this
      end, the Audit Committee has reviewed and discussed the audited financial
      statements of the Company for the fiscal year ended December 31, 2007 with
      management and Mazars CPA Limited, the Company’s independent auditor. The Audit
      Committee discussed with Mazars CPA Limited 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 Mazars CPA Limited the written disclosures and the letter
      regarding the auditor’s independence required by Independence Standards Board
      Standard No. 1 and has discussed with Mazars CPA Limited its independence.





In
      reliance on the reviews and discussions described above, the Audit Committee
      recommended to the Board of Directors that the Company’s audited financial
      statements for the fiscal year ended December 31, 2007 be included in the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2007, and
      the Board of Directors accepted the Audit Committee’s
      recommendation.





The
      Audit
      Committee selected Mazars CPA Limited as the Company’s independent auditors for
      the fiscal year ending December 31, 2007. The selection of auditors is
      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 Mazars CPA Limited. 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.




46




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, effective from June 29, 2007.




AUDIT
      COMMITTEE





Howard
      S.
      Barth (Chair)


Gao
      Jian


Zhixiang
      Zhang




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





Section 16(a)
      of the Securities Exchange Act of 1934, as amended, requires the Company’s
      directors, executive officers and persons who own more than 10% of a registered
      class of the Company’s equity securities, to file with the SEC initial reports
      of ownership and reports of changes in ownership of common stock and other
      equity securities of the Company. Directors, officers and greater than 10%
      shareholders are required to furnish the Company with copies of all
      Section 16(a) forms they file.




To
      the
      Company’s knowledge, based solely on a review of the copies of such reports
      furnished to the Company, with respect to the fiscal year ended
      December 31, 2007, the officers, directors and beneficial owners of more
      than 10% of our common stock have filed their initial statements of ownership
      on
      Form 3 on a timely basis, and the officers, directors and beneficial owners
      of
      more than 10% of our common stock have also filed the required Forms 4 or 5
      on a
      timely basis, except for the timely filing of Form 3’s by Naizhong Che, Peng
      Wang, Zhixiang Zhang, Gao Jian, and Howard S. Barth upon their appointment
      as
      Directors of the Company due to unforeseen delays, which were all subsequently
      filed with the Securities and Exchange Commission. There were no transactions
      that were not reported timely.





**Code
      of Ethics**





On
      February 7, 2007, the Company adopted a Code of Business Conduct and Ethics
      that
      applies to all its employees including its executive officers, which was filed
      as Exhibit
      14 to the Current Report on Form 8-K filed with the Securities and Exchange
      Commission on February 7, 2007.





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




**Compensation
      Discussion and Analysis**





*General
      Philosophy*




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




47




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





The
      newly
      adopted 2007 Omnibus Long-Term Incentive Plan (the “ *2007
      Omnibus Plan* ”)
      will
      assist the Company in attracting, retaining, and rewarding high-quality
      executives, employees, directors and other persons who provide services to
      the
      Company, enabling such persons to acquire or increase a proprietary interest
      in
      the Company and to strengthen the mutuality of interests between such persons
      and to provide annual and long-term incentives to expend their maximum efforts
      in the creation of shareholder value. The 2007 Omnibus PlanP will be
      administered by the Compensation Committee, such other committee as determined
      by the Board of Directors, or a subcommittee consisting solely of non-employee,
      outside directors. The 2007 Omnibus Plan does not limit the availability of
      awards to any particular class or classes of Eligible Employees. Awards granted
      under the 2007 Omnibus Plan are not transferable, except in the event of the
      participant's death. A total of 4,500,000 shares is currently reserved and
      available for delivery in connection with awards under the 2007 Omnibus
      Plan.





*Base
      Salaries*





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




48




**Summary
      Compensation Table**




Name
                & Principal Position
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
              Awards
              ($)
            Option
              Awards
              ($)
            Non-Equity
                Incentive Plan Compensation
              ($)
            Change
                in Pension value and Nonqualified deferred compensation
                earnings
              ($)
            All
                other Compensation
              ($)
            Total
              ($)Wang
                Xin, CEO
            2007
              2006
            65,378
              66,309
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            65,378
              66,309Zhao
                Hongwei, CFO
            2007
              2006
            51,200
              30,110
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            51,200
              30,110Wang
                Xiaolong, Vice-President
            2007
              2006
            29,932
              25,757
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            29,932
              25,757Zhou
                Liangyun Vice-President
            2007
              2006
            29,932
              22,989
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            29,932
              22,989Wan
                Feng, CEO Assistant
            2007
              2006
            26,781
              20,395
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            N/A
              N/A
            26,781
              20,395





As
      of as
      of December 31, 2007 the Company did not have any grants of plan-based awards,
      outstanding equity awards at fiscal year-end, option exercises and stock vested,
      pension benefits, or nonqualified deferred compensation. The Company did not
      have any post-employment payments to report.





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





We
      recently adopted our 2007 Omnibus Long-Term Incentive Plan (the “ *2007
      Omnibus Plan* ”),
      as
      approved by our shareholders at the Annual Meeting on December 18, 2007, but
      there were been no grants under the 2007 Omnibus Plan as of December 31, 2007.
      For additional information on the 2007 Omnibus Plan, please see the Current
      Report on Form 8-K filed with the Securities and Exchange Commission on January
      11, 2008.





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





The
      following table sets forth information regarding the beneficial ownership of
      our
      common stock as of March 31, 2008 for each person known by us to be the
      beneficial owner of more than 5% of our outstanding shares of common stock.
      Unless otherwise indicated, we believe that all persons named in the table
      have
      sole voting and investment power with respect to all shares of common stock
      beneficially owned by them.





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


__________________


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





(2)
            On
                March 31, 2008, there were 29,756,000 shares of our common stock
                outstanding. Each person named above has sole investment and voting
                power
                with respect to all shares of the common stock shown as beneficially
                owned
                by the person, except as otherwise indicated
                below.




