SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549










FORM
10-Q





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





For
the quarterly period ended June 30, 2010





 ̈ 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.)





29th 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)





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   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).





Yes   ̈ No  x





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  ̈
            Accelerated
      filer  ̈Non-accelerated
      filer  ̈ (Do
      not check if a smaller reporting company)
            Smaller
      reporting company x





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12-b2 of the Exchange Act).





Yes   ̈ No  x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b2 of the Exchange Act).





Yes   ̈ No  x





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 August 16, 2010Common
      Stock, US$.001 par value per share
            
            29,756,000
      shares










PagePart
      I: Financial Information
              1Item
      1 -Financial Statements (unaudited)
              1Consolidated
      Balance Sheets
              1Consolidated
      Statements of Income and Comprehensive Income
              2Consolidated
      Statements of Cash Flows
              3Notes
      to Consolidated Financial Statements
              4Item
      2 - Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
              14Item
      3 - Quantitative and Qualitative Disclosures about Market
    Risk
              20Item
      4T - Controls and Procedures
              21Part
      II. Other Information
              21Item
      1 - Legal Proceedings
              21Item
      1A - Risk Factors
              21Item
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
              21Item
      3 - Defaults Upon Senior Securities
              22Item
      4 – Removed and Reserved
              22Item
      5 – Other Information
              22Item
      6 - Exhibits
              22Signatures
              23







PART
I – FINANCIAL INFORMATION


Item
      1.
            Financial
      Statements




Orsus Xelent Technologies, Inc.
      and SubsidiariesConsolidated Balance
      Sheets(Unaudited)





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





June 30,
      2010
                
                
                December 31,2009ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                6
                
                
                $
                374Restricted
      cash
                
                
                4
                
                
                
                4Notes
      Receivable
                
                
                -
                
                
                
                2,779Accounts
      receivable
                
                
                90,973
                
                
                
                81,130Trade
      deposit paid, net
                
                
                4,444
                
                
                
                5,875Other
      current assets, net
                
                
                28
                
                
                
                29Pledged
      deposit
                
                
                1,295
                
                
                
                1,290Total
      current assets
                
                
                96,750
                
                
                
                91,481Property,
      plant and equipment, net
                
                
                164
                
                
                
                178Deferred
      tax asset
                
                
                4,359
                
                
                
                4,095$
                101,273
                
                
                $
                95,754LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesShort-term
      bank loans
                
                $
                9,429
                
                
                $
                9,390Short-term
      loan payable
                
                
                308
                
                
                
                307Accounts
      payable
                
                
                9,229
                
                
                
                7,652Accrued
      expenses and other accrued liabilities
                
                
                4,263
                
                
                
                3,413Due-to
      Shareholders
                
                
                690
                
                
                
                611Income
      taxes payable
                
                
                5,894
                
                
                
                5,870Other
      taxes payable
                
                
                23,612
                
                
                
                21,423Liabilities
      for possible settlement to accounts payable
                
                
                4,199
                
                
                
                2,928Non-Current
      liabilitiesTrade
      deposit received
                
                
                1,884
                
                
                
                1,884Total
      liabilities
                
                
                59,508
                
                
                
                53,478Stockholders’
      equityPreferred
      stock, par value US$0.001; authorized 100,000,000 shares; none
      issuedCommon
      stock, par value US$0.001; authorized 100,000,000
    shares;Issued
      and outstanding 29,756,000 shares as of June 30, 2010 and December 31,
      2009
                
                
                30
                
                
                
                30Additional
      paid-in capital
                
                
                3,209
                
                
                
                3,209Unappropriate
      retained earnings
                
                
                1,042
                
                
                
                1,042Appropriated
      retained earnings
                
                
                31,661
                
                
                
                32,363Accumulated
      other comprehensive income
                
                
                5,823
                
                
                
                5,632Total
      stockholders’ equity
                
                
                41,765
                
                
                
                42,276$
                101,273
                
                
                $
                95,754





See notes
to consolidated financial statements.
  
 1


Orsus
Xelent Technologies, Inc. and Subsidiaries


Consolidated
Statements of Income and Comprehensive Income


(In
thousands, except number of shares and per share data)


(Unaudited)





Three months endedJune30,
                
                
                Six months ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      sales
                
                $
                6,473
                
                
                $
                23,332
                
                
                $
                14,064
                
                
                $
                43,056Cost
      of sales
                
                
                5,997
                
                
                
                20,242
                
                
                
                12,992
                
                
                
                36,874Gross
      profit
                
                
                476
                
                
                
                3,090
                
                
                
                1,072
                
                
                
                6,182Operating
      expenses:Selling
      expenses
                
                
                21
                
                
                
                50
                
                
                
                62
                
                
                
                173General
      and administrative expenses
                
                
                115
                
                
                
                103
                
                
                
                142
                
                
                
                369Research
      and development expenses
                
                
                4
                
                
                
                11
                
                
                
                9
                
                
                
                28Depreciation
      and amortization
                
                
                7
                
                
                
                19
                
                
                
                15
                
                
                
                42Allowance
      for doubtful accounts
                
                
                -
                
                
                
                -
                
                
                
                (251
                )
                
                
                -Total
      Operating Expenses
                
                
                147
                
                
                
                183
                
                
                
                (23
                )
                
                
                612Income
      from operations
                
                
                329
                
                
                
                2,907
                
                
                
                1,095
                
                
                
                5,570Other
      income/(expenses)Interest
      expense
                
                
                (577
                )
                
                
                (266
                )
                
                
                (790
                )
                
                
                (488
                )Other
      (expenses)/income, net
                
                
                -
                
                
                
                -
                
                
                
                (1,252
                )
                
                
                17(Loss)/income
      before income tax expense
                
                
                (248
                )
                
                
                2,641
                
                
                
                (947
                )
                
                
                5,099Income
      tax (expenses)/benefitCurrent
      tax expense
                
                
                -
                
                
                
                334
                
                
                
                -
                
                
                
                657Deferred
      taxes benefit
                
                
                -
                
                
                
                -
                
                
                
                245
                
                
                
                -Net
      (loss)/income
                
                
                (248
                )
                
                
                2,307
                
                
                
                (702
                )
                
                
                4,442Other
      comprehensive incomeForeign
      currency translation adjustment
                
                
                183
                
                
                
                179
                
                
                
                191
                
                
                
                243Comprehensive
      (loss)/income
                
                $
                (65
                )
                
                $
                2,486
                
                
                $
                (511
                )
                
                $
                4,685(Loss)/earnings
      per share:Basic
      and diluted
                
                $
                0.00
                
                
                $
                0.08
                
                
                $
                (0.02
                )
                
                $
                0.15Weighted
      average number of common shares outstanding – basic and
      diluted
                
                
                29,756,000
                
                
                
                29,756,000
                
                
                
                29,756,000
                
                
                
                29,756,000





See notes
to consolidated financial statements.


2


Orsus
Xelent Technologies, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows


(In
thousands, except number of shares and per share data)


(Unaudited)





Sixmonths
      endedJune 30,2010
                
                
                2009Cash
      flows from operating activitiesNet
      (loss)/income
                
                $
                (702
                )
                
                $
                4,442Adjustments
      to reconcile net (loss)/income to net cash used by operating
      activities:Deferred
      tax
                
                
                (245
                )
                
                
                -Depreciation
      and amortization
                
                
                14
                
                
                
                43Loss
      due to liability for possible settlement to accounts
    payable
                
                
                1,252
                
                
                
                -Changes
      in assets and liabilities:Accounts
      receivable
                
                
                (9,466
                )
                
                
                (123
                )Notes
      receivable
                
                
                2,780
                
                
                
                -Trade
      deposits paid, net
                
                
                1,449
                
                
                
                8,116Other
      current assets, net
                
                
                -
                
                
                
                (19,888
                )Accounts
      payable
                
                
                1,545
                
                
                
                117Accrued
      expenses, other accrued liabilities and other tax payable
                
                
                3,005
                
                
                
                6,622Income
      tax payable
                
                
                -
                
                
                
                615Net
      cash flows (used)/provided by operating activities
                
                
                (368
                )
                
                
                (56
                )Cash
      flows from financing activitiesProceeds
      from banks and other loans
                
                
                -
                
                
                
                2,512Repayment
      of bank loans
                
                
                -
                
                
                
                (2,687
                )Repayment
      of mortgage loans
                
                
                -
                
                
                
                (12
                )Net
      cash flows used by financing activities
                
                
                -
                
                
                
                (187
                )Net
      change in cash and cash equivalents
                
                
                (368
                )
                
                
                (243
                )Effect
      of foreign exchange rate changes on cash and cash
    equivalent
                
                
                0
                
                
                
                173Cash
      and cash equivalents - beginning of period
                
                
                374
                
                
                
                102Cash
      and cash equivalents - end of period
                
                $
                6
                
                
                $
                32Supplemental
      disclosure for cash flow informationInterest
      paid
                
                $
                -
                
                
                $
                43Income
      taxes paid
                
                $
                -
                
                
                $
                41




See notes
to consolidated financial statements.




