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 September 30, 2009





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





For
the transition period from ______ to ______.




Commission
file number: 001-33456




ORSUS
XELENT TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)




Delaware
                (State
      of incorporation)
              
              20-1198142
                (I.R.S.  Employer
      Identification No.)





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  o





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  o                      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 o
                    
                    Accelerated
      filer oNon-accelerated
      filer o
      (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  o                      No  x









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





Yes  o                      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 November 23, 2009Common
      Stock, US$.001 par value per share
            
            29,756,000
      shares










PagePart
      I: Financial Information
                    
                    
                    1Item
      1 -Financial Statements
                    
                    
                    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
                    
                    
                    15Item
      3 - Quantitative and Qualitative Disclosures about Market
    Risk
                    
                    
                    22Item
      4T - Controls and Procedures
                    
                    
                    23Part
      II. Other Information
                    
                    
                    23Item
      1 - Legal Proceedings
                    
                    
                    23Item
      1A - Risk Factors
                    
                    
                    23Item
      2 - Unregistered Sales of Equity Securities and Use of
      Proceeds
                    
                    
                    23Item
      3 - Defaults Upon Senior Securities
                    
                    
                    24Item
      4 - Submission of Matters to a Vote of Security Holders
                    
                    
                    24Item
      5 - Other Information
                    
                    
                    24Item
      6 - Exhibits
                    
                    
                    24Signatures
                    
                    
                    25















PART
I – FINANCIAL INFORMATION


Item
1.           Financial
Statements




Orsus
Xelent Technologies, Inc. and Subsidiaries


Consolidated Balance
Sheets




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







September
      30, 2009
                                            
                                            
                                            December
      31, 2008(Unaudited)
                                            
                                            
                                            (Audited)ASSETSCurrent
      assetsCash
      and cash equivalents
                                            
                                            
                                            32
                                            
                                            
                                            
                                            102Accounts
      receivable
                                            
                                            
                                            93,398
                                            
                                            
                                            
                                            82,076Advances
      to suppliers
                                            
                                            
                                            21,834
                                            
                                            
                                            
                                            8,441Other
      current assets
                                            
                                            
                                            1,824
                                            
                                            
                                            
                                            1,859Pledged
      deposit
                                            
                                            
                                            1,290
                                            
                                            
                                            
                                            1,287Total
      current assets
                                            
                                            
                                            118,378
                                            
                                            
                                            
                                            93,765Property,
      plant and equipment, net
                                            
                                            
                                            187
                                            
                                            
                                            
                                            241118,565
                                            
                                            
                                            
                                            94,006LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesLoan
      payable-bank
                                            
                                            
                                            9,389
                                            
                                            
                                            
                                            9,484Loan
      payable
                                            
                                            
                                            307
                                            
                                            
                                            
                                            364Current
      portion of mortgage loan
                                            
                                            
                                            -
                                            
                                            
                                            
                                            12Accounts
      payable
                                            
                                            
                                            24,166
                                            
                                            
                                            
                                            16,353Accrued
      expenses and other accrued liabilities
                                            
                                            
                                            21,813
                                            
                                            
                                            
                                            12,012Trade
      deposits received
                                            
                                            
                                            1,936
                                            
                                            
                                            
                                            1,934Due
      to shareholders
                                            
                                            
                                            568
                                            
                                            
                                            
                                            457Income
      taxes payable
                                            
                                            
                                            5,871
                                            
                                            
                                            
                                            4,989Total
      current liabilities
                                            
                                            
                                            64,050
                                            
                                            
                                            
                                            45,605Commitments
      and contingencies (Note 12)Stockholders’
      equityPreferred
      stock, par value US$0.001; authorized 100,000,000 shares; none
      issued
                                            
                                            
                                            
                                            
                                            
                                            
                                            -Common
      stock, par value US$0.001;
                                              authorized
      100,000,000 shares;
                                              Issued
      and outstanding 29,756,000 shares, both periods
                                            
                                            
                                            30
                                            
                                            
                                            
                                            30Additional
      paid-in capital
                                            
                                            
                                            3,209
                                            
                                            
                                            
                                            3,209Dedicated
      reserves
                                            
                                            
                                            1,115
                                            
                                            
                                            
                                            1,042Accumulated
      other comprehensive income
                                            
                                            
                                            5,691
                                            
                                            
                                            
                                            5,389Retained
      earnings
                                            
                                            
                                            44,470
                                            
                                            
                                            
                                            38,731Total
      stockholders’ equity
                                            
                                            
                                            54,515
                                            
                                            
                                            
                                            48,401118,565
                                            
                                            
                                            
                                            94,006




See notes
to consolidated financial statements.
  1
  Orsus
Xelent Technologies, Inc. and Subsidiaries
 Unaudited
Consolidated Statements of Income and Comprehensive Income
 (US Dollars in thousands except
share and per share data)





Three
      months ended
                  September
      30,
              
              
              Nine
      months ended
                  September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      sales
              
              
              19,125
              
              
              
              29,240
              
              
              
              62,181
              
              
              
              78,853Cost
      of sales
              
              
              17,053
              
              
              
              25,073
              
              
              
              53,928
              
              
              
              68,302Gross
      margin
              
              
              2,072
              
              
              
              4,167
              
              
              
              8,253
              
              
              
              10,551Operating
      expenses:Selling
      expenses
              
              
              40
              
              
              
              128
              
              
              
              213
              
              
              
              353General
      and administrative expenses
              
              
              164
              
              
              
              228
              
              
              
              533
              
              
              
              1,799Research
      and development expenses
              
              
              4
              
              
              
              250
              
              
              
              32
              
              
              
              391Depreciation
              
              
              12
              
              
              
              23
              
              
              
              54
              
              
              
              72Total
      operating expenses
              
              
              220
              
              
              
              629
              
              
              
              832
              
              
              
              2,615Operating
      income
              
              
              1,852
              
              
              
              3,538
              
              
              
              7,421
              
              
              
              7,936Other
      income (expenses)Interest
      expense
              
              
              (270
              )
              
              
              (255
              )
              
              
              (758
              )
              
              
              (733
              )Other
      income
              
              
              -
              
              
              
              87
              
              
              
              17
              
              
              
              465Income
      before income tax expense
              
              
              1,582
              
              
              
              3,370
              
              
              
              6,680
              
              
              
              7,668Income
      tax expense
              
              
              212
              
              
              
              445
              
              
              
              868
              
              
              
              1,320Net
      income
              
              
              1,370
              
              
              
              2,925
              
              
              
              5,812
              
              
              
              6,348Other
      comprehensive incomeForeign
      currency translation adjustment
              
              
              59
              
              
              
              (36
              )
              
              
              302
              
              
              
              1,480Comprehensive
      income
              
              
              1,429
              
              
              
              2,889
              
              
              
              6,114
              
              
              
              7,828Earnings
      per share:Basic
      and diluted
              
              
              0.05
              
              
              
              0.10
              
              
              
              0.20
              
              
              
              0.21Weighted
      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
 Unaudited
Consolidated Statements of Cash Flows 
 (Dollars in thousands except share
and per share data)