49




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




(4)
            In
                determining the percent of our common stock owned by a person (a)
                the
                numerator is the number of shares of our common stock beneficially
                owned
                by the person, including shares the beneficial ownership of which
                may be
                acquired within 60 days upon the exercise of options or warrants
                or
                conversion of convertible securities, and (b) the denominator is
                the total
                of (i) the 29,756,000 shares of our common stock outstanding
                on****March
                31, 2008 and (ii) any shares of our common stock which the person
                has the
                right to acquire within 60 days upon the exercise of options or warrants
                or conversion of convertible securities. Neither the numerator nor
                the
                denominator includes shares which may be issued upon the exercise
                of any
                other options or warrants or the conversion of any other convertible
                securities.





The
      following table sets forth information regarding the beneficial ownership of
      our
      common stock as of March 31, 2008 for each of our officers and directors and
      all
      our officers and directors as a group. Unless otherwise indicated, we believe
      that all persons named in the table have sole voting and investment power with
      respect to all shares of common stock beneficially owned by them.





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


__________________


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





(2)
            On
                March 31, 2008, there were 29,756,000 shares of our common stock
                outstanding. Each person named above has sole investment and voting
                power
                with respect to all shares of the common stock shown as beneficially
                owned
                by the person, except as otherwise indicated
                below.





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




50




(4)
            In
                determining the percent of our common stock owned by a person (a)
                the
                numerator is the number of shares of our common stock beneficially
                owned
                by the person, including shares the beneficial ownership of which
                may be
                acquired within 60 days upon the exercise of options or warrants
                or
                conversion of convertible securities, and (b) the denominator is
                the total
                of (i) the 29,756,000 shares of our common stock outstanding
                on****March
                31, 2008 and (ii) any shares of our common stock which the person
                has the
                right to acquire within 60 days upon the exercise of options or warrants
                or conversion of convertible securities. Neither the numerator nor
                the
                denominator includes shares which may be issued upon the exercise
                of any
                other options or warrants or the conversion of any other convertible
                securities.





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





As
      of the
      fiscal year ended December 31, 2007,





**Plan
                category**
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected at
                left)**Equity
                compensation plans approved by security holders
            (1)
            (1)
            4,500,000Equity
                compensation plans approved by security holders
            0
            0
            0Total
            
            
            4,500,000





(1)
            As
                of December 31, 2007, no securities, options, warrants or rights
                have been
                issued under the 2007 Omnibus Plan approved by our security holders
                on
                December 18, 2007.




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





*Related
      Party Transaction Policy*





Other
      than the Company's Code of Business Conduct and Ethics, the Board does not
      have
      a specific written policy regarding the review of related party transactions.
      The Board does, however, follow certain procedures relating to the approval
      of
      transactions involving related parties. Related parties generally include
      executive officers and directors, stockholders owning more than 5% of the
      Company’s common stock or immediate family members of any such persons. A
      related party transaction will be approved only if it is disclosed to the Board
      and is approved by a majority of the disinterested members of the Board. Prior
      to approving any related party transaction, the members of the Board reviewing
      such transaction must (i) be satisfied that they received all material facts
      relating to the transaction, (ii) have considered all relevant facts and
      circumstances available to them and (iii) have determined that the transaction
      is in (or not inconsistent with) the best interests of the Company’s
      stockholders. No director that is an interested party in a transaction may
      participate in the discussion or approval of such transaction. Other than as
      disclosed below, during fiscal year ended December 31, 2007, based on written
      representations from the executive officers and directors of the Company, there
      were no related party transactions.




51




Messrs.
      Wang Xin and Liu Yu have outstanding loans to the Company in the amount of
      $323,000, which loans are unsecured, interest-free and repayable by the Company
      on demand of the noteholder.





The
      Company has bank loans amounting to $6,699,000 that were guaranteed by a
      director, Mr. Liu Yu.





The
      Company has a mortgage loan amounting to $73,000 that was guaranteed by a
      director, Mr. Wang Xin.





*Director
      Independence*





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




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




Our
      independent accountant is Mazars CPA Limited. As reported in our Form 8K filed
      on July 6, 2007, the Company appointed Mazars CPA Limited as its independent
      accountant effective as of June 29, 2007. Our previous independent accountant
      was Moores Rowland Mazars, and this firm underwent a re-organization in 2007
      and
      did not continue as Moores Rowland Mazars. Certain member of Moores Rowland
      Mazars formed Mazars CPA Limited, and we hired that firm to be our independent
      accountant. Set below are aggregate fees billed by Moores Rowland Mazars and
      Mazars CPA Limited for professional services rendered for the audit of the
      Company’s annual financial statements for the year ended December 31, 2007 and
      2006, and the review of the financial statements included in the Company’s Form
      10Q and Form 10QSB for 2007 and 2006.





*Audit
      Fees*





During
      the fiscal year ended December 31, 2007, the fees for our principal accountant
      were $90,000, which was composed of $22,500 for two quarterly reviews, and
      $67,500 for the preparation of this annual report on Form 10-K. During the
      fiscal year ended December 31, 2006, the fees for our principal accountant
      were
      $81,500, which was composed of $22,500 for quarters review and $59,000 for
      the
      preparation of the annual report on Form 10-K.





*Audit
      Related Fees*





During
      the fiscal years ended December 31, 2007 and December 31, 2006, our principal
      accountants did not render assurance and related services reasonably related
      to
      the performance of the audit or review of financial statements.




52




*Tax
      Fees*





During
      the fiscal year ended December 31, 2007 and December 31, 2006, our principal
      accountant did not render services to us for tax compliance, tax advice and
      tax
      planning.