3




Orsus Xelent Technologies,
      Inc.Unaudited Condensed
      Consolidated Financial
Statements




ORSUS
XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




(In
thousands, except number of shares and per share data)





1.
            ORGANIZATION





Orsus
Xelent Technologies Inc. (“ORS” or the “Company”), formerly known as Universal
Flirts Corp., was organized under the laws of the State of Delaware on May 25,
2004.





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





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 purposes
only), an enterprise incorporated in Beijing, PRC on November 10, 2004
which 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 by ORS
in the British Virgin Islands (“BVI”) with issued capital of US$2.00. OXHBVI is
a wholly-owned subsidiary of ORS; OXHBVI’s principal activity is investment
holding. On July 22, 2005, Orsus Xelent Trading (HK) Company Limited (“OXTHK”)
was incorporated by OXHBVI in HK with issued capital of HK$100.00
(equivalent to US$13.00); OXTHK is a company engaged in trading cellular phones
and accessories, and is wholly-owned by OXHBVI.





2.
            DESCRIPTION
      OF BUSINESS





The
Company is principally engaged in the business of designing and distributing
economically priced cellular phones for retail and wholesale
distribution. The Company currently outsources its manufacturing to third
party factories. In February 2004, the Company registered “ORSUS” with the
State Administration for Industry and Commerce in the PRC as its trademark,
which is also known as “Orsus Cellular” within the industry. In January 2007,
the trademark “PROXLINK” was registered for the Company’s specialized
application mobile series.





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Basis
of presentation





The
accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) and include the financial statements of the
Company and its subsidiaries.





The
accompanying unaudited consolidated financial statements as of June 30, 2010,
and for the six months ended June 30, 2010 and 2009 have been prepared in
accordance with GAAP for interim financial information and with the instructions
to Form 10-Q and Rule 8-03 of Regulation S-X applicable to smaller reporting
companies. In the opinion of management, all adjustments necessary for a fair
statement of the results for the interim periods have been made and all
adjustments are of a normal recurring nature (or a description of the nature and
amount of any adjustments other than normal recurring adjustments). The
unaudited consolidated interim financial statements should be read in
conjunction with the Company’s audited consolidated financial statements and
notes thereto for the year ended December 31, 2009 that are included in the
Company’s 2009 annual report on 10-K filed with the Securities and Exchange
Commission.





The
unaudited consolidated interim financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 2009.


4







Orsus Xelent Technologies,
      Inc.Unaudited Condensed
      Consolidated Financial
Statements









The
consolidated unaudited financial statements include the accounts of Orsus Xelent
Technologies, Inc. and its subsidiaries. All inter-company transactions and
balances have been eliminated in consolidation.





Use
of Estimates





The
preparation of unaudited interim Consolidated Financial Statements in conformity
with accounting principles generally accepted in the United States requires us
to make estimates and assumptions that affect the amounts reported and disclosed
in the financial statements and the accompanying notes. Actual results could
differ materially from these estimates. We evaluate our estimates on an ongoing
basis, including those related to accounts receivable and sales allowances,
useful lives of property and equipment, fair values of options to purchase our
common stock, and income taxes, among others. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable, the results of which form the basis for making judgments about the
carrying values of assets and liabilities.





Accounts
Receivable





Accounts
receivable are recognized and carried at original invoiced amount less an
allowance for any potential uncollectible amounts. An estimate for doubtful
debts is made when collection of the full amount is no longer probable. Bad
debts are written off as incurred. We generally do not require collateral
from our customers.




Recently
issued accounting pronouncements





In
January 2010, the FASB issued the following ASC Updates:





ASU No.
2010-01—Equity (Topic 505): Accounting for Distributions to Shareholders with
Components of Stock and Cash. This Update clarifies that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock dividend for
purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The
amendments in this Update are effective for interim and annual periods ending on
or after December 15, 2009 with retrospective application.





ASU No.
2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary. This Update amends ASC 810 subtopic 10 and related
guidance to clarify that the scope of the decrease in ownership provisions of
the Subtopic and related guidance applies to (i) a subsidiary or group of assets
that is a business or nonprofit activity; (ii) a subsidiary that is a business
or nonprofit activity that is transferred to an equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a non-controlling interest in an entity, but does not
apply to (a) sales of in substance real estate or (b) conveyances of petroleum
and gas mineral rights. The amendments in this Update are effective beginning in
the period that an entity adopts FAS 160 (now included in ASC 810 subtopic
10).





ASU No.
2010-05—Compensation—Stock Compensation (Topic 718): Escrowed Share Arrangements
and the Presumption of Compensation. This Update simply codifies EITF Topic
D-110, “Escrowed Share Arrangements and the Presumption of Compensation and does
not change any existing accounting standards.





ASU No.
2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements.  This Update amends ASC 820
subtopic 10 that requires new disclosures about transfers in and out of Levels 1
and 2 fair value measurements and activity in Level 3 fair value measurements.
This Update also amends ASC 820 subtopic 10 to clarify certain existing
disclosures. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurements,
which are effective for fiscal years beginning after December 15,
2010.





The
Company expects that the adoption of the above updates issued in January 2010
will not have any significant impact on its financial position and results of
operations.


5




Orsus Xelent Technologies,
      Inc.Unaudited Condensed
      Consolidated Financial
Statements




4.
            RESTRICTED
      CASH





There are
three blocked bank accounts with restricted cash with the amount of US$4 as of
June 30, 2010. Two bank accounts are related to the legal disputes with two
suppliers of BOXT. Shenzhen Songding Industry Ltd. (“Songding”) provides the
battery chargers and Beijing Baoxin Packing Materials Co., Ltd. (“Baoxin”)
provides the packing materials to BOXT. The third bank account was blocked
because the loan from Beijing Rural Commercial Bank has been overdue since
September 27, 2009, and the Company has not repaid any principle or interest.
The balance of this account on June 30, 2010 was zero. (Refer to Note 13,
“Commitments And Contingencies”.)





There are
two blocked bank accounts with restricted cash with the amount of US$4 as of
December 31, 2009, which related to Songding and Baoxin.




5.
            ACCOUNTS
      RECEIVABLE





The
Company’s business relies on a few distributors. US$90,973 and US$81,130 of
accounts receivable as of June 30, 2010 and December 31, 2009, respectively,
mainly consisted of a balance of US$83,871 and US$75,616 due from Beijing
Xingwang Shidai Commerce Co., Ltd. (“Xingwang”), the major distributor of the
Company. The reason for the large accounts receivable balance as of June 30,
2010 and December 31, 2009 is due to longer turnover days than
before.  Longer turnover days occur due to the following: (i) industry
profit has decreased, middle-level distributors have been removed and the
national level distributor, Xingwang, had to sell the products to direct
customers—the retailers—and (ii) the turn-over rate of the retailers is always
slower than middle level distributors.