Nine
      months ended
                    September
      30,2009
                  
                  
                  2008Cash
      flows from operating activitiesNet
      income
                  
                  
                  5,812
                  
                  
                  
                  6,348Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
                  
                  
                  54
                  
                  
                  
                  72Compensation
      costs for stock options granted
                  
                  
                  -
                  
                  
                  
                  725Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  (11,114
                  )
                  
                  
                  (18,202
                  )Inventories
                  
                  
                  -
                  
                  
                  
                  4Advances
      to suppliers
                  
                  
                  (13,363
                  )
                  
                  
                  (5,362
                  )Other
      current assets
                  
                  
                  41
                  
                  
                  
                  2,636Accounts
      payable
                  
                  
                  7,769
                  
                  
                  
                  8,582Accrued
      expenses and other accrued liabilities
                  
                  
                  9,443
                  
                  
                  
                  1,610Trade
      deposits received
                  
                  
                  -
                  
                  
                  
                  162Income
      tax payables
                  
                  
                  832
                  
                  
                  
                  1,178Allowance
      for warranty
                  
                  
                  -
                  
                  
                  
                  (38
                  )Net
      cash used in operating activities
                  
                  
                  (526
                  )
                  
                  
                  (2,285
                  )Cash
      flows from financing activitiesDue
      to shareholders
                  
                  
                  110
                  
                  
                  
                  125Proceeds
      from short-term bank loan and financial istitution
                  
                  
                  2,821
                  
                  
                  
                  9,114Repayment
      of bank loan payable-bank and financial istitution
                  
                  
                  (2,689
                  )
                  
                  
                  (9,033
                  )Repayment
      of mortgage loan
                  
                  
                  (12
                  )
                  
                  
                  -Net
      cash (used in)/provided by financing activities
                  
                  
                  230
                  
                  
                  
                  206Effect of foreign currency
      exchange rate fluctuation on cash and cash
      equivalents
                  
                  
                  226
                  
                  
                  
                  75Net
      decrease in cash and cash equivalents
                  
                  
                  (70
                  )
                  
                  
                  (2,004
                  )Cash
      and cash equivalents-beginning of the period
                  
                  
                  102
                  
                  
                  
                  2,928Cash
      and cash equivalents-end of the period
                  
                  
                  32
                  
                  
                  
                  924Supplemental
      disclosure of cash flow informationInterest
      Paid
                  
                  
                  43
                  
                  
                  
                  756Income Taxes
      Paid
                  
                  
                  41
                  
                  
                  
                  515




See notes
to consolidated financial statements.




3




ORSUS
XELENT TECHNOLOGIES, INC. AND SUBSIDIARIES




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




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






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 wholely 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 100% owned by OXHBVI.





2.
            DESCRIPTION
      OF BUSINESS





The
Company is principally engaged in the business of designing, manufacturing and
distributing economically priced cellular phones for retail and wholesale
distribution. 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.




The
Company’s business relies on a few distributors. In the current economic
environment, turnover days of accounts receivable due from these distributors
are longer than before. The Company has not provided any bad debt provision to
the significant accounts receivable balance considering historical good
cooperation relationship with these distributors and believes no provision is
needed as of September 30, 2009.
 
 The
Company is discussing with those distributors to try to collect a portion of
account receivable in fourth quarter of 2009.
 
 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
September 30, 2009. 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
2009 due to difficulty in cash flow.


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. All significant intercompany transactions and
balances have been eliminated on consolidation.





The
accompanying unaudited consolidated financial statements as of September 30,
2009 and for the three months and nine months ended September 30, 2009 and 2008
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, these unaudited
consolidated interim financial statements include all adjustments considered
necessary to ensure the financial statements are not misleading.





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, 2008.





Basis
of consolidation





The
consolidated 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 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.




4




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.





We
maintain allowances for doubtful accounts for estimated losses resulting from
the failure of customers to make payments on time. We review the accounts
receivable on a periodic basis and make specific allowances when there is doubt
as to the collectibility of individual balances. In evaluating the
collectibility of individual receivable balances, we consider many factors,
including the age of the balance, the customer’s past payment history,
cooperation history with us, its current credit-worthiness and current economic
trends.




Recently
issued accounting pronouncements





FASB Establishes Accounting
Standards Codification


In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.




Following
the Codification, the Board will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to
update the Codification, provide background information about the guidance and
provide the basis for conclusions on the changes to the
Codification.




The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification is effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, we are providing the Codification
cross-reference alongside the references to the standards issued and adopted
prior to the adoption of the Codification.





Fair Value
Accounting


In 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements” (ASC Topic 820)
which defines fair value, establishes a market-based framework or hierarchy for
measuring fair value and expands disclosures about fair value measurements. This
guidance is applicable whenever another accounting pronouncement requires or
permits assets and liabilities to be measured at fair value. It does not expand
or require any new fair value measures; however the application of this
statement may change current practice. We adopted this guidance for financial
assets and liabilities effective January 1, 2008 and for non financial
assets and liabilities effective January 1, 2009. The adoption did not have
a material effect on our financial condition or results of
operations.


In April
2009, the FASB issued the following updates that provide additional application
guidance and enhance disclosures regarding fair value measurements and
impairments of securities:




•
            FSP
      FAS 157-4, “Determining Fair Value When the Volume and Level of Activity
      for the Asset or Liability Have Significantly Decreased and Identifying
      Transactions That Are Not Orderly” (ASC Topic 820-10-65). This update
      relates to determining fair values when there is no active market or where
      the price inputs being used represent distressed sales. It reaffirms the
      need to exercise judgment to ascertain if a formerly active market has
      become inactive and in determining fair values when markets have become
      inactive.




•
            FSP
      FAS 115-2 and FAS 124-2, “Recognition and Presentation of
      Other-Than-Temporary Impairments” (ASC topic 320-10-65). This update
      applies to investments in debt securities for which other-than-temporary
      impairments may be recorded. If an entity’s management asserts that it
      does not have the intent to sell a debt security and it is more likely
      than not that it will not have to sell the security before recovery of its
      cost basis, then an entity may separate other-than-temporary impairments
      into two components: 1) the amount related to credit losses (recorded in
      earnings) and 2) all other amounts (recorded in Other comprehensive
      income).




•
            FSP
      FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
      Instruments” (ASC Topic 320-10-65). This update requires fair value
      disclosures for financial instruments that are not currently reflected on
      the balance sheet at fair value on a quarterly
  basis.




5




The
adoption of these updates will not have a material effect on our financial
condition or results of operations.




In August
2009, FASB issued ASU No. 2009-05 which amends Fair Value Measurements and
Disclosures – Overall (ASC Topic 820-10) to provide guidance on the fair value
measurement of liabilities. This update requires clarification for circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: 1) a valuation technique that uses either the
quoted price of the identical liability when traded as an asset or quoted prices
for similar liabilities or similar liabilities when traded as an asset; or 2)
another valuation technique that is consistent with the principles in ASC Topic
820 such as the income and market approach to valuation. The amendments in this
update also clarify that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of the liability. This update further clarifies that if the fair value
of a liability is determined by reference to a quoted price in an active market
for an identical liability, that price would be considered a Level 1 measurement
in the fair value hierarchy. Similarly, if the identical liability has a quoted
price when traded as an asset in an active market, it is also a Level 1 fair
value measurement if no adjustments to the quoted price of the asset are
required. This update is effective for our fourth quarter 2009.