*All
      Other Fees*





During
      the fiscal years ended December 31, 2007 and December 31, 2006, there were
      no
      fees billed for products and services provided by the principal accountants
      other than those set forth above.





The
      Audit
      Committee has reviewed the above fees for non-audit services and believes such
      fees are compatible with the independent registered public accountants’
independence.




**Policy
      on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent
      Accountant**





The
      policy of the Audit Committee, and the Board of Directors acting as a whole
      prior to the establishment of the Audit Committee, is to pre-approve all audit
      and non-audit services provided by the independent accountants. These services
      may include audit services, audit-related services, tax fees, and other
      services. Pre-approval is generally provided for up to one year and any
      pre-approval is detailed as to the particular service or category of services
      and is subject to a specific budget. The Audit Committee, and the Board of
      Directors acting as a whole prior to the establishment of the Audit Committee,
      has delegated pre-approval authority to certain committee members when
      expedition of services is necessary. The independent accountants and management
      are required to periodically report to the full Audit Committee, and the Board
      of Directors acting as a whole prior to the establishment of the Audit
      Committee, regarding the extent of services provided by the independent
      accountants in accordance with this pre-approval delegation, and the fees for
      the services performed to date. None of the fees paid to the independent
      accountants during fiscal years ended December 31, 2007 and 2006, under the
      categories Audit-Related and All Other fees described above were approved by
      the
      Audit Committee, and the Board of Directors acting as a whole prior to the
      establishment of the Audit Committee, after services were rendered pursuant
      to
      the de minimis exception established by the SEC.




**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.




53




**(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 of Orsus Xelent Technologies, Inc. (incorporated
                by
                reference from Exhibit 3.1 to the Registration Statement on Form
                SB-2
                filed with the Securities and Exchange Commission on July 28, 2004
                as
                amended by that Plan of Merger and Agreement of Merger attached as
                Exhibit
                2.1 to the Current Report on Form 8-K filed with the SEC on April
                20,
                2005)3.2
            Amended
                and Restated Bylaws of the Registrant (incorporated by reference
                from
                Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities
                and Exchange Commission on February 7, 2007, as amended by the Current
                Report on Form 8-K filed with the SEC on March 5, 2007)4.1
            Specimen
                Certificate of Common Stock (incorporated by reference to Exhibit
                4.1 to
                Amendment 2 to the Registration Statement on Form SB-2/A filed with
                the
                Securities and Exchange Commission on October 19, 2004)10.1
            Contract
                of Suretyship, dated June 20, 2007, between Yayuncun Branch of Beijing
                Rural Commercial Bank and Beijing Orsus Xelent Technology & Trading
                Company Limited (incorporated by reference from Exhibit 10.1 to the
                Current Report on Form 8-K filed with the Securities and Exchange
                Commission on September 12, 2007)10.2
            X180
                Mobile Terminal Purchase Contract, dated May 31, 2007, among Unicom
                Huasheng Telecommunication Technology Co., Ltd., Dalian Daxian
                Distribution Company and Beijing Orsus Xelent Technology & Trading
                Company Limited (incorporated by reference from Exhibit 10.1 to the
                Current Report on Form 8-K filed with the Securities and Exchange
                Commission on June 6, 2007)10.3
            2007
                Omnibus Long-Term Incentive Plan (incorporated by reference from
                Exhibit
                10.1 to the Current Report on Form 8-K filed with the Securities
                and
                Exchange Commission on January 11, 2008)14.1
            Code
                of Business Conduct and Ethics (incorporated by reference from Exhibit
                14
                to the Current Report on Form 8-K filed with the Securities and Exchange
                Commission on February 7, 2007)16.1
            Letter
                from Moores Rowland Mazars to the Securities and Exchange Commission
                dated
                July 5, 2007 (incorporated by reference from Exhibit 16.1 to the
                Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                on
                July 6, 2007)21.1
            List
                of Subsidiaries *24.1
            Power
                of Attorney (included on signature page)31.1
            Certification
                of Principal Executive Officer under Section 302 of the Sarbanes-Oxley
                Act
                of 2002 *31.2
            Certification
                of Principal Financial Officer under Section 302 of the Sarbanes-Oxley
                Act
                of 2002 *32.1
            Certification
                of Principal Executive Officer and Principal Financial Officer under
                Section 906 of the Sarbanes-Oxley Act of
                2002*





*
      Filed
      herewith





54




**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





55




**Report
      of Independent Registered Public Accounting Firm**








To
      the
      Audit Committee, Board of Directors and Stockholders


**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, 2007 and 2006, and the related consolidated statements of
      operations and other comprehensive income, changes in stockholders' equity
      and
      cash flows for each of the years then ended. These consolidated financial
      statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the
      standards of the Public Company Accounting Oversight Board (United
      States). Those
      standards require that we plan and perform the audits to obtain reasonable
      assurance about whether the financial statements are free of material
      misstatement. The Company is not required to have, nor were we engaged to
      perform, an audit of its internal control over financial reporting. Our audits
      included consideration of internal control over financial reporting as a basis
      for designing auditing procedures that are appropriate in the circumstances,
      but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. Our audits also included examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, 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, 2007 and 2006, and the results of its operations and its cash flows for
      each
      of the years then ended in conformity with accounting principles generally
      accepted in the United States of America.