The long
aged account receivable to Xingwang is guaranteed by a third-party gurantee
company licensed by the PRC government, Zhong Hui Guarantee Corporation
(“Zhonghui”). On December 25, 2008, Xingwang entered into an irrevocable Credit
Guarantee Contract (the “Guarantee Contract”) with Zhonghui and BOXT under which
Zhonghui agreed to guarantee up to Renminbi (“RMB”) 300 million (equivalent to
US$43,885), for the principal debt, fine, damages arising out of breach of
contract, and costs incurred for realizing those legal rights including but not
limited to legal proceeding fees, attorney fees and travel expenses arising out
of the distributor agreement entered into by BOXT and Xingwang. The Guarantee
Contract was effective as of December 25, 2008 and provides a guarantee for all
of the accounts receivable that are or may become outstanding from Xingwang to
BOXT from January 1, 2008 through December 31, 2008. On December 31, 2009, the
guarantee contract expired. A new guarantee contract was signed between BOXT,
Xingwang Shidai and Zhonghui on January 1, 2010 and provides a guarantee for
part of the accounts receivable with a maximum amount of US$43,885 that are or
may become outstanding from Xingwang to BOXT from January 1, 2008 through
December 31, 2010. Since most part account receivable is guaranteed by the
abovementioned guarantee agreement, no allowance for doubtful accounts is
accrued.




6.
            TRADE
      DEPOSITS PAID, NET




US$4,444 and
US$5,875 of trade deposits paid to suppliers on June 30, 2010 and December 31,
2009, is payment in advance to suppliers, which consisted of the
following:





June 30, 2010
                
                
                December 31, 2009(US$’000)
                
                
                (US$’000)(Unaudited)
                
                
                (Audited)Trade
      deposits paid
                
                $
                4,573
                
                
                $
                6,004Less:
      allowance for doubtful accounts
                
                
                (129
                )
                
                
                (129
                )Total
                
                $
                4,444
                
                
                $
                5,875




During
the six months ended June 30, 2010, the Company accrued US$129 as the provision
to the vendors with the aging over three years.




7.
            OTHER
      CURRENT ASSETS, NET





As of
June 30, 2010 and December 31, 2009, the other current assets of US$28 and
US$29, respectively, are mainly composed of the advanced payment of employee
travel expenses and the components and parts for post-sales maintenance of
products stored in the maintenance vendors.


6





Orsus Xelent Technologies,
      Inc.Unaudited Condensed
      Consolidated Financial
Statements




The
allowance for doubtful accounts of US$1,794 as of June 30, 2010 and December 31,
2009 was due to the provision for receivables from Leimeng Times and other
accounts with aging over three years. The management believes these accounts are
uncollectable, and as such, the allowance for doubtful account is
provided.




June
      30, 2010
                
                
                December 31, 2009(US$’000)
                
                
                (US$’000)(Unaudited)
                
                
                (Audited)Other
      current assets
                
                $
                1,822
                
                
                $
                1,816Less:
      allowance for doubtful accounts
                
                
                (1,794
                )
                
                
                (1,787
                )Total
                
                $
                28
                
                
                $
                29




8.
            PLEDGED
      DEPOSIT





US$1,295
of pledged deposits at June 30, 2010 and US$1,290 of pledged deposits at
December 31, 2009 were paid to Zhonghui, a guarantee company, in September 2008
as a pledge for US$6,874 (RMB47,000) of bank loans. Refer to Note 10,
“Short-Term Bank Loans” for more discussion of the bank loans.




9.
            PROPERTY,
      PLANT AND EQUIPMENT





Property,
plant and equipment as of June 30, 2010 and December 31, 2009 consisted of the
following:


June
      30, 2010
                  
                  
                  December
      31,
                    2009US$’000
                  
                  
                  US$’000(Unaudited)
                  
                  
                  (Audited)Moulds
                  
                  
                  4
                  
                  
                  
                  4Leasehold
      improvements
                  
                  
                  131
                  
                  
                  
                  131Office
      equipment
                  
                  
                  323
                  
                  
                  
                  323Motor
      vehicles
                  
                  
                  303
                  
                  
                  
                  303761
                  
                  
                  
                  761Less:
      Accumulated depreciation
                  
                  
                  (597
                  )
                  
                  
                  (583
                  )164
                  
                  
                  
                  178





The
depreciation expenses were US$7 and US$19 for the three months ended June 30,
2010 and 2009, respectively. The depreciation expenses were US$15 and US$42 for
the six months ended June 30, 2010 and 2009, respectively.




10.
            SHORT-TERM
      BANK LOANS





All bank
loans outstanding at June 30, 2010 and December 31, 2009 were borrowed by BOXT.
Details of short-term bank loans are summarized as follows:





At
      June 30,
                                        2010
                                      
                                      Amount
                                        (RMB’000)
                                      
                                      
                                      Annual
                                        interest
      rate
                                      
                                      Term
                                      Guarantee
      provided by(Unaudited)Loan
      from Beijing Rural Commercial Bank
                                      
                                      47,000
                                        (US$6,903)
                                      
                                      
                                      
                                      10.08
                                      %
                                      From
      September 28, 2008 to September 27, 2009
                                      Director
      Liu Yu; A guarantee company; pledged deposit of
US$1,290Loan
      from Huaxia Bank
                                      
                                      17,200
                                        (US$2,526)
                                      
                                      
                                      
                                      6.3720
                                      %
                                      From
      February 20,2009 to February 20, 2010
                                      Director
      Liu Yu; Two third party companies; Distributor
Xingwang.Total
                                      
                                      64,200
                                        (US$9,429)




7




Orsus Xelent Technologies,
      Inc.Unaudited Condensed
      Consolidated Financial
Statements




At
      December 31,
                                      2009
                                    
                                    Amount
                                      (RMB’000)
                                    
                                    
                                    Annual
                                      interest
      rate
                                    
                                    Term
                                    Guarantee
      provided byLoan
      from Beijing Rural Commercial Bank
                                    
                                    47,000
                                      (US$6,874)
                                    
                                    
                                    
                                    10.08
                                    %
                                    From
      September 28, 2008 to September 27, 2009
                                    Director
      Liu Yu; A guarantee company; pledged deposit of
US$1,290Loan
      from Huaxia Bank
                                    
                                    17,200
                                      (US$2,516)
                                    
                                    
                                    
                                    6.3720
                                    %
                                    From
      February 20, 2009 to February 20, 2010
                                    Director
      Liu Yu; Two third party companies; Distributor
Xingwang.Total
                                    
                                    64,200
                                      (US$9,390)





Interest
expense incurred for the three months ended June 30, 2010 and 2009 were US$577
and US$266, respectively. Interest expense incurred for the six months ended
June 30, 2010 and 2009 were US$790 and US$488, respectively.





US$6,903
of a loan from Beijing Rural Commercial Bank was originally due on September 27,
2009. The Company is currently negotiating an extension of the term with the
bank. The penalty interest rate on the principal and interest in default is 130%
of the contracted interest rate and is chargeable from the due date of the
principal. The Company accrued US$446 in penalty interest for the six months
ended June 30, 2010, and US$682 in penalty interest from September 28, 2009 to
June 30, 2010.





US$2,526
of a loan from Huaxia Bank was due on February 20, 2010.  The Company
is currently negotiating an extension of the term with the bank. The penalty
interest rate on the principal and interest in default is 150% of the contracted
interest rate and is chargeable from the due date of the principal. The Company
accrued US$323 in penalty interest for the six months ended June 30,
2010.




11.
            SHORT-TERM
      LOAN FROM A NON-FINANCIAL
INSTITUTION




The
US$308 and US$307 short-term loan from a non-financial institution as of June
30, 2010 and December 31, 2009, respectively was provided by a third party
company, Zhonghui. It was unsecured, interest-free and repayable on September
27, 2009. The Company is currently negotiating an extension of the term with
Zhonghui. No default penalty interest is chargeable according to the loan
agreement.




12.
            AMOUNT
      DUE TO SHAREHOLDERS AND RELATED PARTY
  TRANSACTIONS





(a)
              Name
      and relationship of
shareholders





Related party
              
              RelationshipMr.
      Liu Yu
              
              Director
      and shareholder of the CompanyMr.
      Wang Xin
              
              Shareholder
      and former director of the Company (Resigned on March 27,
      2009)





(b)
              Summary
      of balances due to shareholders and related party
    transactions


June
      30, 2010
                  
                  
                  December
      31, 2009US$’000
                  
                  
                  US$’000(Unaudited)
                  
                  
                  (Audited)Due
      to shareholdersMr.
      Liu Yu
                  
                  
                  482
                  
                  
                  
                  402Mr.
      Wang Xin
                  
                  
                  208
                  
                  
                  
                  209690
                  
                  
                  
                  611Bank
      loans guaranteed by Mr. Liu Yu
                  
                  
                  9,429
                  
                  
                  
                  9,390





The
amounts due to shareholders are unsecured, interest-free and repayable on
demand.