Business Combinations and
Noncontrolling Interests


In 2007,
the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (ASC
Topic 805). This guidance requires the acquiring entity in a business
combination to recognize the full fair value of assets acquired and liabilities
assumed in the transaction (whether a full or partial acquisition); establishes
the acquisition date fair value as the measurement objective for all assets
acquired and liabilities assumed; requires expensing of most transaction and
restructuring costs; and requires the acquirer to disclose the information
necessary to evaluate and understand the nature and financial effect of the
business combination. We adopted this guidance effective January 1, 2009
and have applied it to all business combinations prospectively from that date.
The impact of ASC 805 on our consolidated financial statements will depend upon
the nature, terms and size of the acquisitions we consummate in the
future.





In April
2009, the FASB issued Staff Position No. FSP FAS 141(R)-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies” (ASC Topic 805-20). This updated guidance amended the
accounting treatment for assets and liabilities arising from contingencies in a
business combination and requires that pre-acquisition contingencies be
recognized at fair value, if fair value can be reasonably determined. If fair
value cannot be reasonably determined, measurement should be based on the best
estimate in accordance with SFAS No. 5, “Accounting for Contingencies” (ASC
Topic 405). This updated guidance was effective January 1,
2009.




In 2007,
the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements—an amendment of Accounting Research Bulletin No. 51”,
(ASC Topic 810-10-65). This guidance requires companies to present
noncontrolling (minority) interests as equity (as opposed to a liability) and
provided guidance on the accounting for transactions between an entity and
noncontrolling interests. In addition, it requires companies to report a
consolidated net income (loss) measure that includes the amount attributable to
such noncontrolling interests. We adopted this guidance effective
January 1, 2009. The adoption did not have a material effect on our
financial condition or results of operations.





In June
2009, the FASB issued the following standards:


•
              SFAS
      No. 167, “Amendments to FASB Interpretation No. 46(R),
      Consolidation of Variable Interest Entities” (ASC Topic 810-10). This
      updated guidance requires an analysis to determine whether a variable
      interest gives the entity a controlling financial interest in a variable
      interest entity. It also requires an ongoing reassessment and eliminates
      the quantitative approach previously required for determining whether an
      entity is the primary beneficiary. This update is effective for our fiscal
      year beginning January 1, 2010 and we are currently evaluating the
      impact of adopting this update on our consolidated financial
      statements.•
              SFAS
      No. 166, “Accounting for Transfers of Financial Assets”, (ASC Topic
      810). This updated guidance removed the concept of a qualifying
      special-purpose entity and removed the exception from applying
      consolidation guidance to these entities. This update also clarified the
      requirements for isolation and limitations on portions of financial assets
      that are eligible for sale accounting. ASC Topic 810 is effective for our
      fiscal year beginning on January 1, 2010. We are currently evaluating
      the impact of adopting this update on our consolidated financial
      statements.




6




In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (ASC Topic 855).
This guidance is intended to establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. It requires
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting this date, that is, whether this date represents the
date the financial statements were issued or were available to be issued. This
guidance was effective for our third quarter ended September 30,
2009.





During
2009, the FASB has issued several ASU’s – ASU No. 2009-02 through ASU
No. 2009-15. Except for ASU’s No. 2009-05 discussed above, the ASU’s
entail technical corrections to existing guidance or affect guidance related to
specialized industries or entities and therefore have minimal, if any, impact on
the Company.




4.
            ACCOUNTS
      RECEIVABLE





The main
component of US$93,398 of accounts receivable as of September 30, 2009, was
mainly a balance of US$83,556 due from Beijing Xingwang Shidai Commerce Co.,
Ltd. (“Xingwang”). On December 25, 2008, Xingwang entered into an irrevocable
Credit Guarantee Contract (the “Guarantee Contract”) with Zhong Hui Guarantee
Corporation, a third-party guarantee company licensed by the PRC government
(“Zhonghui”), and BOXT under which Zhonghui agreed to guarantee up to Renminbi
(“RMB”) 300 million (equivalent to US$43,829), 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. Such accounts receivables are guaranteed for a period of two years
from the date they are due.




5.
            ADVANCE
      TO SUPPLIERS




US$21,834
of advance to suppliers at September 30, 2009 is payment in advance to
suppliers. Since financial crisis spread in late 2008, more of our suppliers
require advance payment for purchasing their products.




6.
            OTHER
      CURRENT ASSETS





US$1,824
of the Company’s other current assets at September 30, 2009 included other
receivables with a balance of US$1,731 which relates to the refundable deposit
paid for the potential acquisition of Hebei Leimeng Times Telecommunication
Equipment Co. Ltd.  The potential acquisition was terminated during
the year ended December 31, 2008.




7.
            PLEDGED
      DEPOSIT





US$1,290
of deposit at September 30, 2009 and US$1,287 of deposit at December 31, 2008
was paid to Zhonghui, a guarantee company, in September 2008 as a pledge for
US$6,874 (RMB47,000) of bank loans. Refer to Note 9, “Loan Payable-bank” for
more discussion of the bank loans.




8.
            PROPERTY,
      PLANT AND EQUIPMENT





Property,
plant and equipment as of September 30, 2009 and December 31, 2008 consisted of
the following:




7




September
      30, 2009
                              
                              
                              December
      31,
                                2008US$’000
                              
                              
                              US$’000Moulds
                              
                              
                              4
                              
                              
                              
                              4Leasehold
      improvements
                              
                              
                              131
                              
                              
                              
                              131Office
      equipment
                              
                              
                              323
                              
                              
                              
                              323Motor
      vehicles
                              
                              
                              303
                              
                              
                              
                              303761
                              
                              
                              
                              761Less:
      Accumulated depreciation
                              
                              
                              (574
                              )
                              
                              
                              (520
                              )Net
                              
                              
                              187
                              
                              
                              
                              241





The
depreciation expenses were US$12 and US$23 for the three months ended September
30, 2009 and 2008 respectively. The depreciation expenses were US$54 and US$72
for the nine months ended September 30, 2009 and 2008 respectively.




9.
            LOAN
      PAYABLE-BANK





All bank
loans outstanding at September 30, 2009 and December 31, 2008 were borrowed by
BOXT. Details of short-term bank loans are summarized as follows:





At
      September 30, 2009
                        
                        Amount
                          (RMB’000)
                        
                        Annual
                          interest
      rate
                        
                        Term
                        
                        Guarantee
      provided byLoan
      from Beijing Rural Commercial Bank
                        
                        47,000
                          (US$6,874)
                        
                        10.08%
                        
                        September
      28, 2008 to September 27, 2009 (See note below)
                        
                        Director
      Liu Yu; A guarantee company; pledged deposit of
  RMB8,820KLoan
      from Huaxia Bank
                        
                        17,200
                          (US$2,515)
                        
                        6.372%
                        
                        February
      20, 2009 to February 20, 2010
                        
                        Director
      Liu Yu; Two third party companies; Distributor
  Xingwang.