**Mazars
      CPA Limited**


*Certified
      Public Accountants*


Hong
      Kong


Date:
      March 31, 2008





F-1





**Orsus
      Xelent Technologies, Inc.**


**Consolidated
      Statements of Operations and other Comprehensive Income**


Years
      ended December 31, 2007 and 2006





*(Dollars
      in thousands except share data and per share amounts)*





**Years
                ended December 31,****2007**
            
            2006***Note***
            
            ***US$’000***
            
            *US$’000***Operating
                revenues - Net sales**
            
            
            
            
            
            **89,923**
            
            
            68,108**Cost
                of operating revenues**
            
            
            
            
            
            **(74,174**
            **)**
            
            (55,226
            )**Gross
                income**
            
            
            
            
            
            **15,749**
            
            
            12,882**Operating
                expenses:**Sales
                and marketing
            
            
            
            
            
            **(553**
            **)**
            
            (1,045
            )General
                and administrative
            
            
            
            
            
            **(2,213**
            **)**
            
            (1,560
            )Research
                and development
            
            
            
            
            
            **(340**
            **)**
            
            (255
            )Depreciation
            
            
            
            
            
            **(142**
            **)**
            
            (175
            )Allowance
                for obsolete inventories
            
            
            
            
            
            **(875**
            **)**
            
            (1,387
            )Loss
                on disposal of property, plant and equipment
            
            
            
            
            
            **(71**
            **)**
            
            (454
            )Total
                operating expenses
            
            
            
            
            
            **(4,194**
            **)**
            
            (4,876
            )**Operating
                income**
            
            
            
            
            
            **11,555**
            
            
            8,006**Other
                income (expenses)**Finance
                costs
            
            
            
            
            
            **(989**
            **)**
            
            (116
            )Other
                income, net
            
            
            
            
            
            **765**
            
            
            75**Income
                before income taxes**
            
            
            
            
            
            **11,331**
            
            
            7,965Income
                taxes
            
            
            *4*
            
            
            **(1,648**
            **)**
            
            (1,247
            )**Net
                income**
            
            
            
            
            
            **9,683**
            
            
            6,718**Other
                comprehensive income**Foreign
                currency translation adjustment
            
            
            
            
            
            **1,931**
            
            
            626**Comprehensive
                Income**
            
            
            
            
            
            **11,614**
            
            
            7,344**Earnings
                per share**
            
            
            *5*Basic
                and diluted (US$)
            
            
            
            
            
            **0.33**
            
            
            0.23Weighted
                average number of shares outstanding
            
            
            
            
            
            **29,756,000**
            
            
            29,756,000




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




F-2




**Orsus
      Xelent Technologies, Inc.**


**Consolidated
      Balance Sheets**


As
      of
      December 31, 2007 and 2006





*(Dollars
      in thousands except share data and per share amounts)*




**As
                of December 31,****ASSETS**
            
            
            
            **2007**
            
            2006***Note***
            
            ***US$’000***
            
            *US$’000***Current
                assets**Cash
                and cash equivalents
            
            
            
            
            
            **2,928**
            
            
            2,421Accounts
                receivable, net of allowance**
            
            
            
            
            
            **57,743**
            
            
            31,425Inventories,
                net
            
            
            *6*
            
            
            **4**
            
            
            1,230Trade
                deposits paid, net
            
            
            
            
            
            **839**
            
            
            8,989Advance
                to third party
            
            
            
            
            
            **-**
            
            
            288Other
                current assets
            
            
            *7*
            
            
            **4,196**
            
            
            86Pledged
                deposit
            
            
            *9*
            
            
            **1,206**
            
            
            1,128Total
                current assets
            
            
            
            
            
            **66,916**
            
            
            45,567Property,
                plant and equipment, net
            
            
            *8*
            
            
            **318**
            
            
            320**Total
                assets**
            
            
            
            
            
            **67,234**
            
            
            45,887**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities**Short-term
                bank loans
            
            
            *9*
            
            
            **9,160**
            
            
            6,268Current
                portion of mortgage loan
            
            
            *13*
            
            
            **68**
            
            
            -Accounts
                payable - Trade
            
            
            
            
            
            **10,854**
            
            
            10,964Accrued
                expenses and other accrued liabilities
            
            
            
            
            
            **8,048**
            
            
            4,444Trade
                depositsreceived
            
            
            
            
            
            **1,709**
            
            
            251Due
                to directors
            
            
            *12*
            
            
            **323**
            
            
            330Provision
                for warranty
            
            
            
            
            
            **123**
            
            
            53Tax
                payables
            
            
            
            
            
            **3,047**
            
            
            1,294Total
                current liabilities
            
            
            
            
            
            **33,332**
            
            
            23,604**Non
                current liabilities**Mortgage
                loan
            
            
            *13*
            
            
            **5**
            
            
            -**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 sharesIssued
                and outstanding: 29,756,000 shares as of
              December
                31, 2007 and 2006
            
            
            
            
            
            **30**
            
            
            30Additional
                paid-in capital
            
            
            
            
            
            **2,484**
            
            
            2,484Dedicated
                reserves
            
            
            
            
            
            **1,042**
            
            
            1,042Accumulated
                other comprehensive income
            
            
            
            
            
            **2,906**
            
            
            975Retained
                earnings
            
            
            
            
            
            **27,435**
            
            
            17,752Total
                stockholders’ equity
            
            
            
            
            
            **33,897**
            
            
            22,283**Total
                liabilities and stockholders’ equity**
            
            
            
            
            
            **67,234**
            
            
            45,887





*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, 2007 and 2006





*(Dollars
      in thousands except share data and per share amounts)*




**Common
                    stock issued****No.
                    of shares**
                
                **Amount**
                
                **Additional**
                  **paid-in**
                  **capital**
                
                **Dedicated**
                  **reserves**
                
                **Other**
                  **compre-**
                  **hensive**
                  **income**
                
                **Retained**
                  **earnings**
                
                **Total***US$’000*
                
                *US$’000*
                
                *US$’000*
                
                *US$’000*
                
                *US$’000*
                
                *US$’000*Balance
                    of January 1, 2006
                
                
                29,756,000
                
                
                30
                
                
                2,484
                
                
                1,042
                
                
                349
                
                
                11,034
                
                
                14,939Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                6,718
                
                
                6,718Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                626
                
                
                -
                
                
                626Balance
                    of January 1, 2007
                
                
                29,756,000
                
                
                30
                
                
                2,484
                
                
                1,042
                
                
                975
                
                
                17,752
                
                
                22,283Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                9,683
                
                
                9,683Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,931
                
                
                -
                
                
                1,931**Balance
                    as of December 31, 2007**
                
                
                **29,756,000**
                
                
                **30**
                
                
                **2,484**
                
                
                **1,042**
                
                
                **2,906**
                
                
                **27,435**
                
                
                **33,897**




*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, 2007 and 2006





*(Dollars
      in thousands except share data and per share amounts)*




**Years
                ended December 31,****2007**
            
            2006***US$’000***
            
            *US$’000***Cash
                flows from operating activities****Net
                income**
            