8




Orsus Xelent Technologies,
      Inc.Unaudited Condensed
      Consolidated Financial
Statements




13.
            COMMITMENTS
      AND CONTINGENCIES





(a)
            Operating
      lease commitments





As of
June 30, 2010 and December 31, 2009, the Company had non-cancelable operating
leases for its office premises, under which the expected rental payment due
within the next year was US$26 and US$53, respectively.





(b)
            Contingencies





Tax
penalty





In
accordance with the PRC’s tax regulations, BOXT’s sales are subject to a 17% of
value added tax (“VAT”) upon the sales made to customers. BOXT follows the
practice of reporting its revenue with VAT invoices issued to PRC tax
authorities for VAT purposes.  For the six months ended June 30, 2010
and 2009, there were sales amounting to US$12,177 and US$217,623 respectively,
for which VAT invoices have not yet been issued.





The sales
revenue of the six months ended June 30, 2010 and 2009 was US$14,064 and
US$43,056, respectively, representing US$2,391 and US$7,320 output VAT,
respectively. Meanwhile, the input VAT for which the invoice had been received
was US$301 and US$1,111for the six months ended June 30, 2010 and 2009,
respectively. Therefore, the net VAT payable is US$2,090 and US$6,209 for the
six months ended June 30, 2010 and 2009 respectively.





According
to PRC tax law, only the input VAT supported with a sufficient invoice could be
deducted from the current period’s output VAT.  If a purchase is made
without obtaining an invoice, then the related input VAT is not allowed to be
deducted.





As there
is little tax payment made during the years, the accumulated VAT payable is
US$23,612 and US$21,423 as of June 30, 2010 and December 31, 2009,
respectively.





Furthermore,
BOXT reports its revenue for PRC Enterprise Income Tax (“EIT”) purposes when VAT
invoices are issued rather than when goods are delivered. All unbilled revenue
will become taxable when invoices are issued.





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





Litigation




There are
two legal disputes with two suppliers of BOXT. Songding provides battery
chargers and Baoxin provides packing materials to BOXT. The legal disputes with
the abovementioned suppliers arose because the Company did not accept
accessories and materials supplied by Songding and Baoxin due to quality
issues. The management of BOXT determined to cease payment to Songding and
Baoxin accordingly.




The
dispute between Baoxin and BOXT commenced in arbitration initiated by Baoxin on
October 2006, which was arbitrated by the Beijing Arbitration Commission on
October 24, 2006. BOXT is obligated to pay Baoxin US$246. Currently, BOXT and
Baoxin are in the process of the final negotiation based on the arbitration
result. As such, Baoxin applied to the court for property preservation and one
of BOXT’s bank accounts has been blocked accordingly. BOXT has recorded the
arbitration result as an account payable to the supplier after the arbitration.
The balance of account payable to Baoxin as of June 30, 2010 is
US$36.




The
resolution of the dispute between Songding and BOXT is still pending final
arbitration. Songding has argued for BOXT to pay the amount of US$281 by
Songding. Songding prepared the arbitration application on December 28, 2009 and
applied to the court for property preservation to block the bank account of
BOXT. The application was formally accepted by the Beijing arbitration
commission on January 12, 2010. Since Songding applied for the property
preservation to the court, one of BOXT’s bank accounts has been blocked
accordingly. The balance of accounts payable to Songding as of June 30, 2010 is
US$54.




9


Orsus Xelent Technologies,
      Inc.Unaudited Condensed
      Consolidated Financial
Statements




Warranty





During the
six months ended June 30, 2010, we made no allowance for the warranty for
product problems because, during this period, post-sale services for
newly-launched products were undertaken by Original Equipment Manufacturers
(“OEM”) factories rather than the Company. Therefore, allowances were not made
accordingly for these post-sale services.





Overdue Bank
Loan





The
Company currently has an overdue bank loan of US$6,903 from Beijing Rural
Commercial Bank and US$2, 526 from Huaxia Bank that were loaned on June 30,
2010. The Company is negotiating an extension of the term of the loan with the
banks.




14.
            UNAPPROPRIATED
      RETAINED EARNINGS





The
Company’s subsidiary, BOXT, was required to allocate at least 10% of its after
tax profits as determined under generally accepted accounting principle in the
PRC to a statutory dedicated reserve until the reserve balance reaches 50% of
its registered capital. For the six months ended June 30, 2010, BOXT made
appropriations to this statutory reserve of US$0 due to net loss incurred for
the period. The accumulated balance of the dedicated reserve at BOXT as of June
30, 2010 and December 31, 2009 were US$1,042 and US$1,042,
respectively.




15.
            STOCK
      OPTIONS





On March
27, 2008, a stock option plan named the “2007 Omnibus Long-Term Incentive Plan”
(the “Plan”) was approved by the board of directors. The purpose of the Plan is
to promote the long-term performance goals and general prosperity of the
Company. The Plan, which provides for the grant of stock options, stock
appreciation rights, restricted stock, restricted stock units, unrestricted
stock and cash awards, is designed to help the Company and its subsidiaries and
affiliates attract and retain senior officers for positions of substantial
responsibility and to provide non-employee directors and key employees with
additional motivation and an incentive to improve the business results and
contribute to the success of the Company.





On April
2, 2008, stock options to a subscribed total of 614,000 shares were granted to
certain directors, senior officers and other key employees of the Company at an
exercise price of US$2.26 per share. The options granted are exercisable from
July 2, 2008. The expiration date of the options is April 2, 2018.





In
accordance with the terms of the share-based payment arrangement, the
aforementioned options were vested at the date of grant. According to a
valuation report, dated August 1, 2008, issued by an independent professional
appraiser, the fair value of these options was US$725, which was estimated on
the date of grant using the Binomial Lattice option pricing model. Where
relevant, the expected life used in the model has been adjusted based on
management’s best estimate for the effects of transferability, exercise
restrictions and behavioral consideration. Compensation expense of US$725 is
charged to income as the benefit was fully vested at the date of grant. Key
assumptions included in the estimation are as follows:





Expected
      dividend yield
                  
                  
                  -Expected
      stock price volatility
                  
                  
                  85.07
                  %Risk
      free interest risk
                  
                  
                  3.61
                  %Expected
      life of share options
                  
                  10
                  Years





A summary
of the share option plan activity during the six month period ended June 30,
2010 is presented below:





Number of
                    share options(Unaudited)As
      of January 1, 2010
                  
                  
                  614,000Granted
                  
                  
                  -Exercised
                  
                  
                  -Cancelled/lapsed
                  
                  
                  -As
      of June 30, 2010
                  
                  
                  614,000




10




Orsus Xelent Technologies,
      Inc.Unaudited Condensed
      Consolidated Financial
Statements




16.
            LIABILITIES
      FOR POSSIBLE SETTLEMENT OF ACCOUNTS
PAYABLE





Liabilities
for possible settlement of accounts payable of US$4,182 arose from the provision
of a penalty for unpaid accounts payable to suppliers on June 30, 2010. In
the purchase contracts signed between suppliers and the Company since 2006, an
agreed term between BOXT and the suppliers acknowledges that any outstanding
payment which exceeds the agreed payment schedule will be imposed on an
additional 0.3% per day delayed payment penalty based on the principle amount of
contract liability. However, some of such purchase contracts were signed before
2006, and according to relevant PRC civil laws and regulations, if the
creditors did not claim for the right in writing to the Company within two years
since the date on which the liability was due, the periods of prescription will
expire after two years from the date on which the liability was due. We note
that in the meantime, no legal letters related to this liability (0.3% penalty
arising from the outstanding payment.) were issued from our suppliers in past 4
years. However, from the point of prudence principle, we accrued this liability
based on the terms of the contract. As of June 30, 2010, the Company has
accrued a possible penalty for the purchase contracts signed after June 30,
2008 based on such penalty term in the amount of US$1,252,000. Such possible
liability was accrued during the six months ended June 30, 2010.