At
      December 31, 2008
                          
                          Amount
                            (RMB’000)
                          
                          Annual
                            interest
      rate
                          
                          Term
                          
                          Guarantee
      provided byLoan
      from Beijing Rural Commercial Bank
                          
                          47,000
                            (US$6,857)
                          
                          10.08%
                          
                          From
      September 28, 2008 to September 27, 2009
                          
                          Director
      Liu Yu; A guarantee company; pledged deposit of
  RMB8,820KLoan
      from Huaxia Bank
                          
                          18,000
                            (US$2,627)
                          
                          8.964%
                          
                          From
      February 18, 2008 to February 18, 2009
                          
                          Director
      Liu Yu; Two third party companies; Distributor
  Xingwang.





Interest
expense incurred for the three months ended September 30, 2009 and 2008 were
US$270 and US$255, respectively, and the nine months ended September 30, 2009
and 2008, US$758 and US$733, respectively.





US$6,874
(RMB47 million) of 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 $8 in penalty interest from September
28, 2009 to September 30, 2009.




10.
            LOAN
      PAYABLE





The
USD$307 short-term loan outstanding at September 30, 2009 was provided by a
third party company Zhonghui. It is 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.




8




11.
            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




September
      30, 2009
                    
                    
                    December
      31, 2008US$’000
                    
                    
                    US$’000Due
      to shareholdersMr.
      Liu Yu
                    
                    
                    318
                    
                    
                    
                    219Mr.
      Wang Xin
                    
                    
                    250
                    
                    
                    
                    238568
                    
                    
                    
                    457Bank
      loans guaranteed by Mr. Liu Yu
                    
                    
                    9,379
                    
                    
                    
                    9,484





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




12.
            COMMITMENTS
      AND CONTINGENCIES





(a)
            Operating
      lease commitments





At
September 30, 2009, the Company had a non-cancelable operating lease for the
office premises, under which the rental payment due within the next twelve
months is US$13. The lease term is from January 1, 2009 to December 31, 2009.
Rental expense for the nine months ended September 30, 2009 and 2008 was $39 and
$103, 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 to PRC tax authorities for VAT purposes when
invoices are issued, but accruing the VAT liability when sales are made prior to
invoices being issued. As of September 30, 2009 and December 31, 2008, sales
accumulatively amounted to approximately US$236,748 and US$175,834,
respectively, for which VAT invoices have not yet been issued. The associated
output VAT amounts with the above unbilled revenue were US$40,247 and US$29,892
as of September 30, 2009 and December 31, 2008. Meanwhile, as of September 30,
2009 and December 31, 2008, purchases amounted to US$144,232 and US$137,119
respectively for which VAT invoices have not been received from suppliers. The
input VAT amounts associated with the above purchase were US$24,519 and
US$23,310 as of September 30, 2009 and December 31, 2008, respectively. The net
VAT payables resulting from the above non-issued and non-received invoices were
US$15,728 and US$6,582 as of September 30, 2009 and December 31, 2008,
respectively. The net VAT payable resulting from the issued and received
invoices netting paid amount was US$3,323 and US$3,590 as of
September 30, 2009 and December 31, 2008, respectively. The total net VAT
payables were US$19,051 and US$10,172 as of September 30, 2009 and
December 31, 2008, respectively. These balance amounts were included in “Accrued
expenses and other accrued liabilities.”





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.




9




Financial guarantee
contract





On June
20, 2007, BOXT entered into a guarantee contract for three years from June 20,
2007 to June 16, 2010 to serve as guarantor of a bank loan amounting to
approximately US$17,550 (equivalent to RMB120,000) to an independent
third-party, Chinacom Communications Co., Ltd. (“CECT”), from Beijing Rural Bank
to provide CECT with capital for equipment purchases. Under the guarantee
contract, BOXT shall perform all obligations of CECT under the loan contract
including principal and interest, late interest payments, fines and other
expenses incurred in the claiming process, if CECT fails to perform its
obligations as set forth in the loan contract, including, but not limited to,
ceasing production, going out of business, dissolving the business, having its
business license withdrawn and filing for bankruptcy.





According
to a valuation report dated March 20, 2009 issued by an independent professional
appraiser, the fair value of the undiscounted maximum potential amount of future
payments as of December 31, 2008 that BOXT could be required to make under the
guarantee contract was approximately US$470. The Company’s management assessed
that the fair value of the undiscounted maximum potential amount of future
payments as of September 30, 2009 did not materially differ from the same figure
as of December 31, 2008. Management believes it is not probable BOXT will need
to fulfill any obligation under this contract.




13.
            DEDICATED
      RESERVES





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 nine months ended September 30, 2009, BOXT made
appropriations to this statutory reserve of US$73. The accumulated balance of
the dedicated reserve at BOXT as of September 30, 2009 and December 31, 2008
were US$1,115 and US$1,042, respectively.





In
accordance with the PRC laws and regulations, BOXT is restricted in its ability
to transfer a portion of its net assets to UFI in the form of dividends, which
amounted to US$2,798 as of September 30, 2009.




14.
            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:




10




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 nine month period ended September
30, 2009 is presented below:




Number
      of
                      share
      optionsAs
      of January 1, 2009
                    
                    
                    614,000Granted
                    
                    
                    -Exercised
                    
                    
                    -Cancelled/lapsed
                    
                    
                    -As
      of September 30, 2009
                    
                    
                    614,000


15.
            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$6 and US$8 for the three months ended September 30,
2009 and 2008 respectively. The pension expenses were US$34 and US$24 for the
nine months ended September 30, 2009 and 2008 respectively.




16.
            INCOME
      TAXES




The
Company and its subsidiaries are subject to income taxes on an entity basis on
income arising in or derived from the tax jurisdictions in which they operate.
Provision for income and other related taxes has been provided in accordance
with the tax rates and laws in effect in the various countries of
operations.





No
provision for withholding or United States federal or state income taxes or tax
benefits on the undistributed earnings of the Company's subsidiaries has been
provided as the earnings of these subsidiaries, in the opinion of the
management, will be reinvested indefinitely.




OXHBVI
was incorporated in the BVI and, under the current laws of the BVI, is not
subject to income taxes.





UFI and
OXTHK, both incorporated in Hong Kong, are subject to Hong Kong tax laws and had
no significant income for the periods presented.





The
Company’s income is principally generated in the PRC by BOXT. Since BOXT is
registered as a wholly-owned foreign investment enterprise (“WOFE”), it is
subject to tax laws applicable to WOFEs in the PRC. On March 16, 2007, a New
Enterprise Income Tax Law (“NEITL”) was issued in the PRC, applicable for fiscal
years commencing on or after January 1, 2008. By virtue of the NEITL, BOXT was
subject to the unified EIT rate of 25% in effect from January 1, 2008. However,
the 50% tax reduction, which has already been obtained by BOXT under the old tax
laws, can still be maintained and the remaining tax holiday, which was commenced
before 2008, can still be enjoyed by BOXT, until expiration in
2009.