            
            **9,683**
            
            
            6,718Adjustments
                to reconcile net income to net cash used in operating
                activities:Depreciation
            
            
            **142**
            
            
            175Loss
                on disposal of property, plant and equipment
            
            
            **71**
            
            
            454Allowance
                for doubtful accounts
            
            
            **587**
            
            
            767Allowance
                for obsolete inventories
            
            
            **875**
            
            
            1,387Changes
                in assets and liabilities:Accounts
                receivable, net
            
            
            **(23,925**
            **)**
            
            (19,072
            )Inventories,
                net
            
            
            **436**
            
            
            1,989Trade
                deposits paid, net
            
            
            **7,952**
            
            
            1,245Other
                current assets
            
            
            **(4,104**
            **)**
            
            102Trade
                deposits received
            
            
            **1,441**
            
            
            (5,359
            )Accounts
                payable - trade
            
            
            **(865**
            **)**
            
            2,765Provision
                for warranty
            
            
            **66**
            
            
            (73
            )Accrued
                expenses and other accrued liabilities
            
            
            **3,167**
            
            
            2,133Tax
                payables
            
            
            **1,664**
            
            
            1,272**Net
                cash used in operating activities**
            
            
            **(2,810**
            **)**
            
            (5,497
            )**Cash
                flows from investing activities**Purchase
                of property, plant and equipment
            
            
            **(199**
            **)**
            
            (156
            )Repayment
                from (loan to) third parties
            
            
            **308**
            
            
            (288
            )Pledged
                deposit paid
            
            
            **-**
            
            
            (1,128
            )**Net
                cash provided by (used in) investing activities**
            
            
            **109**
            
            
            (1,572
            )**Cash
                flows from financing activities**Advance
                from a director
            
            
            **99**
            
            
            -Proceeds
                from short-term bank loans
            
            
            **5,195**
            
            
            6,268Proceeds
                from long-term loan
            
            
            **122**
            
            
            -Repayment
                of short-term bank loans
            
            
            **(2,734**
            **)**
            
            -Repayment
                of long-term loan
            
            
            **(49**
            **)**
            
            -**Net
                cash****provided
                by****financing
                activities**
            
            
            **2,633**
            
            
            6,268**Net
                decrease in cash and cash equivalents**
            
            
            **(68**
            **)**
            
            (801
            )**Cash
                and cash equivalents, beginning of the year**
            
            
            **2,421**
            
            
            2,974Effect
                on exchange rate changes
            
            
            **575**
            
            
            248**Cash
                and cash equivalents, end of the year**
            
            
            **2,928**
            
            
            2,421**Supplemental
                disclosure of cash flow information:**Interest
                expenses
            
            
            **732**
            
            
            116Interest
                income
            
            
            **21**
            
            
            -Tax
                paid
            
            
            **47**
            
            
            -




*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, 2007 and 2006
 
 *(Dollars
          in thousands except share data and per share
          amounts)*




**1.**
            **ORGANIZATION
                AND PRINCIPAL ACTIVITIES*****(note)***





Orsus
      Xelent Technologies, Inc. (“ *ORS* ”),
      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., ORS engaged in developing and operating an online dating
      service.





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





Upon
      the
      completion of the reorganization, ORS 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 of 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 ORS 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.





*Note:*  *All
      financial figures mentioned in this note are in dollar
      amounts.*








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





**Accounting
          principles**


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


**Basis
          of consolidation**


The
      financial statements include the accounts of Orsus Xelent Technologies, Inc.
      and
      its subsidiaries. All significant intercompany transactions and balances 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.




F-6




**Orsus
        Xelent Technologies, Inc.**
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2007 and 2006
 
 *(Dollars
        in thousands except share data and per share amounts)*




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




**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$67 and US$81 as of December 31, 2007 and 2006 respectively
      and paid warranty claims of US$1 and US$157 during the years ended December
      31,
      2007 and 2006 respectively. The warranty provision is determined based on known
      product failures, historical experience of the level of repairs and
      replacements, and other currently available evidence.





**Income
      taxes**


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





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




**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.





**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$Nil and US$230 as of
      December 31, 2007 and of 2006 respectively.





**Inventories**


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




F-7


**Orsus
        Xelent Technologies, Inc.**
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2007 and 2006
 
 *(Dollars
        in thousands except share data and per share amounts)*


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





**Property,
      plant and equipment**


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





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





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





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





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





**Impairment
                of long-lived assets**


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





**Foreign
      currency translation**


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





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





F-8




**Orsus
      Xelent Technologies, Inc.**


**Notes
      to Consolidated Financial Statements**


Years
      ended December 31, 2007 and 2006





*(Dollars
      in thousands except share data and per share amounts)*




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





**Foreign
      currency translation (Continued)**


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





Translation
      adjustments, when material, resulting from this process are recorded in
      accumulated other comprehensive income within stockholders’ equity. Other
      comprehensive income for foreign currency translation was recorded for the
      years
      ended December 31, 2007 and 2006 after the Renminbi ceased to be pledged to
      the
      United States Dollars during last year.