17.
            PENSION
      COSTS




As
stipulated by the PRC regulations, the Company maintains a defined contribution
retirement plan for all of its employees who are residents of the
PRC.  All retired PRC employees of the Company are entitled to an
annual pension equivalent to their basic annual salary upon
retirement.  The Company contributed to a state sponsored retirement
plan approximately 20% of the basic salary of its PRC 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$2 and US$0 for the three months ended June 30, 2010 and
2009 respectively. The pension expenses were US$19 and US$29 for the six months
ended June 30, 2010 and 2009 respectively.




18.
            INCOME
      TAXES




The
Company and its subsidiaries file separate income tax returns.





The
United States of America





Orsus
Xelent Technologies, Inc. is incorporated in the State of Delaware in the
United States and is subject to a gradual U.S. federal corporate income tax of
15% to 35%. The State of Delaware does not impose any corporate state income
tax.





British
Virgin Islands





OXHBVI is
incorporated in the British Virgin Islands. Under the current laws of the
British Virgin Islands, OXHBVI is not subject to tax on income or capital gains.
In addition, upon payments of dividends by OXHBVI, no British Virgin Islands
withholding tax is imposed.





Hong
Kong





UFI and
OXTHK are incorporated in Hong Kong. UFI and OXTHK did not earn any income that
was derived in Hong Kong for the six months ended June 30, 2010 and 2009 and
therefore was not subject to Hong Kong Profits Tax. The payments of dividends by
Hong Kong companies are not subject to any Hong Kong withholding
tax.





PRC





Effective
from January 1, 2008, the PRC’s statutory income tax rate is 25%. According to
prior Corporate Income Tax Law, BOXT is characterized as a “Manufacturing
Foreign Invested Enterprise” and enjoyed a 5 year period of reduced taxes. In
the first 2 years, the Corporate Income Tax was exempted and during the
remaining 3 years, an incentive tax rate (12.5%) was provided to the enterprise.
Fiscal year 2009 was the last year of the five year period of reduced taxes.
BOXT has to declare and pay 25% tax rate from the year 2010.





The
Company’s effective income tax rate was 0% and 13.14% for the six-month periods
ended June 30, 2010 and 2009, respectively. The difference between effective tax
rate and statutory tax rate primarily represented the tax effects on the
non-taxable income and non-deductible expenses.


11





Orsus Xelent Technologies,
      Inc.Unaudited Condensed
      Consolidated Financial
Statements




The
Company had deferred tax assets of approximately $4,359 and $4,095 as of June
30, 2010 and December 31, 2009, respectively, which arose from the allowance for
doubtful accounts and the provision for liability for possible settlement to
accounts payable. The Company had no other temporary differences as of June 30,
2010 and December 31, 2009.





As of
June 30, 2010 and the year ended December 31, 2009, the Company and its
subsidiaries did not have unrecognized tax benefits and therefore no interest or
penalties related to unrecognized tax benefits were accrued. The Company does
not expect that the amount of unrecognized tax benefits will change
significantly within the next 9 months.





The
Company and its subsidiaries mainly file income tax returns in the United States
and PRC. The Company is subject to U.S. federal income tax examination by tax
authorities for tax years beginning in 2008.  According to the PRC Tax
Administration and Collection Law, the statute of limitations is three years if
the underpayment of taxes is due to computational errors made by the taxpayer or
the withholding agent. The statute of limitations is extended to five years
under special circumstances where the underpayment of taxes is more than RMB100
(US$15). In the case of transfer pricing issues, the statute of limitations is
ten years. There is no statute of limitations in the case of tax evasion. The
PRC tax returns for the Company’s PRC subsidiary are open to examination by the
PRC state and local tax authorities for the tax years beginning in
2008.




19.
            EARNINGS
      PER SHARE





The
following table sets forth the computation of basic and diluted earnings per
share for the periods presented:




Six months ended June 30,2010
                        
                        
                        2009(Unaudited)
                        
                        
                        (Unaudited)Numerator
      used in basic net income per share:Net
      (loss)/income
                        
                        
                        (702
                        )
                        
                        
                        4,442Shares
      (denominator):Weighted
      average common shares outstanding
                        
                        
                        29,756,000
                        
                        
                        
                        29,756,000Plus:
      weighted average incremental shares from assumed exercise of
      warrants
                        
                        
                        -
                        
                        
                        
                        -Weighted
      average common shares outstanding used in computing diluted net
      income per common share
                        
                        
                        29,756,000
                        
                        
                        
                        29,756,000Earnings
      per ordinary share-basic and diluted
                        
                        $
                        (0.024
                        )
                        
                        $
                        0.15





As of
June 30, 2010 and 2009, the Company had 614,000 outstanding options that could
potentially dilute basic income per share in the future, but which were excluded
in the computation of diluted income per share in the periods presented, as
their effect would have been anti-dilutive since the exercise price of these
options was higher than average market price during six months ended June 30,
2010 and 2009.




20.
            CONCENTRATIONS
      AND CREDIT RISKS





At June
30, 2010, the Company had a credit risk exposure of uninsured cash in banks of
approximately US $6.  To limit exposure to credit risk relating to
deposits, the Company primarily places cash deposits only with large financial
institutions in the PRC with acceptable credit ratings.





During
the six months ended June 30, 2010, the Company was engaged principally in the
design and trading of cellular phones to two primary distributors in the
PRC.  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.




12


Orsus
Xelent Technologies, Inc.


Unaudited Condensed Consolidated
Financial Statements


The
Company buys certain major materials from one major supplier (over 63% of
materials purchased). In addition, the Company subcontracts material purchasing
and assembly works of cellular phones primarily to two subcontracting factories.
The diversification of suppliers will reduce the risk of increasing production
cost.




(a)
            During
      the six months ended June 30, 2010 and 2009, the Company’s operating
      revenue was mainly derived from two distributors. For six months ended
      June 30, 2010 and 2009, 92.2% and 82%, respectively, of total revenue was
      derived from our largest distributor Xingwang. There were no trade
      deposits received from Xingwang as of June 30, 2010 and 2009. Accounts
      receivable from Xingwang were US$83,871 and US$75,616 as of June 30, 2010
      and December 31, 2009, respectively. As mentioned in Note 5, “Accounts
      Receivable”, in the year 2008, a guarantee company provided a guarantee of
      up to US$43,829 (RMB300 million) for the accounts receivable from Xingwang
      for two years from the date they are due. The agreement has been
      renewed and re-signed as of January 20, 2010, and the guaranteed
      period was extended to the year ended December 31,
  2010.





(c)
            Suppliers
      accounting for over 10% of the Company’s purchases are as
      follows:




Three months ended June 30
                    
                    
                    Six months ended June 302010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009%
                    
                    
                    %
                    
                    
                    %
                    
                    
                    %(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Supplier
      A
                    
                    
                    63
                    %
                    
                    
                    53
                    
                    
                    
                    29
                    %
                    
                    
                    49Supplier
      B
                    
                    
                    37
                    %
                    
                    
                    31
                    
                    
                    
                    61
                    %
                    
                    
                    42Supplier
      C
                    
                    
                    
                    
                    
                    
                    16
                    
                    
                    
                    10
                    %
                    
                    
                    -Total
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    
                    100
                    
                    
                    
                    91





Advances
to the above suppliers were US$4,444 and US$3,815 as of June 30, 2010 and
December 31, 2009, respectively. Accounts payable owed to the above suppliers
were US$3,672 and US$0 as of June 30, 2010 and December 31, 2009,
respectively.




(c)
            The
      Company’s revenue for the six months ended June 30, 2010 and 2009,
      respectively, were all derived from the PRC. Geographical information of
      the carrying amount of long-lived assets is as
  follows:




30-Jun-10
                      
                      
                      31-Dec-09US$’000
                      
                      
                      US$’000(unaudited)
                      
                      
                      (audited)PRC
                      
                      
                      162
                      
                      
                      
                      176Hongkong
                      
                      
                      2
                      
                      
                      
                      2Total
      long-lived assets
                      
                      
                      164
                      
                      
                      
                      178




The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC as well as by the general
state of the PRC’s economy. The business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.