As of
September 30, 2009 and December 31, 2008, the Company identified the following
as “major” tax jurisdictions, defined as those jurisdictions in which it was
required to file income tax returns: United States, Hong Kong and the PRC. Based
on the evaluations noted above, the Company has concluded that there are no
significant uncertain tax positions requiring recognition in its consolidated
financial statements. Based on a review of tax positions for all open years, no
reserves for uncertain income tax positions have been recorded pursuant to FIN
48 during the nine months ended September 30, 2009 and during the year ended
December 31, 2008, and the Company does not anticipate that it is reasonably
possible that any material increase or decrease in its unrecognized tax benefits
will occur within the next three months.




11




(a)
            Income
      tax expense comprised the
following:




Nine
      months ended September 30,2009
                      
                      
                      2008US$’000
                      
                      
                      US$’000Current
      taxUnited
      States
                      
                      
                      -
                      
                      
                      
                      -Hong
      Kong
                      
                      
                      -
                      
                      
                      
                      238PRC
                      
                      
                      868
                      
                      
                      
                      1,082868
                      
                      
                      
                      1,320





(b)
              Reconciliation
      between the provision for income taxes computed by applying the PRC
      statutory income tax rate of 25% to income before income taxes and the
      effective income tax rate is as
follows:


Nine
      months ended September 30,2009
                        
                        
                        2008PRC
      statutory income tax
                        
                        
                        25
                        %
                        
                        
                        25
                        %Tax
      exemption and tax relief granted to PRC subsidiary and the effects of
      permanent differences
                        
                        
                        (12
                        %)
                        
                        
                        (8
                        %)13
                        %
                        
                        
                        17
                        %




17.
            EARNINGS
      PER SHARE





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




Three
      months ended
                              September
      30,
                            
                            
                            Nine
      months ended
                              September
      30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Numerator
      used in basic net income per share:Net
      income
                            
                            
                            1,370
                            
                            
                            
                            2,925
                            
                            
                            
                            5,812
                            
                            
                            
                            6,348Shares
      (denominator):Weighted
      average common shares outstanding
                            
                            
                            29,756,000
                            
                            
                            
                            29,756,000
                            
                            
                            
                            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
                            
                            
                            
                            29,756,000
                            
                            
                            
                            29,756,000
                            
                            
                            
                            29,756,000Earnings
      per ordinary share-basic and diluted
                            
                            $
                            0.05
                            
                            
                            $
                            0.10
                            
                            
                            $
                            0.20
                            
                            
                            $
                            0.21




12




As of
September 30, 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 nine months ended September
30, 2009.




18.
            CONCENTRATIONS
      AND CREDIT RISKS





At
September 30, 2009 the Company had a credit risk exposure of uninsured cash in
banks of approximately US $32, US $93,398 accounts receivable and US $21,834
advances to suppliers.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
three and nine months ended September 30, 2009, the Company is 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.





The
Company buys certain major materials from three major suppliers. In addition,
the Company subcontracts material purchasing and assembly works of cellular
phones primarily to five subcontracting factories. The diversification of
suppliers will reduce the risk of increasing production cost.




(a)
            During
      the nine months ended September 30, 2009 and 2008, the Company’s operating
      revenue was mainly derived from two distributors. For the nine months
      ended September 30, 2009 and 2008, 90% and 92%, respectively, of total
      revenue was derived from our largest distributor Xingwang. For the three
      months ended September 30, 2009 and 2008, 87% and 78% of total revenue was
      derived from our largest distributor Xingwang. There was no trade deposit
      received from Xingwang as of September 30, 2009 and December 31, 2008
      respectively. Accounts receivables from Xingwang were US$83,556 and
      US$77,740 as of September 30, 2009, and December 31, 2008 respectively. As
      mentioned in note 4, “accounts receivable”, in year 2008, a guarantee
      company provided a guarantee up to US$43,875 (RMB300 million) for the
      accounts receivable from Xingwang for two years from the date they are
      due.





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





Three
      months ended
                    September
      30,
                  
                  
                  Nine
      months ended
                    September
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008%
                  
                  
                  %
                  
                  
                  %
                  
                  
                  %(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Supplier
      A
                  
                  
                  58
                  
                  
                  
                  -
                  
                  
                  
                  52
                  
                  
                  
                  -Supplier
      B
                  
                  
                  28
                  
                  
                  
                  -
                  
                  
                  
                  38
                  
                  
                  
                  -Supplier
      C
                  
                  
                  14
                  
                  
                  
                  -
                  
                  
                  
                  5
                  
                  
                  
                  -Supplier
      D
                  
                  
                  -
                  
                  
                  
                  34
                  
                  
                  
                  -
                  
                  
                  
                  35Supplier
      E
                  
                  
                  -
                  
                  
                  
                  30
                  
                  
                  
                  -
                  
                  
                  
                  11Supplier
      F
                  
                  
                  -
                  
                  
                  
                  15
                  
                  
                  
                  -
                  
                  
                  
                  12Supplier
      G
                  
                  
                  -
                  
                  
                  
                  12
                  
                  
                  
                  -
                  
                  
                  
                  22Supplier
      H
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  13Total
                  
                  
                  100
                  
                  
                  
                  91
                  
                  
                  
                  95
                  
                  
                  
                  93





Advances
to the above suppliers were US$4,987 and US$8,129 as of September 30, 2009 and
December 31, 2008 respectively. Accounts payable owed to the above suppliers
were US$6,664 and US$12,188 as of September 30, 2009 and December 31, 2008,
respectively.




13




(c)
            The
      Company’s revenue for the three and nine months ended September 30, 2009
      and 2008, respectively, were all derived from the PRC. Geographical
      information of the carrying amount of long-lived assets is as
      follows:





September
      30, 2009
                  
                  
                  December
      31,2008US$’000
                  
                  
                  US$’000PRC
                  
                  
                  184
                  
                  
                  
                  237Hong
      Kong
                  
                  
                  3
                  
                  
                  
                  4Total
      long-lived assets
                  
                  
                  187
                  
                  
                  
                  241




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.




19.
            RECLASSIFICATION





US$307
loan payable to a third party company, previously included in the balance of
accrued expenses and other accrued liabilities as of December 31, 2008, has been
reclassified into loan payable.




20.
            SUBSEQUENT
      EVENT





Management
has considered all events occurring through November 23, 2009, 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.




14




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.




15




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 Original Equipment Manufacturers (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 186,950 cell
phone units during the third quarter of 2009. For the three months ended
September 30, 2009, the Company generated revenue of US$19,125,000,
representing a decrease of 34.59% as compared to US$29,240,000 for the same
period in 2008, in contrast with the entire cell phone market, in which
sales increased by 10.08% compared to the same period in 2008, as
recently reported by Sino Market Research Limited. Meanwhile, the Company
achieved a gross profit margin of 10.83%, a decrease of 3.42% as compared to
14.25% earned for the same period in 2008. 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.  92% of the products the Company sold in this quarter
were priced below RMB1,000 (approximately US$146). This has led to a decrease of
US$2,095,000 or 50.28% in the Company’s gross income, from
US$4,167,000 earned in the three months ended September 30, 2008, to
US$2,072,000 for the three months ended September 30, 2009.