**Cash
      equivalents**


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





**Use
      of estimates**


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





**Segment
      information**


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





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





**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.





**Recent
      accounting pronouncements**


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




F-9




**Orsus
        Xelent Technologies, Inc.**
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2007 and 2006
 
 *(Dollars
        in thousands except share data and per share amounts)*


**3.**
            **CONCENTRATIONS**





The
                Company is engaged principally in the design and trading of cellular
                phones primarily to three dealers in the PRC. The Company buys certain
                major materials from five major suppliers. In addition, the Company
                subcontracts material purchasing and assembly works of cellular phones
                mainly to five subcontracting factories. The Company’s policy is 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:





**2007**
            
            2006***%***
            
            *%*Customer
                A
            
            
            **92**
            
            
            53Customer
                B
            
            
            **-**
            
            
            19Customer
                C
            
            
            **-**
            
            
            15





No
      trade
      deposit was received from the above customers as of December 31, 2007 and
      December 31, 2006. Trade receivables from the above customers were US$54,144
      and
      US$31,425 as of December 31, 2007 and 2006, respectively.





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





**2007**
            
            2006***%***
            
            *%*Supplier
                A
            
            
            **35**
            
            
            -Supplier
                B
            
            
            **15**
            
            
            15Supplier
                C
            
            
            **14**
            
            
            11Supplier
                D
            
            
            **8**
            
            
            15Supplier
                E
            
            
            **-**
            
            
            20Supplier
                F
            
            
            **-**
            
            
            10





Gross
      trade deposits paid to the above suppliers were US$410 and US$6,753 as of
      December 31, 2007 and 2006 respectively. Trade payables owed to the above
      suppliers were US$2,990 and US$1,348 as of December 31, 2007 and 2006
      respectively.




F-10




**Orsus
      Xelent Technologies, Inc.**


**Notes
          to Consolidated Financial Statements**
 Years
          ended December 31, 2007 and 2006
 
 *(Dollars
          in thousands except share data and per share
          amounts)*


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





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





**2007**
            
            2006***US$’000***
            
            *US$’000***Revenues**PRC
            
            
            **89,923**
            
            
            60,001Singapore
            
            
            **-**
            
            
            8,107**89,923**
            
            
            68,108




**2007**
            
            2006***US$’000***
            
            *US$’000***Carrying
                amount of long-lived assets**PRC
            
            
            **312**
            
            
            310HK
            
            
            **6**
            
            
            10Total
                long -lived assets
            
            
            **318**
            
            
            320




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





ORS
      and
      its subsidiaries are 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.





UFI
      was
      incorporated in Hong Kong and has no assessable profit for the years presented.
      OXTHK was also incorporated in Hong Kong. Accordingly, Hong Kong Profits Tax
      has
      not been provided and has incurred a loss for taxation purposes.





The
      Company’s income is principally generated in the PRC by BOXT. 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 of 24% for two years commencing in fiscal year 2005,
      followed by a 50% reduction for the next three years.




F-11


**Orsus
        Xelent Technologies, Inc.**
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2007 and 2006
 
 *(Dollars
        in thousands except share data and per share amounts)*




**4.**
            **INCOME
                TAXES (CONTINUED)**





On
      March
      16, 2007, a New Enterprise Income Tax Law (“ *NEITL* ”)
      was
      issued in the PRC. Prior to the issuance of the NEITL, domestic enterprises
      (“ *DE* ”)
      and
      foreign invested enterprises (“ *FIE* ”)
      in the
      PRC were taxed under different enterprise income tax laws. The NEITL unified
      the
      enterprise tax law applicable to both DE and FIE commencing in fiscal year
      beginning from January 1, 2008. The different enterprise income tax
      (“ *EIT* ”)
      rates
      with effective from January 1, 2008 are as follows:





Unified
                EIT rate effective January 1, 2008
            
            
            25
            %Small
                scale / low profit enterprises
            
            
            20
            %Hi-tech
                enterprise
            
            
            15
            %





By
      virtue
      of the NEITL, it is expected that BOXT will be subject to the unified EIT rate
      of 25% under the NEITL. However, the 50% tax reduction, which has already been
      obtained by BOXT under the old tax laws, can still be maintained and the
      remaining tax holiday, which was commenced before 2008, can still be enjoyed
      by
      BOXT, until the year to expiry at 2009.





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





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





Upon
      adoption of FIN 48 on January 1, 2007, and as of December 31, 2007, the Company
      had no unrecognized tax benefits or accruals for the potential payment or
      interest and penalties. The Company’s policy is to record interest and penalties
      in this connection as a component of the provision for income tax expense.
      For
      the year ended December 31, 2007, no interest or penalties were
      recorded.





F-12
 
 **Orsus
          Xelent Technologies, Inc.**
 **Notes
          to Consolidated Financial Statements**
 Years
          ended December 31, 2007 and 2006
 
 *(Dollars
          in thousands except share data and per share
          amounts)*




**4.**
            **INCOME
                TAXES (CONTINUED)**





(a)
            Income
                tax expenses comprised the
                following:





**2007**
            
            2006***US$’000***
            
            *US$’000*Current
                taxUnited
                States
            
            
            **-**
            
            
            -Hong
                Kong
            
            
            **-**
            
            
            32PRC
            
            
            **1,648**
            
            
            1,215**1,648**
            
            
            1,247





(b)
                Reconciliation
                    from the expected statutory tax rate in the PRC of 24%*(2006:
                    24%)*is
                    as follows:





**2007**
            
            2006%
            
            %Statutory
                rate - PRC
            
            
            **24.0**
            
            
            24.0Difference
                in tax rates in the countries that the Company operates
            
            
            **-**
            
            
            (0.1
            )Tax
                exemption
            
            
            **(14.9**
            **)**
            
            (14.7
            )Non-deductible
                items
            
            
            **5.5**
            
            
            6.3Effective
                tax rate
            
            
            **14.6**
            
            
            15.5




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





Basic
      earnings per share is computed based on the net income for the year and on
      the
      weighted average number of shares of common stock outstanding during each
      period.