21.
            SUBSEQUENT
      EVENTS





Management
has considered all events occurring through August 16, 2010, the date the financial
statements have been issued, and has determined that there are no such events
that are material to the financial statements, or all such material events have
been fully disclosed.




13





Item
2. 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-Q.





OVERVIEW




The Company was organized under
the laws of the State of Delaware in May 2004 under the name “Universal Flirts
Corp.” On June 1, 2004, the Company acquired all the issued and outstanding
shares of Universal Flirts, Inc., a New York corporation, from its sole
shareholder, Darrel Lerner, 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 a wholly-owned subsidiary of
the Company.





Pursuant to a 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 the
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 (“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, par value
US$0.001 per share, 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 US$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”).




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 of 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 (“PRC”).





The business operations of UFIL are
conducted through its wholly-owned subsidiary, Xelent, also known as “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, and specialized users from all fields of business and 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.




14




Many of Xelent’s cellular phone
products are equipped with industry cutting-edge features such as 1.8 to
2.8-inch CSTN, TFT or QVGA dual-color display; capacity to record videos lasting
one minute up to four hours; 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 and flip-phone technology; and
innovative ultra-thin lightweight design.




Xelent has provided its handsets to
many different types of consumers in the market for GSM mobile devices. 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 significant marketing efforts 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 GSM model X180 in large volumes starting in April 2007, thereby taking
advantage of the opportunity to establish a presence in the specialized
application mobile terminal market.




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





The Company’s cell phone products are
mainly produced through OEMs and the products were delivered from OEMs to
distributors directly. The Company keeps no inventory or very limited
quantity.





Business
Review





The Company sold 97,000 cell phone
units during the second quarter of 2010. For the three months ended June 30,
2010, the Company generated revenue of US$6,473,000, representing a decrease of
72.25% as compared to US$23,332,000 for the same period in 2009, in contrast
with the entire cell phone market, the whole GSM market size was down 11.6% than
last quarter and 2.2% than the second quarter of 2009. While CMDA1X market size
was decline of 5.7% compared to the last quarter but an increase of 37.1%
compared to the same time in 2009, as recently reported by Sino Market Research
Limited. Meanwhile, the Company achieved a gross profit margin of 7.35%, a
decrease of 5.89% as compared to 13.24% earned for the same period in 2009. The
Company believes this decrease is due to the fact that our major customers
didn’t get several large orders from their customers. The Company continued to
supply feature-rich, economically-priced, mid-level and low-end products—a
different strategy from that of foreign brands, which tend to have higher costs
and higher output prices.




The Company believes there are four
main influences on the current state of the cell phone market in the
PRC. First, the reorganization of domestic telecommunication operators has
created a lag in market demand. In particular, the market demand for
high-margin products was much lower than expected, because telecom operators
applied preferential service packages to low-priced cell phones in order to
safeguard increases in their customer base and control costs while dealing with
increased competition. Second, the major force driving current cell phone sales
in the PRC is rural customers, a majority of whom tend to favor less expensive,
lower-end products. This strength is expected to grow continually as the PRC
government further implements its national policies to bring more home
appliances to rural households. Third, it is unknown when the far-reaching
international financial crisis will hit its bottom and the PRC’s
economic stimulus programs have mainly focused on infrastructure projects,
rather than the consumer demand. Fourth, cell phones are gradually shifting from
high-tech products to fast-moving consumer goods, which, inevitably, will lead
to a decrease in cell phone prices in the near future.




The Company is aware that the cell
phone market in the PRC may continue to experience some difficulty in 2010, but
it still projects that the industry will be in a better position in upcoming
quarters because (a) the reorganization of PRC telecom carriers is projected to
lead to market development, and (b) new 3G technology is likely to encourage
market demand. With these projections in mind, the Company will continue to
employ the following three operating strategies going forward:





1.
            Safeguard
      our traditional sales channels and explore the possibility of selling more
      GSM cell phones in traditional markets. The Company will use its key
      ability to create telephone models that respond precisely to market
      opportunities to target customer
needs.


2.
                Launch
      our own 3G products while telecom carriers are promoting the commercial
      use of 3G. Based on the relationships we have already built with the
      telecom carriers, we believe the Company will be able to establish a
      beneficial market share in this new era of the telecom
      industry.


15





3.
            Expand
      our industrial structure by consummating certain acquisitions using funds
      obtained from the capital markets in order to enhance our business
      foundation and long-term
development.





In
summary, the Company predicts modest decline in both sales revenues and net
income during the fiscal year ending December 31, 2010.




CRITICAL
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES




Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates based on historical experience and
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




The
following table summarizes our operating results for the six months ended June
30, 2010 and 2009, respectively (in thousand USD):




Six months ended
                  
                  
                  Six months endedJune30,2010
                  
                  
                  June30,2009
                  
                  
                  Comparison(US$000)
                  
                  
                  %of
                    Revenue
                  
                  
                  (US$000)
                  
                  
                  %of
                    Revenue
                  
                  
                  (US$000)
                  
                  
                  %Net
      sales
                  
                  
                  14,064
                  
                  
                  
                  100.00
                  %
                  
                  
                  43,056
                  
                  
                  
                  100.00
                  %
                  
                  
                  (28,992
                  )
                  
                  
                  (67.34
                  )%Cost
      of sales
                  
                  
                  12,992
                  
                  
                  
                  92.38
                  %
                  
                  
                  36,874
                  
                  
                  
                  85.64
                  %
                  
                  
                  (23,882
                  )
                  
                  
                  (64.77
                  )%Sales
      expenses
                  
                  
                  62
                  
                  
                  
                  0.44
                  %
                  
                  
                  173
                  
                  
                  
                  0.40
                  %
                  
                  
                  (111
                  )
                  
                  
                  (64.16
                  )%General
      & administrative expenses
                  
                  
                  142
                  
                  
                  
                  1.01
                  %
                  
                  
                  369
                  
                  
                  
                  0.86
                  %
                  
                  
                  (227
                  )
                  
                  
                  (61.52
                  )%Research
      and development expenses
                  
                  
                  9
                  
                  
                  
                  0.06
                  %
                  
                  
                  28
                  
                  
                  
                  0.07
                  %
                  
                  
                  (19
                  )
                  
                  
                  (67.86
                  )%Depreciation
      and amortization
                  
                  
                  15
                  
                  
                  
                  0.11
                  %
                  
                  
                  42
                  
                  
                  
                  0.10
                  %
                  
                  
                  (27
                  )
                  
                  
                  (64.29
                  )%Allowance
      for doubtful accounts
                  
                  
                  (251
                  )
                  
                  
                  (1.78
                  )%
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (251
                  )
                  
                  
                  100.00
                  %Interest
      expenses
                  
                  
                  (790
                  )
                  
                  
                  (5.62
                  )%
                  
                  
                  (488
                  )
                  
                  
                  (1.13
                  )%
                  
                  
                  (302
                  )
                  
                  
                  61.89
                  %Other
      (expenses)/income, net
                  
                  
                  (1,252
                  )
                  
                  
                  (8.90
                  )%
                  
                  
                  17
                  
                  
                  
                  0.04
                  %
                  
                  
                  (1,269
                  )
                  
                  
                  (7466.06
                  )%Income
      before income tax expense
                  
                  
                  (947
                  )
                  
                  
                  (6.74
                  )%
                  
                  
                  5,099
                  
                  
                  
                  11.84
                  %
                  
                  
                  (6,046
                  )
                  
                  
                  (118.58
                  )%Current
      tax expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (657
                  )
                  
                  
                  (1.53
                  )%
                  
                  
                  657
                  
                  
                  
                  100.00
                  %Deferred
      taxes benefit
                  
                  
                  245
                  
                  
                  
                  1.74
                  %
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  245
                  
                  
                  
                  100.00
                  %Net
      (loss)/income
                  
                  
                  (702
                  )
                  
                  
                  (4.99
                  )%
                  
                  
                  4,442
                  
                  
                  
                  10.32
                  %
                  
                  
                  (5,144
                  )
                  
                  
                  (115.81
                  )%




16





Three months ended
                  
                  
                  Three months endedJune30,2010
                  
                  
                  June30,2009
                  
                  
                  Comparison(US$000)
                  