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 the 2009,
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.





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.




16




In
summary, the Company predicts modest decline in both sales revenues and net
income during the fiscal year ending December 31, 2009.





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 nine months ended
September 30, 2009 and 2008, respectively (in thousand USD):





Nine
      months ended
                                            
                                            
                                            Nine
      months endedSeptember
      30, 2009
                                            
                                            
                                            September
      30, 2008
                                            
                                            
                                            Comparison(US$000)
                                            
                                            
                                            %
      of Revenue
                                            
                                            
                                            (US$000)
                                            
                                            
                                            %
      of Revenue
                                            
                                            
                                            (US$000)
                                            
                                            
                                            %Net
      sales
                                            
                                            
                                            62,181
                                            
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            78,853
                                            
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            (16,672
                                            )
                                            
                                            
                                            (21.14
                                            )%Cost
      of sales
                                            
                                            
                                            53,928
                                            
                                            
                                            
                                            86.73
                                            %
                                            
                                            
                                            68,302
                                            
                                            
                                            
                                            86.62
                                            %
                                            
                                            
                                            (16,434
                                            )
                                            
                                            
                                            (21.04
                                            )%Sales
      & marketing expenses
                                            
                                            
                                            213
                                            
                                            
                                            
                                            0.34
                                            %
                                            
                                            
                                            353
                                            
                                            
                                            
                                            0.45
                                            %
                                            
                                            
                                            (140
                                            )
                                            
                                            
                                            (39.66
                                            )%General
      & admin. expenses
                                            
                                            
                                            533
                                            
                                            
                                            
                                            0.86
                                            %
                                            
                                            
                                            1,799
                                            
                                            
                                            
                                            2.28
                                            %
                                            
                                            
                                            (1,266
                                            )
                                            
                                            
                                            (70.37
                                            )%R&D
      expenses
                                            
                                            
                                            32
                                            
                                            
                                            
                                            0.05
                                            %
                                            
                                            
                                            391
                                            
                                            
                                            
                                            0.50
                                            %
                                            
                                            
                                            (359
                                            )
                                            
                                            
                                            (91.82
                                            )%Depreciation
                                            
                                            
                                            54
                                            
                                            
                                            
                                            0.09
                                            %
                                            
                                            
                                            72
                                            
                                            
                                            
                                            0.09
                                            %
                                            
                                            
                                            (18
                                            )
                                            
                                            
                                            (25.00
                                            )%Interest
      expenses
                                            
                                            
                                            758
                                            
                                            
                                            
                                            1.22
                                            %
                                            
                                            
                                            733
                                            
                                            
                                            
                                            0.93
                                            %
                                            
                                            
                                            25
                                            
                                            
                                            
                                            3.41
                                            %Other
      income
                                            
                                            
                                            17
                                            
                                            
                                            
                                            0.03
                                            %
                                            
                                            
                                            465
                                            
                                            
                                            
                                            0.59
                                            %
                                            
                                            
                                            (448
                                            )
                                            
                                            
                                            (96.34
                                            )%Income
      before income taxes
                                            
                                            
                                            6,680
                                            
                                            
                                            
                                            10.74
                                            %
                                            
                                            
                                            7,668
                                            
                                            
                                            
                                            9.72
                                            %
                                            
                                            
                                            (988
                                            )
                                            
                                            
                                            (12.88
                                            )%Income
      tax
                                            
                                            
                                            868
                                            
                                            
                                            
                                            1.40
                                            %
                                            
                                            
                                            1320
                                            
                                            
                                            
                                            1.67
                                            %
                                            
                                            
                                            (452
                                            )
                                            
                                            
                                            (34.24
                                            )%Net
      income
                                            
                                            
                                            5,812
                                            
                                            
                                            
                                            9.35
                                            %
                                            
                                            
                                            6,348
                                            
                                            
                                            
                                            8.05
                                            %
                                            
                                            
                                            (536
                                            )
                                            
                                            
                                            (8.44
                                            )%




17




The
following table summarizes our operating results for the three months ended
September 30, 2009 and 2008, respectively:





Three
      months ended
                                            
                                            
                                            Three
      months endedSeptember
      30, 2009
                                            
                                            
                                            September
      30, 2008
                                            
                                            
                                            Comparison(US$000)
                                            
                                            
                                            %
      of Revenue
                                            
                                            
                                            (US$000)
                                            
                                            
                                            %
      of Revenue
                                            
                                            
                                            (US$000)
                                            
                                            
                                            %Net
      sales
                                            
                                            
                                            19,125
                                            
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            29,240
                                            
                                            
                                            
                                            100.00
                                            %
                                            
                                            
                                            (10,115
                                            )
                                            
                                            
                                            (34.59
                                            )%Cost
      of sales
                                            
                                            
                                            17,053
                                            
                                            
                                            
                                            89.17
                                            %
                                            
                                            
                                            25,073
                                            
                                            
                                            
                                            85.75
                                            %
                                            
                                            
                                            (8,020
                                            )
                                            
                                            
                                            (31.99
                                            )%Sales
      & marketing expenses
                                            
                                            
                                            40
                                            
                                            
                                            
                                            0.21
                                            %
                                            
                                            
                                            128
                                            
                                            
                                            
                                            0.44
                                            %
                                            
                                            
                                            (88
                                            )
                                            
                                            
                                            (68.75
                                            )%General
      & admin. expenses
                                            
                                            
                                            164
                                            
                                            
                                            
                                            0.86
                                            %
                                            
                                            
                                            228
                                            
                                            
                                            
                                            0.78
                                            %
                                            
                                            
                                            (63
                                            )
                                            
                                            
                                            (27.63
                                            )%R&D
      expenses
                                            
                                            
                                            4
                                            
                                            
                                            
                                            0.02
                                            %
                                            
                                            
                                            250
                                            
                                            
                                            
                                            0.85
                                            %
                                            
                                            
                                            (246
                                            )
                                            
                                            
                                            (98.40
                                            )%Depreciation
                                            
                                            
                                            12
                                            
                                            
                                            
                                            0.06
                                            %
                                            
                                            
                                            23
                                            
                                            
                                            
                                            0.08
                                            %
                                            
                                            
                                            (11
                                            )
                                            
                                            
                                            (47.83
                                            )%Interest
      expenses
                                            
                                            
                                            270
                                            
                                            
                                            
                                            1.41
                                            %
                                            
                                            
                                            255
                                            
                                            
                                            
                                            0.87
                                            %
                                            
                                            
                                            15
                                            
                                            
                                            
                                            5.88
                                            %Other
      income
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            87
                                            
                                            
                                            
                                            0.30
                                            %
                                            
                                            
                                            (87
                                            )
                                            
                                            
                                            (100.00
                                            )%Income
      before income taxes
                                            