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





F-13


**Orsus
        Xelent Technologies, Inc.**
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2007 and 2006
 
 *(Dollars
        in thousands except share data and per share amounts)*


**6.**
            **INVENTORIES,
                NET**





Inventories
      consisted of the followings:




**2007**
            
            2006***US$’000***
            
            *US$’000*Raw
                materials
            
            
            **-**
            
            
            1,115Trading
                goods
            
            
            **4**
            
            
            115**4**
            
            
            1,230





The
                Company has changed its mode of operation from keeping inventories
                for
                resale to indent trading during the year ended December 31, 2007
                and
                resulted in significant decrease in inventories at the balance sheet
                date.




**7.**
            **OTHER
                CURRENT ASSETS**





Included
      in other current assets was a deposit of US$4,102 in relation to a proposed
      acquisition paid  pursuant
      to a letter of intent entered into during the year.





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





Property,
      plant and equipment is summarized as follows:





**2007**
            
            2006***US$’000***
            
            *US$’000*Moulds
            
            
            **4**
            
            
            107Leasehold
                improvements
            
            
            **123**
            
            
            115Plant
                and machinery
            
            
            **19**
            
            
            18Office
                equipment
            
            
            **284**
            
            
            266Motor
                vehicles
            
            
            **284**
            
            
            89**714**
            
            
            595Accumulated
                depreciation
            
            
            **(396**
            **)**
            
            (275
            )**318**
            
            
            320





Property,
                plant and equipment with an aggregate net book value as of December
                31,
                2007 of US$177 were pledged to secure the mortgage loan granted to
                a
                subsidiary of the Company as set out in note 13 to the financial
                statements. No such pledge as of December 31,
                2006.




F-14


**Orsus
        Xelent Technologies, Inc.**
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2007 and 2006
 
 *(Dollars
        in thousands except share data and per share
        amounts)*





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





All
                bank loans are secured by personal guarantee provided by the director,
                Mr.
                Liu Yu. Bank loans amounted to US$6,699, renewed during the year,
                are
                further secured by a pledged deposit of US$1,206 and guarantee provided
                by
                a guaranty company. Remaining bank loans of US$2,461, obtained during
                the
                year, are further secured by co-guarantees provided by two third
                party
                companies and a major customer of the Company. All bank loans are
                repayable within one year at interest rates ranging from 7.344% to
                7.956%
                per annum.




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





The
      Company's income is substantially contributed by BOXT, a company incorporated
      in
      the PRC. Income of BOXT is distributable to its equity owners 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 2005, 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.





The
      general reserve fund can be used to make good losses in previous years. The
      staff welfare and bonus fund, which is to be used for the welfare of the staff
      and workers of the subsidiary, is of a capital nature.




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





As
      stipulated by PRC regulations, the Company maintains a defined contribution
      retirement plan for all of its employees who are residents of PRC. All retired
      employees of the Company are entitled to an annual pension equal to their basic
      annual salary upon retirement. The Company contributed to a state sponsored
      retirement plan approximately 20% of the basic salary of its employees and
      has
      no further obligations for the actual pension payments or post-retirement
      benefits beyond the annual contributions. The state sponsored retirement plan
      is
      responsible for the entire pension obligation payable to all
      employees. The
      pension expenses were US$63 and US$27 for the years
      ended December 31, 2007 and 2006 respectively.


F-15


**Orsus
        Xelent Technologies, Inc.**
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2007 and 2006
 
 *(Dollars
        in thousands except share data and per share
        amounts)*


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





(a)
            Name
                and relationship of related parties




**Related
                party**
            **Relationship
                with the Company during the year ended December 31,
                2007**Mr.
                Wang Xin
            Director
                and stockholder of the CompanyMr.
                Liu Yu
            Director
                and stockholder of the CompanyMr.
                Wang Zhibin
            Director
                and stockholder of the Company #





(b)
            Summary
                of related party balances




**2007**
              
              2006***Note***
              
              ***US$’000***
              
              *US$’000***Due
                  to directors**Mr.
                  Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin
              
              
              
              
              
              **-**
              
              
              330Mr.
                  Wang Xin and Mr. Liu Yu
              
              
              *(i)*
              
              
              **323**
              
              
              -**Bank
                  loans guaranteed by a director**Mr.
                  Liu Yu
              
              
              *9*
              
              
              **6,699**
              
              
              6,268**Mortgage
                  loan guaranteed by a director**Mr.
                  Wang Xin
              
              
              *13*
              
              
              **73**
              
              
              -




Note :


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


#
            Ceased
                to be a director since February 7,
                2007.





**13.**
            **MORTGAGE
                LOAN**





The
      mortgage loan is secured by a motor vehicle of a subsidiary of the Company
      as
      set out in note 8 to the financial statements and a personal guarantee provided
      by the director, Mr. Wang Xin. It was charged at a fixed interest rate of 7.56%
      per annum and repayable on February 9, 2009.





**2007**
            
            2006***US$’000***
            
            *US$’000*Current
                portion
            
            
            **68**
            
            
            -Non-current
                portion
            
            
            **5**
            
            
            -**73**
            
            
            -





F-16


**Orsus
        Xelent Technologies, Inc.**
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2007 and 2006
 
 *(Dollars
        in thousands except share data and per share
        amounts)*





**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$133 and US$51
      for the year ended December 31, 2007 and 2006 respectively.