                  
                  %of
                    Revenue
                  
                  
                  (US$000)
                  
                  
                  %of
                    Revenue
                  
                  
                  (US$000)
                  
                  
                  %Net
      sales
                  
                  
                  6,473
                  
                  
                  
                  100.00
                  %
                  
                  
                  23,332
                  
                  
                  
                  100.00
                  %
                  
                  
                  (16,859
                  )
                  
                  
                  (72.26
                  )%Cost
      of sales
                  
                  
                  5,997
                  
                  
                  
                  92.65
                  %
                  
                  
                  20,242
                  
                  
                  
                  86.76
                  %
                  
                  
                  (14,245
                  )
                  
                  
                  (70.37
                  )%Sales
      expenses
                  
                  
                  21
                  
                  
                  
                  0.32
                  %
                  
                  
                  50
                  
                  
                  
                  0.21
                  %
                  
                  
                  (29
                  )
                  
                  
                  (58.00
                  )%General
      & administrative expenses
                  
                  
                  115
                  
                  
                  
                  1.78
                  %
                  
                  
                  103
                  
                  
                  
                  0.44
                  %
                  
                  
                  12
                  
                  
                  
                  11.65
                  %Research
      and development expenses
                  
                  
                  4
                  
                  
                  
                  0.06
                  %
                  
                  
                  11
                  
                  
                  
                  0.05
                  %
                  
                  
                  (7
                  )
                  
                  
                  (63.64
                  )%Depreciation
      and amortization
                  
                  
                  7
                  
                  
                  
                  0.11
                  %
                  
                  
                  19
                  
                  
                  
                  0.08
                  %
                  
                  
                  (12
                  )
                  
                  
                  (63.16
                  )%Interest
      expenses
                  
                  
                  (577
                  )
                  
                  
                  (8.91
                  )%
                  
                  
                  (266
                  )
                  
                  
                  (1.14
                  )%
                  
                  
                  (311
                  )
                  
                  
                  116.92
                  %Income
      before income tax expense
                  
                  
                  (248
                  )
                  
                  
                  (3.83
                  )%
                  
                  
                  2,641
                  
                  
                  
                  11.32
                  %
                  
                  
                  (2,889
                  )
                  
                  
                  (109.39
                  )%Current
      tax expense
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (334
                  )
                  
                  
                  (1.43
                  )%
                  
                  
                  (334
                  )
                  
                  
                  (100.00
                  )%Net
      (loss)/income
                  
                  
                  (248
                  )
                  
                  
                  (3.83
                  )%
                  
                  
                  2,307
                  
                  
                  
                  9.89
                  %
                  
                  
                  (2,555
                  )
                  
                  
                  (110.75
                  )%





Net
sales





Our
revenue was US$14,064,000 for the six months ended June 30, 2010, representing a
decrease of 67.34% compared to US$43,056,000 for the same period in 2009. For
the three months ended June 30, 2010, the total revenues of the Company were
US$6,473,000, representing a decrease of 72.26% as compared to US$23,332,000 in
the same period of 2009.





As stated
in the Business Review section above, despite the global economic turmoil, we
believe China's economy has begun to improve gradually. However, it seems that
the economy has mainly focused on large-scale projects instead of the consumer
goods markets, as the sector has experienced a much slower recovery. Under this
situation, the Company continuously focuses its production and sales strategies
on low-priced cell phones. However, less of 3G products and the decline of
market demand for low end products led to poor sales performance of
the second quarter of 2010.





Products Segment




For the
three months ended June 30, 2010, the Company’s sales were primarily
attributable to the following products:




Cellular
                  
                  Three months ended June 30, 2010phones model
                  
                  Amount
                  
                  
                  % of total revenue(US$’000)DX9188
                  
                  
                  4,025
                  
                  
                  
                  62
                  %H808
                  
                  
                  1,526
                  
                  
                  
                  24
                  %DXX9
                  
                  
                  919
                  
                  
                  
                  14
                  %Total
                  
                  
                  6,473
                  
                  
                  
                  100
                  %




Customer
Segments





For the
six months ended June 30, 2010, our sales in the aggregate amount of
US$14,064,000 were derived mainly from Xingwang. Xingwang has been our most
important distributor for a long period of time. It is one of the largest
distributors in mainland China and has sales networks in major cities across the
PRC.




17




Three months ended June 30, 2010Amount
                      
                      
                      % of total Accounts(US$’000)
                      
                      
                      ReceivableBeijing
      Xingwang Shidai Tech & Trading Co., Ltd.
                      
                      
                      83,871
                      
                      
                      
                      92
                      %Tianjin
      Tongguang
                      
                      
                      7,102
                      
                      
                      
                      8
                      %Total
                      
                      
                      90,973
                      
                      
                      
                      100.00
                      %





Gross
Margin





For the
three months ended June 30, 2010, gross margin was US$476,000, representing a
decrease of US$2,614,000 in gross profit when compared to the same period of
2009. During this period, to cope with the global financial crisis and the
increasing competition in the Chinese cell phone market, many manufacturers were
involved in price wars, clearance sales and capital recalls, regardless of the
losses they might suffer from in the short term. As a result, normal selling
prices of products were unstable and products’ gross profits dropped severely.
The Company’s gross margin for the period decreased to 7.35% as compared to
13.24% for the same period of 2009.





For the
three months ended June 30, 2010, DX9188 products have contributed approximately
62% of our revenue in the quarterly financial results. Marketed at a very
reasonable price, DX9188 products were sold in such a large quantity that they
indeed boosted the Company’s overall gross margin for this quarter.




Under
the guidance of its previously planned products strategy, the Company will be
focused on broadening sales channels for high-profit customized products and
enhancing the existing customer base and sales channel in the traditional
market. To maintain a sustainable growth in gross margin, the Company is
planning to extend its product development in line with telecom operators’
requirements.




Selling
expenses





Selling
expenses mainly represent payments made to sales personnel and transportation
costs.




For the
three months ended June 30, 2010, selling expenses were US$21,000, or 0.32% of
revenues, representing a US$29,000 decrease compared with US$50,000 for the
corresponding period in 2009.




The
decrease in selling expenses is created as the sales performance of second
quarter of 2010 does not meet the management’s
expectation.


Research
and Development (R&D) expenses





For the
three months ended June 30, 2010, R&D expenses were US$4,000, or 0.06% of
revenue, representing a decrease of US$7,000 or 63.64%, compared with the
numbers for the corresponding period in 2009. The significant decrease in
R&D expenses was a result of the Company’s focus on more regular R&D
initiatives and the fact that it did not launch full R&D projects for
development of new products during the current year. This decision was
considered prudent in light of the potential impact from the pending telecom
industrial reorganization in the PRC.




General
and administrative expenses





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




For the
three months ended June 30, 2010, total general and administrative expenses were
US$115,000, or 1.78% of total revenues, representing an increase of US$12,000,
or 11.65% as compared to US$103,000, or 0.44%, of the total revenues for the
corresponding period in 2009. For the six months ended June 30, 2010, total
general and administrative expenses were US$142,000, or 1.01% of total revenues,
representing an decrease of US$227,000, or 61.52% as compared to US$369,000, or
0.86%, of the total revenues for the corresponding period in
2009.


18





From the
longer periods, the sharp decrease in general and administrative expenses was
primarily attributable to structural adjustment, internal management control and
costs reduction.




Interest
expenses





For the
three months ended June 30, 2010, interest expenses decreased by US$311,000
compared with same period in 2009. The decrease is mainly due to the Company not
paying the outstanding interest expenses in a timely manner.





Other
(expenses) income, net





For the
six months ended June 30, 2010, other expenses accounted for US$(1,252,000). It
was mainly comprised of reversals of accrued allowance for contingent
liabilities that might be raised pursuant to the penalty terms of the purchasing
contract.





Provision
for income taxes





For the
three months ended June 30, 2010, provision for income taxes decreased by
US$334,000 compared with same period in 2009. The decrease is mainly
attributable to a decline in taxable income.