                                            
                                            1,582
                                            
                                            
                                            
                                            8.27
                                            %
                                            
                                            
                                            3,370
                                            
                                            
                                            
                                            11.53
                                            %
                                            
                                            
                                            (1,788
                                            )
                                            
                                            
                                            (53.06
                                            )%Income
      tax
                                            
                                            
                                            212
                                            
                                            
                                            
                                            1.11
                                            %
                                            
                                            
                                            445
                                            
                                            
                                            
                                            1.52
                                            %
                                            
                                            
                                            (233
                                            )
                                            
                                            
                                            (52.36
                                            )%Net
      income
                                            
                                            
                                            1,370
                                            
                                            
                                            
                                            7.16
                                            %
                                            
                                            
                                            2,925
                                            
                                            
                                            
                                            10.00
                                            %
                                            
                                            
                                            (1,555
                                            )
                                            
                                            
                                            (53.16
                                            )%





Net
sales





Our
revenue was US$62,181,000 for the nine months ended September 30, 2009,
representing a decrease of 21.14% compared to US$78,853,000 for the same period
in 2008. For the three months ended September 30, 2009, the total revenues of
the Company were US$19,125,000, representing a decrease of 34.59% as compared to
US$29,240,000 in the same period of 2008.





As stated
in Business Review 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. In the Chinese
cell phone market, sales volume has fallen by 30% as compared to the same period
last year. During this quarter, the Company has continued to undertake its sales
strategy of supplying feature-rich, low-priced, mid-level and low-end products.
It has also put great efforts into developing new products tailored for telecom
operators and expanding its sales channels beyond the enhanced traditional
market in which products were traded at prices less than RMB1,000, or
approximately US$146.





Products
Segment





For the
nine months ended September 30, 2009, the Company’s sales were primarily
attributable to the following products:




Cellular
                      
                      Nine
      months ended September 30, 2009phones
      model
                      
                      Amount
                        (US$’000)
                      
                      
                      %
      of total revenueX600
                      
                      
                      5,430
                      
                      
                      
                      8.73
                      %X610
                      
                      
                      5,559
                      
                      
                      
                      8.94
                      %X555
                      
                      
                      1,949
                      
                      
                      
                      3.13
                      %T303
                      
                      
                      6,795
                      
                      
                      
                      10.93
                      %DX880
                      
                      
                      3,685
                      
                      
                      
                      5.93
                      %X650
                      
                      
                      3,710
                      
                      
                      
                      5.97
                      %X780
                      
                      
                      12,554
                      
                      
                      
                      20.19
                      %LM2800
                      
                      
                      1,187
                      
                      
                      
                      1.91
                      %LM2850
                      
                      
                      1,312
                      
                      
                      
                      2.11
                      %LM2820
                      
                      
                      877
                      
                      
                      
                      1.41
                      %CN747
                      
                      
                      2,571
                      
                      
                      
                      4.13
                      %X98
                      
                      
                      2,748
                      
                      
                      
                      4.42
                      %X666
                      
                      
                      8,542
                      
                      
                      
                      13.74
                      %X8828
                      
                      
                      2,598
                      
                      
                      
                      4.18
                      %X6102
                      
                      
                      2,666
                      
                      
                      
                      4.28
                      %Total
                      
                      
                      62,183
                      
                      
                      
                      100.00
                      %




18




For the
three months ended September 30, 2009, the Company’s sales were primarily
attributable to the following products:




Cellular
                    
                    Three
      months ended September 30, 2009phones
      model
                    
                    Amount
                      (US$’000)
                    
                    
                    %
      of total revenueCN747
                    
                    
                    2,571
                    
                    
                    
                    13.44
                    %X98
                    
                    
                    2,748
                    
                    
                    
                    14.37
                    %X666
                    
                    
                    8,542
                    
                    
                    
                    44.66
                    %X8828
                    
                    
                    2,598
                    
                    
                    
                    13.58
                    %X6102
                    
                    
                    2,666
                    
                    
                    
                    13.95
                    %Total
                    
                    
                    19,125
                    
                    
                    
                    100.00
                    %





Customer
Segments





For the
nine months ended September 30, 2009, our sales in the aggregate amount of
US$62,181,000 were derived mainly from Beijing Xingwang Shidai Tech &
Trading Co., Ltd. (“Xingwang”).  Xingwang has been our most important
distributor for a long period of time and provided revenues of US$56,239,000. It
is one of the largest distributors in mainland China and has sales networks in
major cities across the PRC.





Nine
      months ended September 30, 2009Amount
                        (US$’000)
                      
                      
                      %
      of total revenueBeijing
      Xingwang Shidai Tech & Trading Co., Ltd.
                      
                      
                      56,239
                      
                      
                      
                      90.44
                      %Tianjin
      Tongguang
                      
                      
                      5,942
                      
                      
                      
                      9.56
                      %Total
                      
                      
                      62,181
                      
                      
                      
                      100.00
                      %





For the
three months ended September 30, 2009, our revenues were derived also mainly
from sales to Xingwang, in the aggregate amount of US$16,558,000.





Three
      months ended September 30, 2009Amount
                            (US$’000)
                          
                          
                          %
      of total revenueBeijing
      Xingwang Shidai Tech & Trading Co., Ltd.
                          
                          
                          16,558
                          
                          
                          
                          86.58
                          %Tianjin
      Tongguang
                          
                          
                          2,567
                          
                          
                          
                          13.42
                          %Total
                          
                          
                          19,125
                          
                          
                          
                          100.00
                          %





Gross
Margin





For the
three months ended September 30, 2009, gross margin was US$2,072,000,
representing a decrease of US$2,095,000 in gross profit when compared to the
same period of 2008.  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 10.83% as compared to 14.25% for the same period of
2008.




19




For the
three months ended September 30, 2009, although we received few bulk orders on
high-margin customized products from the telecom operators sector, we did
develop and supply our customized 3G phone model T303 to meet their needs. X666
products have contributed approximately 40.20% of our sales volume and 44.67% of
our revenue in the quarterly financial results. Marketed at a very reasonable
price, X666 products were sold in such a large quantity that they indeed boosted
the Company’s overall gross margin for this quarter.




For the
nine months ended September 30, 2009, gross margin was US$8,253,000,
representing a decrease of US$2,298,000 in gross profit when compared to the
same period of 2008.  The decline of gross margin is due to financial
crisis impact and increasing competition in the market.




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 September 30, 2009, selling expenses were US$40,000, or 0.21%
of revenues, representing a US$88,000 decrease compared with US$128,000 for the
corresponding period in 2008.





For the
nine months ended September 30, 2009, selling expenses were US$213,000, or 0.34%
of revenues, representing a US$140,000 decrease compared with US$353,000 for the
corresponding period in 2008.





We rely
more on concentrated distributors in products sales and this strategy led to the
decrease of selling expenses.