The
      following table summarizes the approximate future minimum rental payments under
      non-cancelable operating leases in effect as of December 31, 2007 and
      2006:





**2007**
            
            2006***US$’000***
            
            *US$’000*2007
            
            
            **-**
            
            
            272008
            
            
            **31**
            
            
            -2009
            
            
            **20**
            
            
            -**51**
            
            
            27





(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, 2007 and 2006, there were sales amounted to approximately US$117,824 and
      US$61,324 respectively for which VAT invoices have not yet been issued.





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





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





F-17


**Orsus
        Xelent Technologies, Inc.**
 **Notes
        to Consolidated Financial Statements**
 Years
        ended December 31, 2007 and 2006
 
 *(Dollars
        in thousands except share data and per share
        amounts)*


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





(c)
            Contingencies
                (Continued)





*Financial
      guarantee contract*


On
      June
      20, 2007, BOXT entered into a guarantee contract for three years to June 16,
      2010 to serve as guarantor of a bank loan amounting to approximately US$15,350
      (equivalent to RMB120,000) 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, BOXT 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.





According
      to a valuation report dated March 27, 2008 issued by an independent professional
      valuer, the fair value of the undiscounted maximum potential amount of future
      payments, which was estimated by the independent professional valuer, that
      BOXT
      could be required to make under the guarantee contract is amounted to US$102
      (equivalent to approximately RMB745) as of the date of inception. At the balance
      sheet date, there is no change in the estimated fair value of the financial
      guarantee since the date of inception in accordance with the above mentioned
      valuation report.




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.**By:
            /s/ Wang
                XinWang
                XinChief
                Executive
                Officer





DATED:
      April 1, 2008





S-1




____________________




**POWER
      OF ATTORNEY**





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





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





Signature
            
            Title
            
            Date/s/
                Wang Xin
            
            Chief
                Executive Officer
            
            April
                  1, 2008Wang
                Xin
            
            (Principal
                Executive Officer) and Director/s/
                Zhao Hongwei
            
            Chief
                Financial Officer
            
            April
                  1, 2008Zhao
                Hongwei
            
            (Principal
                Accounting Officer)/s/
                Liu Yu
            
            Chairman
                  of the Board of Directors
            
            April
                  1, 2008Liu
                Yu/s/
                Naizhong Che
            
            Director
            
            April
                  1, 2008Naizhong
                Che/s/
                Peng Wang
            
            Director
            
            April
                  1, 2008Peng
                Wang/s/
                Zhixiang Zhang
            
            Director
            
            April
                  1, 2008Zhixiang
                Zhang/s/
                Gao Jian
            
            Director
            
            April
                  1, 2008Gao
                Jian/s/
                Howard S. Barth
            
            Director
            
            April
                1, 2008Howard
                S. Barth




S-2


**Index
      to Exhibits**


**Exhibit**
                **Number**
              **Exhibit
                  Description**3.1
              Certificate
                  of Incorporation of Orsus Xelent Technologies, Inc. (incorporated
                  by
                  reference from Exhibit 3.1 to the Registration Statement on Form
                  SB-2
                  filed with the Securities and Exchange Commission on July 28, 2004
                  as
                  amended by that Plan of Merger and Agreement of Merger attached
                  as Exhibit
                  2.1 to the Current Report on Form 8-K filed with the SEC on April
                  20,
                  2005)3.2
              Amended
                  and Restated Bylaws of the Registrant (incorporated by reference
                  from
                  Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities
                  and Exchange Commission on February 7, 2007, as amended by the
                  Current
                  Report on Form 8-K filed with the SEC on March 5, 2007)4.1
              Specimen
                  Certificate of Common Stock (incorporated by reference to Exhibit
                  4.1 to
                  Amendment 2 to the Registration Statement on Form SB-2/A filed
                  with the
                  Securities and Exchange Commission on October 19, 2004)10.1
              Contract
                  of Suretyship, dated June 20, 2007, between Yayuncun Branch of
                  Beijing
                  Rural Commercial Bank and Beijing Orsus Xelent Technology & Trading
                  Company Limited (incorporated by reference from Exhibit 10.1 to
                  the
                  Current Report on Form 8-K filed with the Securities and Exchange
                  Commission on September 12, 2007)10.2
              X180
                  Mobile Terminal Purchase Contract, dated May 31, 2007, among Unicom
                  Huasheng Telecommunication Technology Co., Ltd., Dalian Daxian
                  Distribution Company and Beijing Orsus Xelent Technology & Trading
                  Company Limited (incorporated by reference from Exhibit 10.1 to
                  the
                  Current Report on Form 8-K filed with the Securities and Exchange
                  Commission on June 6, 2007)10.3
              2007
                  Omnibus Long-Term Incentive Plan (incorporated by reference from
                  Exhibit
                  10.1 to the Current Report on Form 8-K filed with the Securities
                  and
                  Exchange Commission on January 11, 2008)14.1
              Code
                  of Business Conduct and Ethics (incorporated by reference from
                  Exhibit 14
                  to the Current Report on Form 8-K filed with the Securities and
                  Exchange
                  Commission on February 7, 2007)16.1
              Letter
                  from Moores Rowland Mazars to the Securities and Exchange Commission
                  dated
                  July 5, 2007 (incorporated by reference from Exhibit 16.1 to the
                  Current
                  Report on Form 8-K filed with the Securities and Exchange Commission
                  on
                  July 6, 2007)21.1
              List
                  of Subsidiaries *24.1
              Power
                  of Attorney (included on signature page)31.1
              Certification
                  of Principal Executive Officer under Section 302 of the Sarbanes-Oxley
                  Act
                  of 2002 *31.2
              Certification
                  of Principal Financial Officer under Section 302 of the Sarbanes-Oxley
                  Act
                  of 2002 *32.1
              Certification
                  of Principal Executive Officer and Principal Financial Officer
                  under
                  Section 906 of the Sarbanes-Oxley Act of
                  2002*
 
 *
        Filed
        herewith