Net income




For the
six months ended June 30, 2010, our net income was US$702,000 or a net profit
margin of −4.99%, representing a decrease of US$−5,144,000, or 115.81%, as
compared to US$4,442,000, or a net profit margin of 10.32% in the same period of
2009. The significant decrease was mainly due to our business shrinking in the
current economic downturn.





LIQUIDITY
AND SOURCES OF CAPITAL




The
Company’s business relies on few distributors. In the current economic
environment, turnover days of accounts receivable due from these distributors
are longer. The Company has not provided any bad debt provision to the
significant accounts receivable balance considering the historically good
cooperative relationship with these distributors and believes no provision is
needed as of June 30, 2010.




The
Company is discussing with those distributors to try to collect a portion of
account receivable in third quarter of 2010.





The
Company has limited cash and cash equivalents in hand for a long time and may
obtain loans from banks to finance business operation from time to time. The
Company currently has certain overdue loan from Beijing Rural Commercial Bank at
June 30, 2010. The Company is negotiating an extension of the term with the
bank.




The
Company has not paid salaries and welfare to employees for certain months in
2010 due to difficulty in cash flow.





We
generally finance our operations from cash flow generated internally and
short-term financing from domestic banks in China.





As of
June 30, 2010, we had current assets of US$96,750,000. Current assets are mainly
comprised of accounts receivable of US$90,973,000, advance to suppliers of
US$4,444,000, cash and cash equivalents of US$6,000, pledged deposits of
US$1,295,000, restricted cash of US$4,000 and other current assets of
US$28,000.





As of
June 30, 2010, our current liabilities were US$59,508,000 and included
short-term bank loans of US$9,429,000, short-term loan payable of US$308,000,
accounts payable of US$9,229,000, accrued expenses and other accrued liabilities
of US$4,263,000, trade deposits received of US$1,884,000, amounts due to
shareholders of US$690,000, income taxes payable of US$5,894,000, other taxes
payable of US$23,612,000 and liabilities for possible settlement to accounts
payable of US$4,199,000.


19





We offer
two different trading terms to our customers: cash-on-delivery or credit terms
of 45-120 days. As of June 30, 2010, our accounts receivable had increased by
US$9,843,000 to US$90,973,000, as compared to US$81,130,000 on December 31,
2009. The increase in accounts receivables was mainly due to a longer turn over
period in the current economic recession environment. We will pay close
attention to the liquidity progress of our distributors. As previously
disclosed, in order to reduce the risks of default, we have limited terms of
credit to our major distributor in the Master Distributor Agreement and have the
third-party guarantee company to guarantee the accounts receivable due from this
major distributor.





As of
June 30, 2010, our advance to suppliers was US$4,444,000, which represented a
decrease of US$1,431,000 as compared with US$5,875,000 as of December 31, 2009.
The decrease was primarily because the Company offsets the advance to suppliers
when the goods are received properly.





As of
June 30, 2010, our other current assets were US$28,000, which represented a
decrease of US$1,000, as compared to US$29,000 as of December 31, 2009. There
are no any significant changes between these two periods.




As of
June 30, 2010, our accounts payable were US$9,229,000, which represents an
increase of US$1,577,000, or 20.61%, as compared to US$7,652,000 as of December
31, 2009. The increase was mainly because we delayed the payment to certain
suppliers to meet our working capital demand.





As of
June 30, 2010, accrued expenses and liabilities were US$4,263,000, representing
an increase of US$850,000 or 24.90%, compared to US$3,413,000 as of December 31,
2009. The increase was mainly due to accrued salary and accrued VAT in past
period.





During
this quarter, we made no allowance for warranty problems because, during this
period, after-sale services for newly-launched products were undertaken by OEM
factories, rather than the Company. Therefore, allowances were not made
accordingly for these after-sale services.





As of
June 30, 2010, income tax payable was US$5,894,000, representing an increase of
US$24,000 or 0.41%, compared to US$5,870,000 as of December 31, 2009. The
increase was mainly due to the foreign exchange rate change.





As of
June 30, 2010, cash and bank balances were mainly denominated in Renminbi
(“RMB”). Our revenue and expenses, assets and liabilities are mainly denominated
in RMB and U.S. Dollars (“USD”). The Company operations are mainly denominated
in RMB.




It seems
that the global financial crisis has made it difficult for companies to raise
capital through equity financing. In order to ensure its liquidity, the Company
will attempt to recover accounts receivable due from customers and to raise
funds, as necessary, through loans from Chinese domestic banks.




CASH
FLOWS




As of
June 30, 2010, we had cash and cash equivalents of US$6,000. This represented a
decrease of US$368,000 when compared with US$374,000 as of December 31, 2009.
During the three months ended June 30, 2010, we had a fast moving cash flow to
ensure desirable goods supplies. We made timely payments to our suppliers so
that we had shortened goods supply terms to deal with the fierce competition in
the cell phone market.




As of
June 30, 2010, our aggregate short term loans were US$9,737,000, which were
comprised of US$2,526,000 from Huaxia Bank, US$6,903,000 from Beijing Rural and
Commercial Bank and US$308,000 from a third party company.




OFF
BALANCE SHEET ARRANGEMENTS





As of June 30, 2010, we had no
off-balance sheet arrangements.




Item 3.                 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.
Aggregate bank loans as of June 30, 2010, were US$9,737,000. The interest rate
for the three months ended June 30, 2010 was charged at 6.372% to 10.080% per
annum.


20




Item
4T.               Controls
and Procedures.




Evaluation
of Disclosure Controls and Procedures




Disclosure
Controls and Procedures




The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in reports filed by the Company under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and regulations and that such information is
accumulated and communicated to our management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. Our Chief Executive Officer and Chief
Financial Officer evaluated, with the participation of other members of
management, the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rule 15d-15(e)), as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective.




Although
the management of our Company, including the Chief Executive Officer and the
Chief Financial Officer, believes that our disclosure controls and internal
controls currently provide reasonable assurance that our desired control
objectives have been met, management does not expect that our disclosure
controls or internal controls 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 design of a control system must reflect the fact that there are
resource constraints, and 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
and instances of fraud, if any, within our 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
controls. 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.




Changes
in Internal Controls over Financial Reporting




There
were no significant changes in our internal controls over financial reporting
identified in connection with this evaluation that occurred during our last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal controls over financial
reporting.




PART
II – OTHER INFORMATION


Item
1.                  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
1A.               Risk
Factors.





Not
required.





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





(a)           None.


21




(b)           Not
applicable.





(c)           None.





Item
3.                 
Defaults Upon Senior Securities.





None.





Item
4.                 
Removed and Reserved.





Item
5.                  Other
Information.





(a)           None.





(b)           There
were no material changes to the procedures by which security holders may
recommend nominees to the registrant's board of directors during the fiscal
quarter ended June 30, 2010.





Item
6.                  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 Description3.1
            
            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
            
            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)10.2
            
            Master
      Distributor Agreement, dated as of August 7, 2008, by and between Beijing
      Orsus Xelent Technology & Trading Company Limited and Beijing Xingwang
      Shidai Commerce Co., Ltd. (incorporated by reference from Exhibit 10.1 to
      the Current Report on Form 8-K filed with the Securities and Exchange
      Commission on August 20, 2008)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 under Section 906 of the Sarbanes-Oxley Act
      of 2002 *32.2
            
            Certification
      of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 *


* Filed
herewith


22


SIGNATURES


Pursuant
to the requirements 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/ Guoji LiuGuoji
      LiuChief
      Executive OfficerBy:
              /s/ Hua ChenHua
      ChenChief
      Financial Officer




DATED:
August 16, 2010


23


INDEX
TO EXHIBITS


Exhibit Number
            
            Exhibit Description3.1
            
            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
            
            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)10.2
            
            Master
      Distributor Agreement, dated as of August 7, 2008, by and between Beijing
      Orsus Xelent Technology & Trading Company Limited and Beijing Xingwang
      Shidai Commerce Co., Ltd. (incorporated by reference from Exhibit 10.1 to
      the Current Report on Form 8-K filed with the Securities and Exchange
      Commission on August 20, 2008)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 under Section 906 of the Sarbanes-Oxley Act
      of 2002 *32.2
            
            Certification
      of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act
      of 2002 *


* Filed
herewith




24