R&D
expenses





For the
three months ended September 30, 2009, R&D expenses were US$4,000, or 0.02%
of revenue, representing a decrease of US$246,000 or 98.40%, compared with the
numbers for the corresponding period in 2008. For the nine months ended
September 30, 2009, R&D expenses were US$32,000, or 0.05% of revenue,
representing a decrease of US$359,000 or 91.82%, compared with the numbers for
the corresponding period in 2008. 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 September 30, 2009, total general and administrative expenses
were US$164,000, or 0.86% of total revenues, representing a decrease of
US$63,000, or 27.63% as compared to US$228,000, or 0.78%, of the total revenues
for the corresponding period in 2008.





For the
nine months ended September 30, 2009, total general and administrative expenses
were US$533,000, or 0.86% of total revenues, representing decreases of
US$1,266,000, or 70.37% as compared to US$1,799,000, or 2.28%, of the total
revenues for the corresponding period of 2008.




The sharp
decrease in general and administrative expenses was primarily attributable to
structural adjustment, internal management control and costs reduction. In
addition, there was US$724,520 stock based compensation cost recognized during
the nine months ended September 30, 2008. There was no such type of expense
during the nine months ended September 30, 2009 since no stock options were
granted.





Interest
expenses





For the
three months ended September 30, 2009, interest expenses increased by US$15,000
compared with same period in 2008. The increase is mainly due to an additional
of US$218,000 short-term loan is outstanding in the third quarter of 2009
compared with same period in 2008.





For the
nine months ended September 30, 2009, interest expenses increased by US$25,000
compared with same period in 2008. The increase is mainly due to significant
outstanding loans during the nine months ended September 30, 2009 as well as a
result of exchange rate fluctuation, as the short-term loans are denominated in
RMB.




20




Other
income





For the
nine months ended September 30, 2009, other income accounted for US$17,000, or
0.03% of total revenues. It was mainly comprised of reversals of doubtful
accounts allowance.





Provision
for income taxes





For the
three months ended September 30, 2009, provision for income taxes decreased by
US$233,000 compared with same period in 2008. The decrease is mainly
attributable to a decline in taxable income.





For the
nine months ended September 30, 2009, provision for income taxes decreased by
US$452,000 compared with same period in 2008. The decrease is mainly
attributable to a decline in taxable income.





Net
income





For the
nine months ended September 30, 2009, our net income was US$5,812,000 or a net
profit margin of 9.35%, representing a decrease of US$536,000, or 29.77%, as
compared to US$6,348,000, or a net profit margin of 8.05% in the same period of
2008, primarily due to the current difficulties effecting the market and
industry as well as our deceased net sales.





For the
three months ended September 30, 2009, our net income was US$1,370,000 or a net
profit margin of 7.16%, representing a decrease of US$1,555,000, or 53.16%, as
compared to US$2,925,000, or a net profit margin of 10.00% in the same period of
2008.





The
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 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 historical good cooperation
relationship with these distributors and believes no provision is needed as of
September 30, 2009.
 
 The
Company is discussing with those distributors to try to collect a portion of
account receivable in fourth quarter of 2009.
 
 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 September 30,
2009.  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
2009 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
September 30, 2009, we had current assets of US$118,378,000. Current assets are
mainly comprised of accounts receivable of US$93,398,000, advance to suppliers
of US$21,834,000, cash and cash equivalents of US$32,000, pledged deposit of
US$1,290,000 and other current assets of US$1,824,000.





As of
September 30, 2009, our current liabilities were US$64,050,000 and included
accounts payable of US$24,166,000, trade deposits received of US$1,936,000,
short-term loans of US$9,389,000, accrued expenses and other accrued liabilities
of US$21,813,000, income tax payables of US$5,871,000 and amounts due to
directors of US$568,000.





We offer
two different trading terms to our customers: cash-on-delivery or credit terms
of 45-120 days.  As of September 30, 2009, our accounts receivable had
increased by US$11,322,000 to US$93,398,000, as compared to US$82,076,000 on
December 31, 2008. 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
September 30, 2009, our advance to suppliers was US$21,834,000, which
represented an increase of US$13,393,000 as compared with US$8,441,000 as of
December 31, 2008. The increase was primarily because the Company made some
prepayments to suppliers in past quarters of year 2009.





As of
September 30, 2009, our other current assets were US$1,824,000, which
represented a decrease of US$34,000, as compared to US$1,859,000 as of December
31, 2008. The “other current assets” are mainly composed of prepaid deposits to
acquire a manufacturing facility in the amount of US$1,731,000. The acquisition
was terminated in 2008. The decrease in other current assets was mainly
attributable to the recovery of some of the deposit paid to our office equipment
and facilities suppliers.




21




As of
September 30, 2009, our accounts payable were US$24,166,000, which represents an
increase of US$7,813,000, or 47.78%, as compared to US$16,353,000 as of December
31, 2008. The increase was mainly because we delayed the payment to certain
suppliers to meet our working capital demand.





As of
September 30, 2009, accrued expenses and liabilities were US$21,813,000,
representing an increase of US$9,801,000 or 81.59%, compared to US$12,012,000 as
of December 31, 2008. The increase was mainly due to an additional VAT payable
of US$8,916,000 mainly caused by outstanding input VAT invoices.





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
September 30, 2009, income tax payable was US$5,871,000, representing an
increase of US$888,000 or 17.80%, compared to US$4,989,000 as of December 31,
2008.  The increase was mainly due to provision of PRC income tax at
the effective tax rate of 13%, and our deferment of income tax payable to the
government for the three months ended September 30, 2009.





As of
September 30, 2009, 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
September 30, 2009, we had cash and cash equivalents of US$32,000. This
represented a decrease of US$70,000 when compared with US$102,000 as of December
31, 2008. During nine months ended September 30, 2009, 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
September 30, 2009, our aggregate short term loans were US$9,696,000, which were
comprised of US$2,515,000 from Huaxia Bank, US$6,874,000 from Beijing Rural and
Commercial Bank and US$307,000 from a third party company.




CONTINGENT
LIABILITIES





On June
20, 2007, we entered into a guarantee contract to serve as guarantor of a loan
in the amount of RMB 120,000,000, or approximately US$17,530,000,to CECT-Chinacom
Communications Co., Ltd. (“CECT-Chinacom”) from Beijing Rural Bank to provide
CECT-Chinacom with capital for equipment purchases between June 20, 2006 and
June 16, 2010. Under the guarantee contract, we shall perform all obligations of
CECT-Chinacom under the Loan Contract if CECT-Chinacom fails to perform its
obligations as set forth in the Loan Contract.  Failing to perform
could include, but is not limited to, the following: ceasing production, going
out of business, dissolving the business, having its business license withdrawn,
or filing for bankruptcy.





OFF
BALANCE SHEET ARRANGEMENTS





As of September 30, 2009, 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 September 30, 2009, were US$9,389,000. The interest
rate for the three months ended September 30, 2009 was charged at 6.372% to
10.080% per annum.




22




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.





(b)           Not
applicable.




(c)           None.





23




Item
3.        Defaults Upon Senior
Securities.





None.





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





None.





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 September 30, 2009.





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




24




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 Officer




By:
                          /s/
      Hua ChenHua
      ChenChief
      Financial Officer


DATED:  November
23, 2009




25




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




26